Nationalised version of KiwiSaver could boost savings, but at what cost?

By Amanda Morrall

The creation of a single-default KiwiSaver scheme has been challenged by existing providers who questioned what good would come of it.

But according to the Saving Working Group, which tabled the recommendation to Government Tuesday, the move could lower consumer costs by as much as 50%. See more in Alex Tarrant's article from Wellington.

Group member Mary Holm said despite competition among the six existing default providers and more than two dozen others operating in the market, fees "could be a lot lower."

She said a universal default scheme would have the effect of producing wholesale fees which would translate into considerable long-term savings for KiwiSavers.

"Anything to get the fees down would be terrific," she said.

Some providers weren't convinced that adding another default scheme would make a difference on fees.

"Why would the government set up a business that competes with the private sector if the private sector already has suitable products?,'' said SuperLife's Michael Chamberlain, whose scheme boasts some of the lowest fees on the market. See more in our article here.

Chamberlain said the creation of a single default scheme also raised many questions about who and how it would be managed and what kind of guarantees it would have.

"The government will have to consider a guarantee of some form. Anything else would raise the risk to the individual and I am not sure why as a taxpayer I would want the government to give a guarantee,'' Chamberlain said.

Holm said the logistics of how such a scheme would work would be left to Government as it was outside of the taskforce's jursidication.

Regardless, it was her understanding that Inland Revenue had the infrastructure in place to facilitate such a move.

Tower Investment CEO Sam Stubbs also questioned the move.

"There are a whole bunch of administrative questions about why it would be better for New Zealanders than the current scheme which is already effectively Government controlled, where the rates are very low and monitored by the Government and where Government keeps a very close eye on the operation of these funds," Stubbs said.

To create a new default scheme on the basis that it would lower fees, was questionable, he said.

"The default schemes are already low cost and are already performing well and everyone is keeping each other honest but they seem to be recommending this guise of it being a low cost scheme."

Active and high cost vs passive and lower cost

Stubbs said he was also troubled by the Saving Working Group's proposal to create a scheme that invested only in index based shares and bonds because of the risk of those type of funds not being inflation-proofed, given the record on returns.

"The problem with that is if you look at any active manager in New Zealand, over the long-haul, they generally out perform the index by one or two percent. Those returns would far outweigh what you’d be saving if anything in costs. That doesn’t seem to make economic sense for the majority of providers to be effectively defaulting into a low cost fund that isn’t going to be that much lower in cost than the existing default funds, and effectively giving away returns that would be quite significant when they compounded over time,'' he said.

Holm rejected the assertion that actively managed funds out-performed passively managed index-tracking funds, such as those proposed by the group for a national default scheme.

"I don't buy it. I reckon when you look at the research over the long haul and then compare it to what other countries are doing, the returns are just as good and the fees are lowered. But I know there are plenty of people who disagree with that," she said.

Soft compulsion

In terms of group's soft-compulsion recommendation on KiwiSaver, Holm said the move was directed at getting the people who needed most to be in KiwiSaver invested and taking an interested in their retirement savings.

"We didn’t want to make it compulsory because it would lead to people just moving their savings from one savings vehicle to another, but we do know there are lot of people out there who just haven’t got around to joining KiwiSaver and just feel they don’t know enough about it. But we feel that if all employees were auto-enrolled they could opt out just the same as new employees can now," she said.