Over 400,000 KiwiSaver members may have lost out on approximately $1 billion over the last six years with banks and insurance companies profiting from the loss, according to a group of financial advisers.
$800 million of KiwiSaver default funds are currently invested in securities issued by Australian-owned banks and insurance companies. According to the advisers, KiwiSavers investing in these funds have lost out on at least $830 million, and may also have overpaid an estimated $100 million in taxes.
In an open letter to the Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ), a group of financial advisers set out the reasons why KiwiSaver members have ended up missing out, and have proposed a 10-point programme to address the issue. According to the group, the main reasons for the loss include a failure on the part of MBIE and the FMA to reform its strategy on default fund providers, and a failure of the providers themselves to meet their obligation to switch members out of the default funds.
“Default funds were designed as a ‘temporary holding place’ for new KiwiSavers from which they could be switched to a more appropriate fund,” said authorised financial adviser John Cliffe, who spoke on behalf of the group. “They are well understood, yet little of real substance has been done to resolve them by those involved – this includes the banks and insurance companies, the FMA, the Reserve Bank or successive governments.”
Assessing the losses on an individual level, the group found that KiwiSaver members with conservative funds have lost an average of 12.5% over the last 10 years when compared with the results of a balanced fund. This amounts to a $3,400 loss for a member earning $20k per annum, and an $8,100 loss for a member earning $60k.
“This is a serious financial issue that has not and is not being resolved,” Cliffe stated. “There are clear conflicts of interest with some default KiwiSaver providers, and it has cost some of the most vulnerable New Zealanders significant sums. It is both an inexcusable and continuing problem.”
The adviser group has set out a 10-point plan in its open letter to the regulators. Its suggestions include changing all default fund options to balanced, not conservative fund types, progressively removing all default members who have remained in a default fund after 12 months, and investigating KiwiSaver fund managers who have “significant conflicts of interest.”
“The FMA, government ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education is required, along with better fund manager performance,” said Cliffe. “After a decade of failure with this approach, it is time to take action.”
