The big KiwiSaver default fund shift has arrived

The biggest change in KiwiSaver since its inception occurred yesterday, affecting the savings of more than 234,000 people invested in default funds.

A default fund is a KiwiSaver fund that new members are automatically placed in when they join the scheme. KiwiSavers can then choose to move to another fund type.

But last year the Government announced sweeping changes to the default fund system, signalling that default portfolios should be balanced, not conservative, and favoured fund managers charging lower fees.

The result was that former providers, AMP, ANZ, ASB, Fisher Funds, and Mercer, lost their status and Simplicity and Smartshares were added.

Under the current scheme the default providers are BNZ, Booster, Westpac, Kiwi Wealth, Simplicity and Smartshares.

In order to manage this shift, more than $2.4 billion will change hands during the next few weeks, with the transition starting today.

David Boyle, head of sales and marketing at Mint Asset Management, said the transition could be costly if it was not handled correctly as the conservative investment portfolios of 233,000 KiwiSaver members had to be cashed up and immediately reinvested in growth assets.

Boyle was happy to see that the Government was finally shifting default KiwiSavers to balanced portfolios, something he said should have been done long ago. But more than market gains, he hoped new default providers would be able to engage with default members, who are historically unengaged with their KiwiSaver funds and notoriously hard to reach.

‘‘These default fund members may think they don’t need or want to be contacted, but the industry needs to be better than that. It is so important that we make sure this part of the market has some contact with their KiwiSaver provider not for anything else but making sure they understand what their fund will mean for their retirement,’’ Boyle said.

Joe Taylor, chief executive of KiwiSaver advice firm BetterSaver, said shifting the default scheme from conservative to balanced might not provide the best result for many members.

‘‘I think this is risky. Moving from conservative to balanced puts their money in a higher risk fund. If they are hoping to use their money in the near term, such as if they are retiring soon, then they could potentially lose money,’’ Taylor said.

The one size fits all approach the Government has chosen for default members will not fit everyone’s situation, he said.

‘‘What is a default fund there for? It is to get people saving, and I think moving everyone into a balanced fund just adds an element of risk for a default fund for people who haven’t made active decisions,’’ Taylor said.

Simplicity managing director Sam Stubbs said anyone concerned about the movement of money had the wrong end of the stick.

Stubbs said that of the $2.5b of conservative funds being sold, only about $250 million was New Zealand shares. ‘‘In terms of the daily liquidity of the New Zealand stock exchange that is a drop in the ocean. It might be two days of liquidity spread over two months, so anyone who is trying to make money over that period of time may find themselves sorely disappointed.’’

Most of the heavy lifting of the exchange was being done by Inland Revenue, the default scheme switch had been a fairly straightforward process, he said.

‘‘From our point of view it has been relatively easy. Basically the IRD is doing the switch. There are about 40,000 new members per provider. So we are going to wake up on December, and we will have 40,000 more new members than we did,’’ Stubbs said.

Tom Simcock, financial markets manager, at MBIE said a great deal of effort had gone into working with providers to make sure the transfer process was efficient and safe.

A spokesperson from the Financial Markets Authority said the long transition window over a number of weeks had been designed to allow providers to space out their transfers and reduce costs for members.