Stop letting the Government be your KiwiSaver matchmaker

If you view KiwiSaver through the eyes of a marriage counsellor, what would they say about our great retirement institution?

Well let's be frank. It's one big Married at First Sight disaster zone.

We have 28 fund managers and the government swiped right on nine of these. The nine special ones became default partners and 430,000 Kiwis have ended up in a long-term relationship with them. It wasn't intentional.

As matchmaker extraordinaire, the Government didn't want to upset anyone. Our money-marriage was arranged by spinning a roulette wheel.

We were randomly hooked up with one of the dull, bland and uninspiring partners. It was our job to wriggle out of the predicament.

Despite being asked if we were happy or if we'd like something more exciting, 430,000 of us don't want to discuss it and wont respond.

Why? Because the matchmaker sent a very strong and early signal that picking a low-risk conservative partner was the right thing to do. Dare to move at your own risk. To the unconfident it felt like defying the wisdom of your Gran.

It wasn't the fund manager's fault, either. They got told to strip off their jazzy clothes and take the mousse out of their hair. Forced to arrive at the alter showing only the most conservative side of their personality, they hoped to strut their stuff and woo us properly later.

They wrote, they rang, they emailed, all while being monitored and told off for not trying harder. The trouble is, once you've metaphorically married a nun or vicar, it's hard to erase the mental picture. The strutting only gives rise to an eye-roll.

Marriages based on dull conservatism are never a good idea. They risk failure in the same way that marriages full of excitement, but not enough stability, are prone to blow up.

The world of funds management is no different. Industry best practice is a balanced fund (a balance of bonds and shares, a stable base with controlled excitement). It suits the vast majority of people over the long term.

Anyone accepting a very low-risk conservative fund should not be fooled into thinking it's less risky. It will be in terms of volatility, but long-term underperformance must still be presented honestly. It leaves you poorer and disinterested.

The seven-year itch

Even the government suffers from the seven-year itch and reviews default partners. It decides if any will get the flick and brings in extras to spice up the mix.

Before they do this in 2021, they've decided to look at the whole Marriage at First Sight predicament. They blandly call this "the settings".

Submissions were called for and closed last month.

The matchmaker has acknowledged that forcing default managers into nuns and vicars outfits isn't doing anyone any good. They had no idea so many of us would get paralysed in fear or apathy and fail to move on.

Quite rightly, they're giving serious consideration to knee-length skirts and cargo shorts – the good old balanced fund.

It's an admirable stance and one I sincerely hope isn't paying lip service to the problem. The consultation process will soon tell us.

They're also considering a life-stages option. That's where the fund managers get forced back into the nun's outfits, the older we get. The trouble is, at 65 we're not old and life-stages solutions are now out of sync with longevity.

Close conservative default funds

Even if things change it still leaves a massive legacy issue of 430,000 people and billions of dollars stuck in conservative funds. This needs confronting rather than leaving it to rot.

1. All default funds should be wound up with an automatic move into a balanced fund. An opt-out into the manager's conservative fund can remain for those who are there willingly.

2. Or, close default funds so no new money is added. All new payments should be allocated to a balanced fund, with opt-outs.

These savers would end up with a split of conservative and balanced solutions, which is not abnormal or difficult.

All managers become default managers

What the consultation hasn't raised is why we have a select number of default managers at all.

Their initial purpose is no longer relevant. Default providers initially helped savers trust the system. It was hoped managers would stay innovative and competitive by competing in a tender that restricted the flow of new money to a select group.

The entire question needs turning on its head.

In a mature market there should be an assumption that all managers become default providers with exclusions in certain cases. For example, it doesn't feel appropriate that those who are too new, too small, or have a specific narrow purpose would qualify.

Why is it not a process of elimination rather than inclusion? If the government isn't happy to give a manager a default dollar in a more mature market, you've got to ask why.

Given they've let them set up a scheme and use the KiwiSaver brand, the horse has bolted. Either revoke their license, exclude them as an anomaly or give them a share of the dollars coming in. They have our retirement savings so you have to back every manager out there.

The KiwiSaver market has grown rapidly since 2007. There's $57 billion under management and every approved scheme should be under the same scrutiny and pressure to provide a good value range of funds. The public expect it. Every dollar deserves identical trust, monitoring and fair fees.

While market movements can't be controlled, if one of these schemes suffered a liquidity, credit, fraud, fee or insider trading scandal (preventable with better regulatory oversight), what would the Government do?

Hands in the air and exclaim we should have been with one of the nine default managers who went through a beauty parade dressed as nuns and vicars? No they'd be forced to mop up the mess and stand by the KiwiSaver brand they created.

It's always worth stopping for breath. Rolling out the same methods for another seven years isn't compulsory. There's plenty of time for a solid new regime that backs the whole market.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.