Banks are concerned New Zealand First’s bid to launch a government-run KiwiSaver provider risks undermining the whole KiwiSaver scheme.
The KiwiFund Bill proposes establishing a working group to advise on setting up a fund that’s guaranteed by the government, has lower fees and gives preferential treatment to ethical and New Zealand-based investments.
Having passed its first reading in Parliament on February 21, the public had until April 13 to provide feedback on the Bill to the Economic Development, Science and Innovation Select Committee.
The New Zealand Bankers’ Association (NZBA) in its submission highlights a raft of concerns that echo some of those made by National MPs during the Bill’s first reading.
Government guarantee skews competition
The NZBA argues giving preferential treatment to ‘KiwiFund’ in the form of a government guarantee would “skew the competitive nature of the KiwiSaver market”.
While banks are arguably the worst offenders in terms of giving their customers incentives to join their KiwiSaver schemes, the NZBA points to a warning the Financial Markets Authority (FMA) recently made on this: “Our [The FMA's] concern would centre on whether the value of the incentive is such that the customer focused on that, rather than making a good decision about KiwiSaver.”
The NZBA goes on to say a government guarantee could “create a moral hazard, where investors may not apply the normal rigour to their investment decisions”.
Furthermore, it “may disadvantage investors in other schemes and raises the question: why should all New Zealanders bail out just one group of KiwiSaver investors, or any KiwiSaver investors at all?...
“There is also a risk that some providers may exit the market, resulting in less choice for consumers.”
Prioritising local investment concentrates risk
The NZBA also sees giving preferential treatment to New Zealand-based investments as problematic.
It says, “Currently 47% of total KiwiSaver funds under management are invested in New Zealand assets (we note that this is significantly higher than the New Zealand Superannuation Fund which has 14.4% of its funds under management invested in New Zealand assets). This suggests there is already a strong representation of New Zealand assets in KiwiSaver.
“Mandating a bias towards New Zealand assets by way of the Bill could inflate New Zealand asset prices and create concentration risk, which could adversely impact fund performance.
“Additionally, it may encourage investment in passive conservative assets which does not benefit New Zealand businesses.”
Implying the KiwiSaver regime isn't in good shape dampens investor confidence
Fundamentally, the NZBA says the proposals in the Bill signal that something’s wrong with the current KiwiSaver regime and that the FMA isn’t adequately regulating providers.
The NZBA disagrees with the general policy statement that the working group “examine the accountability of current KiwiSaver providers relating to complaints of charging exorbitant fees, unethical investments, and profiteering in the trading of KiwiSaver providers”.
It says claims of exorbitant fees, unethical investments and profiteering generalised across the industry are simply incorrect.
While KiwiSaver investment fees as a percentage of returns fell in 2017 (from 16.87% in 2016), they still sat at 9.84%, according to the FMA.
The NZBA says “significant work” is underway across the industry to help KiwiSaver investors better understand the fees they pay.
It notes the FMA’s focus on this area, which has resulted in providers being made to publish fees in dollar terms as of this month.
“Providers offer a wide range of investment options, and this necessitates a wide range of business models,” it says.
“Additionally, the industry has made considerable progress with regard to responsible investment practices. Transparency has greatly improved through the provision of environmental, social and governance statements as part of KiwiSaver product disclosure statements.”
Overall, the NZBA says the working group “should be cognisant of FMA’s efforts to date”.
It warns the signals the Bill sends about the state of the KiwiSaver regime are “likely to have a negative effect on investor confidence”.
*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.
24 Comments
"Banks are concerned New Zealand First’s bid to launch a government-run KiwiSaver provider risks undermining the whole KiwiSaver scheme."
No. New Zealand First's bid to launch a government-run scheme risks undermining the banks cushy position and profits.
At the start of the GFC, and uncertain as to what the implications were to be, I moved my KiwiSaver to ASB cash account (banks safe, cash less risky).
I soon found out that my return was less than that of a cash (and much less than a term) deposit. Why? ASB KiwiSaver is owned by ASB Investments, an independent subsidiary of ASB Bank. ASB Investment as managers take their clip (1%?) plus fees for simply moving it to ASB Bank at wholesale rates (less than retail term deposit rates).
This was reported in the press at the time.
Handy link for you here: https://fundfinder.sorted.org.nz/ ... shows breakdown of investments under each fund and fees, returns etc.
FYI ASB cash fund is mostly invested in Westpac. Large commercial deposits like this dont attract the premiums that retail deposits do because RBNZ down-weights them for liquidity.
Depending on your # of years until retirement, it's generally not great to park funds in Cash Funds...
The heart of the problem regardless of what you think of the banks is this furthermore taxpayers will once again be on the hook we are on a very slippery slope.
“Our concern would centre on whether the value of the incentive is such that the customer focused on that, rather than making a good decision about KiwiSaver.” The NZBA goes on to say a government guarantee could “create a moral hazard, where investors may not apply the normal rigour to their investment decisions”.
It's an appalling idea. A government guarantee sounds like all lollipops and unicorns, but ultimately someone has to stump up with the cash to make good losses - who do you think that is? Meanwhile the incentive is for the managers to "hit it out of the park" with risky investments, knowing that the taxpayer will bail them out if/when they go wrong.
It effectively makes Kiwisaver a defined-benefit scheme, which will have all sorts of repercussions (as we're currently seeing in the US). The negative effects on government finances are potentially enormous.
The NZBA goes on to say a government guarantee could “create a moral hazard, where investors may not apply the normal rigour to their investment decisions”.
Hahaha.
NZBA are talking about the investors??? No. The moral hazard, if any applies to the fund itself. But lets assume that its not going to go crazy and act like South Canterbury Finance 2.
