[The Wrap] What we learnt from the great KiwiSaver shakeout

There’s something very passive about the active shakeout of KiwiSaver default funds.

Sunday, May 16th 2021, 3:44PM

First kudos to the officials. It seems the KiwiSaver default tender process which started last year has been well run. None of the providers knew the results until they were told on Thursday night before the Friday morning public announcement.

Some of the winners I spoke to expressed relief and even surprise that they were successful. It was a different reaction to incumbents who were shown the proverbial door.

The new lineup of six is undoubtedly a refresh. Out went the big old managers who have been in defaults since day one and in with newer managers and some, like Booster and BNZ, who only came in in subsequent tender rounds.

Some changes were not a surprise. One being AMP getting the heave-ho. Another the appointment of Simplicity.

You could suggest the results of the tender demonstrates to some degree how funds management and KiwiSaver is changing.

The biggest change here, clearly, is the growth of passive investment options. Other new developments such as roboadvice are not acknowledged in the results.

Clearly fees played an important role in the decisions made by officials. In the tender documents for new defaults fees had a weighting of 60% of the score.

One observation is that there seems to be too much of a focus purely on fees as opposed to value. The value a manager offers comes from a wide range of factors including fees, returns, education and information provided to members.

For instance I am prepared to pay higher fees for active management if my provider provides the performance.

This laser like focus on fees is potentially misguided if it is used as a blanket approach to funds management.

This part of the Financial Markets Authority press release on the new defaults seems to suggest that is the case, and frankly that is worrying.

“The new default provider settings offer a range of benefits to default investors, including improved outcomes from a balanced fund, lower fees, and services. There is also an obligation to exclude fossil fuel production and illegal weapons from the default funds. Altogether, this is a fair representation of value for money for existing and new default members, sending a strong signal to the market,” he said.

Maybe with the defaults where members are too lazy to make active investment choices pushing them into balanced funds and giving a low fee option has merit.

The comments from Booster managing director Allan Yeo are worth reading on this question. Read what he had to say here.

Amongst the many questions is what is the future for players like Mercer? It seems the firm relied on the default process for members. It doesn’t work with advisers and does not have a distribution network like a bank and minimal retail brand awareness.

What does it mean for AMP and any future plans to try and sell the business.

With the appointment of new defaults (who all have to each create a new fund) KiwiSaver took on a markedly NZ-made complexion. Out went Australian owned banks and in came New Zealand firms like Simplicity and Smartshares. (While Westpac is still Australian owned there are talks it may spin off its New Zealand operations).

Now the much anticipated announcement is out the mad scramble to keep members begins.

There are 381,000 members in default funds and the majority of these are with managers who have lost their treasured default status.

These managers will be working their butts off to try and keep as many of them as possible.

Maybe they should have been doing this years ago.

Tags: default funds KiwiSaver Opinion