The default KiwiSaver landscape is going through another shake-up. With the current government placing focus on the fees and services offered by the default providers, they have announced a series of changes.

The most prominent change is the reduction in appointed default providers being reduced from nine to six.

BNZ, Booster, Kiwiwealth and Westpac are staying on.
ANZ, ASB, AMP, Fisher Funds and Mercer will not be reappointed.
Joining the team are passive providers Smartshares and Simplicity.

The changes will be made effective on the 1st of December 2021. For those providers not reappointed, their default KiwiSaver members who have not made an active choice to remain will be taken from them and redistributed to other providers.

There are about 380,000 of these members enrolled with the nine providers, with over $4B saved, 7.5% of the total funds in KiwiSaver. According to the FMA, this is only down 4.3% since last year.

Although the default providers are expected to get people out of default funds, the numbers don't show much success. Last year, the most successful were Booster and ASB, getting 16% of default members to make a decision, while worst off was AMP with 6%. Their efforts are offset by the steady stream of new members coming in, roughly a third of which end up in a default fund.

As reported by Investment News, the five booted providers represent 85% of the default market, with AMP having 22% alone. These providers will surely be working hard to retain their members before the change in December, although it remains to be seen whether they can improve on historically poor conversion rates.

The effect this will have on the providers is not entirely clear. These member's accounts tend to be smaller than those who have chosen their fund. Mercer has 60% of members in their default fund without having made an active choice, yet they represent 7% of their total funds under management. This may seem like a small chunk, but it does represent more than $1B walking out the door.

Another big change is for the default funds themselves. The current asset allocations are essentially cash funds, with the majority of investments being in term deposits.

In 2018, we submitted a joint open letter to the FMA and Reserve Bank, created with by our friend John Cliffe of Cliffe Consulting. The first of ten recommendations was to change the default fund type to a balanced portfolio. This will come into effect this year.

John estimated default fund members had missed out on more than $1B in gains over five years by not transferring to a balanced fund. It is good to see the proposed change is now being implemented, as default funds will soon follow a balanced asset allocation, with between 40% and 60% allocated to growth assets. The additional growth will better prepare KiwiSaver members for retirement, even if they don't take time to choose the right fund themselves.

Lastly, the government has suggested a larger focus on fees. With the change in default providers, the fees charged for default funds will drop from 0.38% - 0.52% p.a. down to 0.2% - 0.4%. This does not include a member fee charged by some providers, typically $2 - $3 each month.

We strongly support the upcoming changes and believe it will lead to a more competitive KiwiSaver market and better outcomes for New Zealander's retirement funds. While we believe the changes could have gone further, which you can read about in the open letter above, lower fees and a balanced allocation will benefit KiwiSaver members in the long-term.