Ministry backs aligning KiwiSaver fund manager, investor interests

Ministry of Business, Innovation and Employment officials back better alignment between the interests of fund managers and investors in KiwiSaver accounts as part of a review of the savings scheme's default providers.

Government officials say a balance needs to be struck between an efficient fee structure and maintaining service performance, which is complicated by the differing goals of fund managers and investors, a discussion document reviewing provider arrangements of the default KiwiSaver schemes says.

The ministry says there is 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.

"Ideally, the default product should be structured in a way that ongoing performance, relative to market performance, is linked to the ongoing appointment of the adviser," the report says.

"There is some evidence to suggest that higher fees do not typically translate into higher performance or higher returns." 

The ministry is calling for submissions on the discussion document as part of a scheduled review of the default providers, whose appointments expire at the end of June 2014. Submissions are open until December 24.

Commerce Minister Craig Foss signalled the review in the May Budget, saying at the time it would seek to examine the effectiveness of the default arrangements and what their objectives should be.

The review excluded possible future changes to KiwiSaver settings, such as first home withdrawal, compulsion and transferability between providers.

The default providers were set up at the scheme's inception, so all members would be automatically enrolled in a conservative portfolio, giving them time to choose a more appropriate risk setting in the future.

Of those starting in a default option, about 60% are still in the allocated scheme.

Earlier this year ANZ New Zealand said the default fund settings were costing KiwiSaver members $72,000 in potential savings over the course of their lifetimes. The bank pushed for a new approach based on a person's lifetime, adopting riskier investments early on and shifting to more conservative assets as they got older.

The ministry says a "lifecycle fund offers a greater probability of increased asset growth than a conservative fund" but could be "administratively burdensome and costly".

It is seeking submissions on whether the default portfolios should be kept as is, switched into balanced or aggressive allocations with more growth assets, or whether to introduced the lifecycle method.

A target-date fund – where the fund was linked to an end date, aligning it with an investors' age – was also touted as a possible option.

The report says the government does not favour introducing a single state-owned default provider, and wants feedback on options for the default providers.

It is also asking for submissions on how to transition members into any new arrangements.

(BusinessDesk)