KiwiSaver legislation fails its members

2009
Press release

KiwiSaver legislation fails its members

Yet again KiwiSaver is in the news for the wrong reasons. “This is not surprising,” says Michael Chamberlain of SuperLife, “the problem is the default providers mechanism in the legislation”.

“When KiwiSaver was set up in 2007 with six privileged providers being granted default status and 25 other providers, I predicted then that in five years’ time, there would only be around 10 providers left. Most of the non-default providers would pack up shop and a few of the default provider schemes would be exited” said Mr. Chamberlain.

The system based on the appointment of six default providers, most of whom are not specialist superannuation providers, is flawed. It reduces competition and compromises quality. The demise of the IRIS and eosaver schemes will not be the last. Mr. Chamberlain says the Government should be very concerned about eosaver’s failure. It is an indictment on the KiwiSaver framework and the industry. “There is no excuse,” he says, “for the 3000 members of that scheme to have been left in the financial wilderness, probably totally perplexed as to what has happened.” He adds, “What should have happened is that one or more providers should have had the opportunity to work alongside the trustees of eosaver to offer its members a credible alternative.”

Instead, it has been reported that the large providers were given the opportunity to step in but did not consider it worth their while to get involved. “This smacks of arrogance,” says, Mr. Chamberlain, “as the default providers know that if nothing is arranged for these 3000 members they will automatically absorb them through the default mechanism at no cost.” For many of these members, ending up in a scheme and an investment strategy that gives a different result to what they originally picked with eosaver could mean increased confusion and an expensive transition.

Mr. Chamberlain points out that there are a number of non-default providers that will survive and his company’s SuperLife KiwiSaver scheme will be one of them. As New Zealand’s only independent specialist and experienced superannuation provider, he asserts that it had a head start on most other providers and as such it has the capability and size to survive. “Even prior to the launch of KiwiSaver, we were already in the business of superannuation providing services to some of New Zealand’s top businesses. KiwiSaver provided us with the opportunity that we were already equipped for that was part of our core strength,” adds Mr. Chamberlain. SuperLife KiwiSaver would be a natural home for the current eosaver members.

Mr. Chamberlain is concerned about the fate of the eosaver members and has approached the trustees of that scheme to put together a transfer package that will ensure eosaver members get an opportunity to move to SuperLife’s genuinely low fee based scheme. However it may now be too late. As an investment specialist, he is equally concerned that these members get vital and clear information about their investment options to ensure they are in an investment strategy that they want, not one which they are pushed into through the KiwiSaver default mechanism.

The IRIS scheme, on the other hand, could have been the New Zealand forerunner of the union-based “industry” schemes that are dominant in Australia’s compulsory super environment. Why has it failed its membership? “Primarily because the default provider regime has deprived IRIS of its share of the 400,000 members who haven’t chosen a provider and were allocated by the IRD to a default provider,” asserts Mr. Chamberlain. He adds, “Had the IRIS scheme, been given the opportunity to share in the KiwiSaver bonanza that comes from being a default provider, it too would have quickly got beyond the critical mass of membership that it would have needed to survive and provide a quality option for its members.”

Mr. Chamberlain argues that it was not rational for the Government to hand over automatic business to a privileged few. The default providers have been given an incredibly generous handout by the Government, each getting a kick-start of around 65,000 members and a guaranteed income of fees of around $4 million per annum and growing – much of which will go overseas. Had the handout been given to the 30 providers currently in the market, it would have given each provider 10,000 members - enough to give them a chance to show their capability to survive. “The reality however,” says Mr. Chamberlain, “is even with that kick-start, many would not survive. It would have however provided a real market and incentive for others in the industry to rescue the members of those that collapse into their portfolio.”

The current system deprives the industry of natural competition. This is clearly not in the public’s interest. The guaranteed income handed to the 6 default providers means they have little incentive to commit the time, energy and cost to promoting and differentiating the services they provide to their membership. They also claim that it will take 5 years for them to break even. If they are not already deriving profit from KiwiSaver, then there’s something terribly wrong with their systems and processes.

ENDS

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