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Financial adviser group takes crack at default KiwiSaver funds; backs govt scheme

Monday 16th July 2018

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A group of financial advisers want the government to change the default KiwiSaver fund settings, which they say aren't working, and support government stepping into the default role, at a time when MPs are considering a bill to set up a state-run scheme. 

The nine advisers today wrote to the heads of the Financial Markets Authority and Reserve Bank, and finance and commerce ministers outlining their concerns that KiwiSaver members in default funds with conservative investment mandates have not only missed out on potential earnings but may have also overpaid investment tax. The group, led by adviser John Cliffe of Cliffe Consulting, lays the blame on government's decision to keep a conservative fund strategy in a 2014 review of the KiwiSaver scheme, the failure of default fund providers in switching their members out of the default schemes which were envisaged as being temporary holding funds, and a lack of action by regulators over the poor performance of default funds in making those switches. 

"We estimate that it would take six years at the current rate of switch outs from the default funds for all members to be removed, provided no new members were added," the group said. "The regulators appear to have had too much faith in the default provider's financial education tools, as a potential solution to the problem for so many years, yet these are clearly failing for many default members." 

The previous administration stuck with the conservative investment mandate for default KiwiSaver funds amid stiff lobbying from the industry to introduce a life-cycle approach, linking the level of investment risk to a person's age. Leading into the 2013 review, government officials sought a better alignment between fund managers and investors which they said at the time had an "inherent misalignment" between investor interests to maximise returns over the long term and fund managers, who want to increase funds under management, typically by focusing on short-term gains.

The following year, Westpac Banking Corp, Bank of New Zealand, KiwiBank and Grosvenor Financial Services (now Booster) joined AMP Financial Services, Australia & New Zealand Banking Group, ASB Bank, Mercer and Fisher Funds as default providers for a seven-year term. 

Cliffe and his cohorts want to see changes in the way default funds operate, including the establishment of a white-label government fund with a balanced investment mandate, into which all longer-term default members are switched, and with minimal investments in Australian-owned bank securities. 

That comes as Parliament's economic development, science and innovation committee is considering submissions on NZ First MP Fletcher Tabuteau's private member's KiwiFund Bill, which seeks to set up a working group to investigate a government-owned and operated KiwiSaver provider. 

Financial services firms, including ASB Bank, ANZ Bank New Zealand and Westpac New Zealand have so far opposed the establishment a Crown-owned KiwiSaver rival, as have lobby groups the Bankers' Association and Financial Services Council. 

"We are concerned that, a government guaranteed scheme would potentially distort the market, create a moral hazard and create a new and unjustified burden on tax payers," FSC chief executive Richard Klipin said in his submission. "We therefore do not support the bill in its current form and consider that, should the bill proceed, there are several areas where the bill can be improved." 

The select committee will report back to Parliament by Aug. 21.

Among other initiatives Cliffe and his fellow advisers would like to see are ensuring Inland Revenue providers default fund managers with correct member tax rates for all members, investigate  potential conflicts of interest where fund managers invest default fund holdings into related party securities, require management fees be refunded for investing in a fund manager's own securities, and requiring explicit disclosure of investment conflicts. 


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