Group of AFAs tackles KiwiSaver problems

A group of financial advisers says big banks are using KiwiSaver to line their pockets.

The group wants changes to the way default KiwiSaver schemes operate.

The group is made up of John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland,  Michael Lay, John McLean, John Milner, Tony Walker and John Wood.

The group wants all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

New default member flows should be stopped to any default provider that did not meet specific engagement and switch-out rates for members and the white-labelled fund should be told to minimise investments in Australian-owned bank securities, the group said.

Fund managers with conflicts of interest in security selection should be investigated and management fees should be refunded when they were charged for placing and keeping investments in their own issued securities.

The group also wants explicit identification and disclosure of conflicts to members.

It estimates  $1.5 billion of KiwiSaver funds are invested in securities issued by Australian-owned banks and insurance companies.

“The problems with default KiwiSaver funds are systemic and long-standing,” Cliffe said, speaking on behalf of the group.

“They are well-understood, yet little of real substance has been done to resolve them by those involved, including the banks and insurance companies, the Financial Markets Authority, the Reserve Bank of New Zealand or successive governments.” 

He said the government’s decisions to keep default funds conservative rather than balanced has resulted in default members missing out on approximately $830 million over the six years ended March 31, roughly $2.7 million every week.

Many of the lowest-income earning KiwiSaver members are paying tax at the highest possible rate of 28%, when they should have been taxed at 10.5% or 17.5%.

The IRD supplies default KiwiSaver funds with default member account details but not the member’s tax rate, so unless a fund successfully contacts members and gets their tax rate, it is required to deduct tax at 28%, the maximum rate. This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund.

The group said the real winners in the scheme were Australian-owned banks, which had been able to invest the default funds in their own and each other’s securities.

As at March 2018 this amounted to 31% of the ASB’s default fund, 30% of ANZ, 31% of BNZ, 27% of Westpac and 34% of AMP. If a balanced fund option for default funds was implemented, the exposure to Australian-owned bank securities would decrease by approximately $1 billion. The banks charge KiwiSaver members management fees for investing their funds in this way. 

“The FMA, Government Ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education of default investors is required along with better fund manager performance in switching out default members to solve the problem,” Cliffe said. “After a decade of failure with this approach it is time to take action.”