Credit where credit is due; Pensions come to those who wait, till 80; Do financial advisors encourage bad behaviour?; Dow Jones 101; Goodbye welfare states

By Amanda Morrall (email)

1)  Credit where credit is due - finally

Starting this month, we've moved to something called a positive credit reporting system in NZ. Previously, the information that was captured on your credit report was confined to failures; all those missed, late and skipped payments. The new system works by crediting you for good financial behaviour including prompt payment of bills, rent and credit cards. This is beneficial for creditors in that it helps to more accurately screen for the baddies. It's good for consumers (at least those with a good track record) in that you'll ostensibly be able to leverage that responsible financial behaviour into a good deal at the bank because you have evidence of your credit worthiness. (How to find out your credit report).

Credit reporting agency Dun and Bradstreet points out the other following benefits of the new system.

• the ability to correctly assess low risk individuals is more than doubled in a‘comprehensive’ credit reporting environment;
• under a ‘comprehensive’ credit reporting environment there is a 32 per cent improvement in the ability to identify an individual that is most likely to pay late or default;
• the use of non‐bank information, like payments on telecommunication and utility bills,provides significant improvement in access to credit for previously under‐served sectors of the community;
• young people are the primary beneficiaries because of their limited banking history and the fact that non‐bank credit, such as mobile phone accounts, are the first credit experience of most young people.

Dun and Bradstreet's general manager John Scott says that by documenting good credit performance, the introduction of ‘comprehensive’ reporting removes the barriers to mainstream credit for those individuals who may have previously had an adverse credit event. He said the positive reporting system is always good for small business.

“In particular, small business is a big winner from the new reforms because of the additional information that becomes available on business owners – this tends to turn small business owners from credit ‘invisible’ to credit worthy.”

2) Wait till you're 80, baby

With government pensions dying a slow death, U.K. chancellor of the exchequer George Osborne has proposed resetting the age of eligibility in line with increased longevity. In Britain, that would mean that a child born this year, would have to wait till they were 80 years old to receive their pension. The fact the other nations are exploring such radical measures to address the problem drives home the real urgency of the situation and yet here in New Zealand politicians continue to bury their head in the sand.

This article in the Guardian questions why financial institutions aren't doing more to incentivise savings for youngsters. Here here. I have oft wondered the same. I have been trying to extol the benefits of early saving to my own children but the pennies they earn on their savings account just don't get them excited. I can't say I blame them.

3) Financial advisors

Do financial advisors create better financial outcomes for their clients? That's the theory however this blog posted by rickferri.com points to research that suggests otherwise. Why? Because high fees and commissions (on products that are more in their best interest than their clients) end up robbing clients of potentially higher returns that could be had simply by being invested in low-fee index trackers. This is an interesting debate and one that is particularly relevant here. Why? Because where other countries are moving to ban commissions in favour of a fee only service, New Zealand is committed (for now) to the status quo. Alex Tarrant reports on NZ's position on fees and commissions here.

4) Dow Jones

On the subject of index tracking, here's a primer on how to understand the Dow Jones Industrial  Average via yourguidetoinvesting.com

5) Reason to worry

Beating up on Baby Boomers has become somewhat of a sport. I understand the arguments and reasons for resenting them but I get no joy out of bashing them. The Boomers I know and love have worked their tails off. I don't begrudge them the fruits of their labour one bit. I'm no sycophant, I'm just sympathetic.  That doesn't mean I'm not concerned about the inequities on the horizon with respect to the pension drain down.

In our web-chat Friday with Martin Lewington of Mercer he mentioned the inevitable paring down of New Zealand Super from its current form. Funding costs are projected to double in the next 30 years. Add to that the problem of escalating health care costs (research shows they're three to four times higher for someone over 65 then for someone under 44) and it's going to get ugly.

Save early, save often and plan to fund your own retirement. Government pensions could be a thing of the past.

To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter@amandamorrall