People who don't choose which KiwiSaver fund they want to be in will be a lot better off over the long term under new changes revealed by the Government.

It has completed a review of the KiwiSaver default provider arrangements.

The term of the existing nine default providers, the schemes into which people are placed if they do not make an active choice, will expire in June next year.

As it works through the process of deciding who will be the default providers in future, the Government is also changing the settings under which they must work.

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Instead of default funds being required to be conservatively invested, with a heavy weighting to cash, they will be required to be balanced funds.

That means that they will have more money invested in growth assets such as shares.

While there may be more volatility for balances as a result, customers who do nothing should end up better off over the long term because growth assets outperform over time.

When KiwiSaver launched, it was intended that default funds would be only a "parking space" for people while they decided whether they wanted to invest.

But large numbers of people have not made a choice, even 12 years later. There are still 400,000 people who are in default funds without having made an active choice to be there.

Someone on $50,000 a year from age 18 in a default fund on the current settings, contributing 3 per cent plus an employer's 3 per cent, could expect to accumulate $161,933 by 65, according to AMP's calculator. In a balanced fund, that would rise to $209,110.

Commerce and Consumer Affairs Minister Kris Faafoi said he hoped it would mean a significant improvement for consumers.

Many people did not realise how big a difference changing the type of fund could make, he said.

KEVIN STENT/STUFF Kris Faafoi said the changes should be a boost to KiwiSaver balances.

Retirement commissioner Jane Wrightson said it was a major change.

"Increasing the risk level of your KiwiSaver fund from conservative to balanced or balanced to growth will have the biggest impact of any factor on your overall returns – more than fees, more than the Government contribution.

"The Government uses an example of someone joining KiwiSaver at 18 on a starting salary of $42,500, contributing 3 per cent of their income into a balanced fund," Wrightson said.

"By the time they're 65 it's estimated they will have around $56,000 more than if they were in a conservative fund. Most KiwiSaver members will make even bigger gains as they will earn more and may contribute more over their working lives.

"We are very much in support of this change as a way to increase people's retirement savings."

During the submission process, there was support for a change.

GRANT MATTHEW/STUFF Retirement commissioner Jane Wrightson says: "Increasing the risk level of your KiwiSaver fund from conservative to balanced or balanced to growth will have the biggest impact of any factor on your overall returns."

BNZ said in its submission: "This is because the concept of default funds as short-term "parking spaces" does not appear to be well understood given the large proportion of default members who stay in default funds and do not engage with their default providers."

ASB argued that it would be better to improve customer engagement to make an active choice rather than change settings.

But ASB said that was difficult and the Government could end up having to support those who did not make good investment decisions.

The providers pointed out that people who wanted their money within a short period of time to buy a house would need a more conservative setting to preserve their savings, but they said those people were more engaged with their investment, anyway,

Another option considered during the review was a "life stages" model where risk is dialled down over time but the industry raised concerns over how the appropriate model would be decided on.

"The change is intended to make a real difference to people's financial wellbeing in retirement," Finance Minister Grant Robertson said.

"We're also focusing on ensuring New Zealanders get greater value for money from their fees, which we know can make a big difference in the amount of money people have for their retirement. So the fees each provider charges will be factored into the providers we select during the procurement process."

Faafoi said another key area of focus would be to ensure members had all the information they need to make good decisions about their fund.

"We want all New Zealanders to enjoy the benefits of KiwiSaver. No fund will be right for everyone so we're requiring default providers to do more to engage with their members and help them make the right decision for their circumstances.

"This will help with things like understanding what fund is best for KiwiSaver members and how much they should be contributing so they are on track for the type of retirement they want," Faafoi said.

The Government will also require default funds to exclude investment in fossil fuels.

Faafoi said investing money in a sector that did not necessarily have a long-term future was "not necessarily the wisest investment decision to make".

"This reflects the Government's commitment to addressing the impacts of climate change and transitioning to a low-emissions economy," he said.

"It also makes sense for the funds themselves given that there is a risk of investing in stranded assets as the world moves to reduce emissions.

"In 2017, the $47 billion New Zealand Superannuation Fund adopted a climate change investment strategy that resulted in it removing more than $3b worth of stocks that exceed thresholds for either emissions intensity or fossil fuel reserves, without negatively affecting performance. So we know that moving away from investments in fossil fuels doesn't have to mean lower returns," Faafoi said.

Barry Coates, who founded Mindful Money, a platform that allows investors to see what their KiwiSaver funds are invested in, said there was about $62 million invested in fossil fuel companies from KiwiSaver default members who had not made an active choice about their funds.

He said a move away from fossil fuels should help boost their returns, too. "There's increasing evidence that fossil fuels are not good investments."

The Government had pondered introducing a wider responsible investment mandate for default funds and Coates said it would have been better if it went beyond fossil fuels to exclude other investments that drove social or environmental harm.

As it was, he said the fossil fuel ban should be extended across all KiwiSaver funds.

The Government is not setting any clear rules around fees but Faafoi said there would be an obligation on providers wanting to be selected in the next round of defaults to have competitive fees.

He said providers would need to be mindful that if they were charging fees, that they were fair and people were getting a service for that.

SIMON MAUDE/STUFF Requiring default funds to be balanced, not conservative, should give KiwiSaver members who don't make a choice more money at retirement.

Wrightson said the changes had responded to concerns raised during the review of retirement income policies.

"We support the drive to push fees lower through the procurement process, though would have liked to see Government go one step further and enact our recommendation from the review of retirement income polices to exclude fixed fees from low balance KiwiSaver accounts, say those containing less than $5000.

"Still, incentivising providers to provide low or zero fees for members with low balances is a move in the right direction."

Wrightson said a Commission for Financial Capability survey of 2000 New Zealanders showed 74 per cent of KiwiSaver members were interested in ethical investment.

When it came to fossil fuels, 41 per cent of respondents wanted them excluded from their fund, a figure which increased to 46 per cent of younger members and to 49 per cent of women.

"It was clear from the submissions we received during the review that a significant number of KiwiSaver members want transparency about where their money is invested," Wrightson said.

She was also pleased to see an emphasis on driving fees lower.

"Fees matter, especially for younger KiwiSaver members – in our survey 41 per cent of 18 to 33-year-olds told us fees were the second most important consideration after performance when selecting a KiwiSaver fund, yet many submitters felt they were being charged excessively.

"They also did not know how to tell whether the fees they were being charged were fair, or how they compared to other similar funds."