Big News has a post on the "wasted vote". We all know - or we all should know - that under MMP, the number of seats a party wins in Parliament is determined by its proportion of the party vote. But it's a little bit more complicated than that, because if we simply applied the above rule, we would always have a Parliament of less than 120 seats, due to the distorting effects of the 5% threshold. In order to have a fixed-size Parliament, we therefore assign each party seats based on the proportion of the party vote of all parties eligible for seats. This isn't so much a reallocation of the wasted vote (as Dave mischaracterises it), but a way of ignoring it. Those votes are effectively not even counted in the final result.
(The exact number of seats is actually determined by the Sainte-Laguë formula, but this is really about who benefits from rounding)
If we are concerned about the "wasted vote", then there is an obvious way to solve it: elminate the threshold (or rather, reduce it 0.8%, the amount required to gain a single MP). While some parties will still fail to make this lower barrier, there will be far fewer wasted votes (only 20,023 based on last election's results), and therefore far fewer people disenfranchised. And in a democracy, that can only be a Good Thing.