Saturday, April 7, 2012

The Trouble with Pushing People Around–More KiwiSlaver Problems….

It appears there is some disquiet about the default provisions of the KiwiSaver scheme. At present some six relatively lucky providers are the “default” providers for those savers who find themselves compelled by law to donate their hard earned to the Kiwisaver scheme and forget, fail or otherwise do not nominate who that provider should be.

In the interests of the great egalitarian state and “fairness” one of six (actually five since one of them owns two of the providers) carefully selected providers are chosen to receive such funds on a random basis as the default provider.

The unsolicited punter can change to a different provider if he or she wishes. Personal experience tells me that in fact the process is somewhat bureaucratic and takes the expected length of time any transfer run by a government sponsored scheme would be expected to take.

Being one of the providers is fairly helpful. It is helpful not just for the fact that one gets a certain guaranteed stream of funds and attendant fees, but – and the Herald article along with the commentators seem to completely miss this point – it means that with the dice assuring one that one will get ones share, there are five other competitors one need not worry about.

And these are not just any competitors. They are for any given fund manager the five other largest competitors in the market. Not having to compete with them because the dice is ensuring you get a good lick at what is going is very helpful indeed.

The providers are well aware of this of course. Evidence for this comes from “our man from Tower” popping up and declaring that, sadly, they have barely broken even having sunk an enormous amount of money into establishing themselves as a provider and ensuring that the punter gets a great service.

His conclusion is the oft quoted and ever helpful, quaint and folksy “If it ain’t broke don’t fix it”. Clearly it is not broke from his point of view. The last thing he needs is someone “fixing it”.

The Herald article and commentators suggest a variety of solutions. Unsurprisingly their first port of call is that “the State” should provide a default service. Brilliant. If the State’s well-known acumen in the finance sector is to set the benchmark then again one wouldn’t be too worried about the standards that one is likely to have to meet down in the provider bazaar.

What seems to be missed in this commentary and others is that the net effect of having a default provider system with six carefully mandated and selected providers is two-fold:

  1. It means these providers don’t have to compete with one another to get Kiwisaver business. Inhibiting competition like this results in outcomes we are all too well aware of; and,
  2. Various drivel about consumers and investors not being able to choose for themselves simply continues a situation where citizen knowledge of investment continues to be poor. If punters can’t decide which provider to use or are unaware of which provider they ought to use then it is more than high time they learnt.

Good financial outcomes in New Zealand require better education amongst consumers. Squashing incentives to learn and become educated in matters of risk and return involves the same arrogant paternalism that led to the need for the Kiwisaver scheme in the first place.

If, of course, these providers produce such wonderful results and provide such an incredibly competitive service that they are without peer then they have nothing to fear from open competition. Putting selected default provider status utterly to the axe would be a, shall we say, “fair” test of their claim.


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