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2.2 Administration of the scheme

The administration of the KiwiSaver scheme is carried out by the Inland Revenue, with contributions paid via the PAYE system and using existing relationships with employers. Inland Revenue in turn holds those funds in a holding account and distributes the funds to the member’s nominated KiwiSaver provider. Inland Revenue has a direct legal relationship with KiwiSaver schemes under scheme provider agreements under which the administrative requirements are set out.

Automatic enrolment into the scheme and any subsequent opt-out is administered by Inland Revenue upon an employee commencing a new job. Allocation of schemes to those members who either have not chosen their own or joined an employer-chosen scheme is carried out by Inland Revenue to a number of default schemes, on a consecutive basis. Inland Revenue’s oversight over the administration of the scheme also extends to the enforcement against employers of non-payment of employer contributions.

Inland Revenue acts to ensure that the administration of system is smooth and that its interventions have only limited impact on the competition between providers for members. Switching between providers is made easier for members with standardised notification and transition arrangements carried out by the new fund manager.

Enrolment in the scheme

Salary and wage earners are automatically enrolled upon starting a new job and must actively opt-out within eight weeks. The Inland Revenue deducts employee contributions during this period so workers can see the effect of KiwiSaver on take-home pay. These features ensure that participation among those workers who would not have taken an active step to seek out a retirement savings scheme (ie, inertia) is improved. The automatic enrolment process itself also capitalises on inertia, as once enrolled, members are less likely to take the active steps required to opt-out.

Other methods of enrolment include employees opting-in via their employer's nominated scheme or directly via a KiwiSaver provider. Direct enrolment is also available for all New Zealand citizens and residents (with some exceptions), therefore this includes the self-employed and those aged under 18.

Contribution rates

Following enrolment, employees are required to contribute a minimum of 3% of gross salary or wages with 4% and 8% also offered as options for automatic deductions from pay. Employers are required to contribute an additional 3% of an employee's gross salary or wages which provides a financial incentive for non-member employees to join.

The options available as minimum contribution rates by Government policy influence the rate at which members contribute even after the minimum rate changes. Reductions in the minimum contribution rate in the past have resulted in the majority of members continuing to contribute at the previous (higher) minimum rate.[9]

Incentives and tax

KiwiSaver members receive financial incentives. A $1,000 kick start cash payment (removed from 22 May 2015) promotes enrolment and an annual maximum $521.43 tax credit is intended to incentivise ongoing contributions. Tax is payable on KiwiSaver investment earnings at the prescribed investor rate (up to a maximum of 28%). Withdrawals are not taxed.

KiwiSaver provider admission and ongoing conduct monitoring

KiwiSaver providers are admitted to the scheme provided they comply with the relevant sections in Part 4 of the KiwiSaver Act. Registration occurs upon application to the Financial Markets Authority (FMA) and providers are registered with the FMA.[10] KiwiSaver schemes are established under trust deeds. The fund manager makes investment decisions and receives fees and the trustee holds the assets via a custodian on behalf of the members and oversees the manager in the first instance to ensure separation of investment decisions and ownership of assets.

KiwiSaver providers are required to be licensed by the FMA which also carries out ongoing compliance and conduct monitoring of KiwiSaver fund managers, trustees, financial advisers selling KiwiSaver funds as financial products and other financial market participants which deal in underlying securities held by KiwiSaver funds. The primary laws under which the FMA carries out this conduct monitoring role are the KiwiSaver Act 2006, Financial Markets Conduct Act 2013, Securities Act 1978, Financial Advisers Act 2008 and related legislation and regulations.

The FMA maintains a register of providers and schemes and collects disclosures pursuant to the KiwiSaver (Disclosure) Regulations 2013, publishing these on a quarterly basis on their website and in the FMA KiwiSaver annual reports. This has important implications for transparency of funds under management and the fees and other charges providers levy on members.

Some of these regulatory matters impose frictions on competition between fund managers. The rules relating to identification of clients which are required to be completed when a customer joins or switches to a new fund can impose a transaction cost that dissuades members from changing. There is also a trade-off between regulatory oversight with its associated set-up costs such as preparing legal documents and the barriers to entry for new KiwiSaver funds/providers.

KiwiSaver default funds

Generally speaking, the KiwiSaver fund managers compete with one another to manage the assets of members. The exception to the general rule of direct competition for members is the default provider regime. Individuals who are automatically enrolled upon starting a new job and who have not actively chosen a provider or whose employer has not appointed a provider are provisionally enrolled with a default provider on a sequential basis. Default providers were appointed for a seven year term upon the creation of KiwiSaver and new providers (nine) were appointed effective from 1 July 2014.

The original policy intent was that the default funds would be shorter term holding accounts in response to the inertia automatically enrolled members experience, until an active choice is made about a fund suited to their needs. In the early years of KiwiSaver, there was also a policy motivation to ensure that KiwiSaver was a stable savings vehicle and avoid investor losses associated with volatility.[11] Additionally, the default funds needed to have lower fees since members had not actively chosen the provider. Accordingly, the Government elected to set the investment direction for default KiwiSaver funds as 'conservative' meaning that these invested in cash, fixed interest and other lower risk assets for a relatively lower management fee. Under the instruments of appointment issued by the Government to default providers, KiwiSaver default funds are required to retain a conservative investment approach and limit allocation to growth assets within a 15 to 25% range.

The default funds have a large share of the market. As of June 2014, the (then) five default funds held 26% of total KiwiSaver AUM and 22% of members were automatically enrolled into one of these schemes. The five funds were from AMP, ANZ, ASB, Fisher Funds and Mercer. However, the market share of the default funds has decreased over time, as the default funds held 35% of total AUM four years earlier in December 2010.

From 1 July 2014, nine providers will offer default funds for the next seven year period (up from the six appointed in 2007). These new default providers were appointed following a competitive tender process managed by the Ministry of Business Innovation and Employment (MBIE) that evaluated technical competency, balance sheet strength, governance structures, member education initiatives and fee levels.

The Government's appointment of the default providers is a significant intervention in the market for provision of KiwiSaver funds management to individuals who fail to make an active choice. However, given the auto-enrolment settings of KiwiSaver, it is not clear that the counter-factual for the default fund system would be a market failure. Individuals who are auto-enrolled into a default fund might be myopic or happy to have minimised their search costs by relying on the Government's choice of default manager. The default provider system accompanied the launching of KiwiSaver and ensured the existence of providers with a minimum standard of service provision and costs. The default provider system also aligned with the behavioural design features of KiwiSaver auto-enrolment, ensuring that take-up was not hindered by individuals' failure to actively choose a fund following being automatically co-opted into the scheme.

The 'default status' granted by the Government gives the providers certainty of member growth via the auto-enrolment system which minimises marketing costs for those firms. Once a member is assigned to a particular provider, that provider can market its other (potentially more costly) fund products. Providers with default status also actively market this fact, promoting the Government approval as attractive to potential customers. This demonstrates the spillover benefits of default provider status that exist beyond the flow of new customers via the auto-enrolment system.

Fund/Provider switching

Members may switch between schemes freely. Switching is carried out at a practical level by a saver choosing a new scheme which in turn provides notice to the Inland Revenue and the old scheme of the desire to switch. Upon receiving such notice, the old scheme must action the transfer within 35 days or any longer period agreed between the providers of the old and new schemes.

Notes

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