I think such a fund will be reasonably popular. Certainly with me, given that my retirement savings are too important to me to consider gambling them on the stock market.
The other thing is:
“Additionally, it may encourage investment in passive conservative assets which does not benefit New Zealand businesses.”
I think a lot of the money that is now going into term deposits with banks essentially comes from Kiwisaver accounts. They are quiet on this but in private they will be very much appreciating this source of money because they are not having to borrow much (more expensive) money internationally at all at the moment.
You need to understand moral hazard. It's no laughing matter actually.
If I choose a high-risk fund, and lose 10% in a bad year, then that is my loss and if I don't like it I should choose a more conservative fund.
You throw in a government guarantee, then of course I am going to choose the high risk fund, because there is the chance of high returns, and no downside.
You think a guaranteed investment will be popular - no sh*t, hence moral hazard. It won't be just reasonably popular, you'd be a fool not to jump in.
The laughable thing here is that you somehow think that such a fund would not be investing in the stock market.
You are still incentivising big risk taking by a few and transferring that risk to everyone paying tax regardless of the magnitude required for the guarantee to kick in.
As stated above you'd be crazy not too because you will pay in the end anyway even indirectly.
Uninterested - you need to clarify the terms you are using (provider or fund). A provider will usually have a range of funds for people to invest in, normally according to levels of risk (e.g. conservative fund, balanced fund, growth fund, aggressive fund).
To find a fund that does not invest in shares, you are looking for a very specific type, e.g. it might be called a fixed interest fund, which only invests in bonds, term deposits and cash.
Any fund that has the name such as the four I have mentioned will be invested into shares.
The point is that there is no reason to be conservative if the govt guarantees your investment.
You are right though in that the devil is in the detail about what the govt is actually guaranteeing.
This is all kinds of wrong.
To even come up with such an idea is to misunderstand the most basic principle of investing, being risk vs reward.
Why on earth would someone invest in a conservative fund? Everyone is incentivised to jump into the highest risk fund. Who cares if it loses money when your investment is guaranteed by the govt!
Expecting something economically sound from NZF is the first issue.
Of course the banks are concerned to protect their fees stream: that's the nature of capitalism: looking after yer revenue.
But their note about concentration risk is to me the biggest negative for the proposal. NZ is such a small, undercapitalised market that making 'investments' solely in it is simply economically ludicrous.
And then there's that Gubmint Guarantee, which if exercised would be paid for by the person you can spot in any mirror....
Words fail me....mercifully.
No, the govt should stay out of retail kiwisaver offerings. They already get the same effect by selling LGFA and treasury bonds to Kiwisaver providers now. eg, the ASB moderate fund has 6 of its top 10 investments in NZ govt & LGFA bonds. https://www.asb.co.nz/content/dam/asb/documents/kiwisaver-fund-updates/… <-bottom of page 2
Kiwi saver owners? Do you mena the company providing the kiwisaver scheme? Or the individual whose money isinvested in the kiwisaver scheme?
if the 2nd:
1) as far as i know it is free, but certainly not instant. I don't think instant is realisitc, but certainly having a 5 working day maximum timeframe would be good.
2) a lot of overhead for something that is supposed to be a long term investment, and shouldn't be tampered with on a regular basis. Also real time.. given that my kiwisaver fund is invested (via various other funds) in over 3000 different investments in 20+ countries all in different time zones with different trading windows.. ick.
3) certainly agree with some maximum limits on fees, but if the underlying international funds have buy/sell spread then that difference has to passed on to you somewhere.
If you have that much of a problem with kiwisaver, you could always go on a contributions holiday. Just throw the minimum amount to get the govt money in the lowest fee kiwisaver you can find and self manage the rest of it yourself. there are many retail funds, sharsies, investnow etc that offer access to many ETFs.
Pity about the government guarantee and preference for NZ investments as I thought the idea of a government provided Kiwisaver fund would be good to keep the private ones honest. What about allowing individuals to invest private equity in the NZ superannuation fund (or a tracker of this)? Surely admin fees could be kept reasonably low for this type of scheme (maybe making use of the IRD machinery)?
Isn't it a given in the light of what happened after GFC when Banks were bailed out that if any Kiwisaver provided goes under here the Govt will come to rescue the customers ?
I don't think the Govt will stay still and do nothing to restore confidence and trust in Kiwisaver. It is already TBTF in a manner of speaking with billiions in investment and play...
The way kiwisaver is structured (at least from what I have seen) it really wouldn't be a big deal if the provider goes under.. it just means the providers running cost were higher than their fees brought in. Your investments are in trust so are safe. So the govt stepping in would pretty much just sell all the investments to cash them up, then ask you which provider you would like to switch to and send your details and money through to the new provider.
Of course if the provider can't manage to keep their outgoings under their income then they probably did a bit of a poor job managing your money so there might not be much to send to the new provider.
The govt better do nothing in that case.. investments can go down in value, that why you have to diversify and invest in asset classes that suit your risk profile. But that is on the investor, so long as the fund follows its published asset allocation policy reasonably well the govt needs to shrug and say 'hard luck fella".
create a moral hazard, where investors may not apply the normal rigour to their investment decisions”.
Since when did kiwisaver providers apply morals in their operations ?? Judging by their exorbitant management fees & how the figures are woven into the accounts in a way that befuddles ordinary consumers, "moral" considerations are as alien as swallows in winter .
Little wonder that the government had to wield the big stick by way legislation to tame them a bit into saner management fees & a more transparent fee reporting regime.
Keep it up Labour by prioritising consumer over vested interests
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