KiwiSaver Insight: The employer’s conundrum
Why have so few employers chosen a preferred provider scheme? The March 2017 FMA KiwiSaver Annual Report showed that 20,004 employers have a preferred KiwiSaver scheme. As IRD records show that over 200,000 companies deduct PAYE, this suggests less than 10% of all employers have a preferred scheme. This is lower than was originally intended when KiwiSaver was first introduced. But is it leaving New Zealanders worse off or does it not matter?
In the United States, United Kingdom and Australia, employers are required to select a licensed manager at the outset. In New Zealand it was contemplated that after an introductory period which was designed to build confidence in KiwiSaver, both employers and employees would transition from the default regime to selecting a scheme that best aligned with their objectives.
Ten years on, this is exactly what has transpired, with employees at least. Of the 2.8 million1 New Zealanders who have been enrolled in KiwiSaver1, only 16.4%1 are currently in a default fund. Despite a general agreement that these funds are not appropriate as a long-term savings option, new members are still directed to these funds. Under the existing rules, if an employee does not select a scheme and their employer does not have a preferred provider, new employees are randomly allocated across the nine different default schemes. These different default schemes are mandated to have a high allocation to income.
This process is far from ideal from the employee’s perspective. In many cases they receive little or no guidance, they may end up in an inappropriate fund, and there is the high inconvenience of switching. From the employer’s perspective, no employer wishes to be seen endorsing one manager over another in case that manager does a poor job. Anticipating this, the KiwiSaver Act 2006, Financial Advisers Act 2008, and Inland Revenue’s website, state where an employer chooses a scheme they will not be held responsible if the scheme fails. In addition, all schemes are subject to the same regulatory oversight and no scheme is guaranteed by the government, regardless of whether they are a default scheme or not. Nevertheless, whether an employer is legally on the hook or not, employees may still hold their employer morally accountable for selecting one scheme over another, and therein lies the rub.
Interestingly, many employers have chosen a ‘preferred’ healthcare provider, ‘preferred’ insurance provider or ‘preferred’ banking relationship. In most cases they have done so because by aligning with a single provider their employees receive additional value in the form of a discounted price or a higher level of service. In KiwiSaver, employers may be forgoing the opportunity to offer their employees complementary personalised financial advice, financial planning software, regular financial guidance seminars, dedicated call centres and management reporting which can answer questions such as: “What percentage of your employees feel confident about their retirement preparation?”.
Over time, the issue may well end up being resolved by employees themselves. For employers, attracting and retaining high quality motivated people is difficult. Some employers will take full advantage of every comparative advantage they can get, from gym memberships to health and life insurance, banking services and ultimately the additional services and products KiwiSaver providers are willing to offer in order to win ‘preferred provider’ status. As KiwiSaver balances grow, so too will the perceived value of complementary personalised financial advice. Access to an Authorised Financial Adviser may seem inconsequential to an employee when their KiwiSaver balance is in the thousands, but as balances climb into the hundreds of thousands and in some cases millions, so too will the value they place on advice.
We can therefore expect the more competitive and entrepreneurial organisations to be the first movers in the preferred provider space. Interestingly, there do not appear to be enough qualified financial advisers (or schemes for that matter) to provide a full service offering to all of the 180,000 firms yet to align themselves with a preferred provider. It is therefore not inconceivable that, over time, employers find the best schemes are ‘closed’ to new preferred provider relationships. Like in most aspects of business, there will be risks in moving early, but there should also be rewards.
1. www.kiwisaver.govt.nz/statistics/annual/, April 2018.
