Mary Holm: Bailout unlikely if scheme folds

What's the guarantee?

Although risking disapproval from some of your readers, Mary, could you kindly address one more KiwiSaver question?

My wife, a keen KiwiSaver, was warned by a friend to beware, as the scheme is not government-guaranteed. My response was that as the scheme was initiated by, and generously subscribed to, by the Government, a formal declaration was unnecessary. However, your views would be welcome.

Not only do I worry about writing too much about KiwiSaver, but we now have readers worried about asking about it! You anti-KiwiSaver readers - all five of you - have put all the rest of us on the back foot.

But given only 30 per cent of recent Q&As have been about KiwiSaver, and it's clearly a popular topic judging by your letters, let's go!

Every Q&A today includes at least a mention of KiwiSaver. Note, though, that every Q&A is also about broader investment principles or practices, which I hope will interest all readers.

Okay, now on with your question. Your wife's friend is quite right, KiwiSaver is not government-guaranteed. But that doesn't mean it's panic time.

While ordinary bank accounts are covered by the Government's deposit guarantee scheme, that lasts only until October 12 - with just a few smaller financial institutions taking part in the extension until December 2011. That means that a week or so from now, your wife's bank account won't have any more Government back-up than her KiwiSaver account.

We should acknowledge, though, that KiwiSaver can be riskier than bank accounts in two ways:

* The investments may be riskier - especially if your fund includes corporate bonds, shares or property.

* The provider could be badly run.

The first risk is easily controlled. If you don't want riskier investments - which tend to bring in higher returns but are more volatile - choose a conservative fund.

The second is more complicated, but in the normal course of events it shouldn't be a problem. Your wife's money is not invested in the provider itself, but in many other companies' securities. The trustee of her KiwiSaver scheme guarantees such investments have been made.

If a provider folded, its KiwiSaver accounts should be transferred to another provider with values unchanged. And any member who doesn't like the new provider can easily move elsewhere.

It's always possible, though, that somebody has committed fraud, and the money is not where it's meant to be.

In such a situation, would the Government ride to the rescue? Well, it's certainly not going to tell us now that it would. If it did that, nobody would care who they invested with. To keep providers running well, they need to face public scrutiny.

But, you seem to be saying, while the Government might not say in advance that it would bail out a bung KiwiSaver scheme, wouldn't it do so if push came to shove?

I rather doubt it.

It's a bit like the situation with uninsured houses damaged in the Christchurch earthquake. The Government can't treat those homeowners too generously or everyone else would cancel their insurance from now on.

I expect the Government would try to help KiwiSavers recover their money - perhaps including taking legal action - but I don't foresee a government handout.

However, that doesn't mean stay away from KiwiSaver. It just means invest with a provider you trust and in a suitable fund for you.

As I've said before, if you don't want to run the risk of being in a car crash, don't ever ride in a car. We have to take some risks in life if we are going to get anywhere.

Eggs in one basket

This is about having all your eggs in one basket.

I bank with Kiwibank. If I have KiwiSaver with them too, is my KiwiSaver safe even if the bank has problems?

Probably, as explained above, but there are no absolute guarantees.

If you are a cautious type, there's something to be said for having your KiwiSaver account with a different provider from your banking - although I don't think anyone is predicting the collapse of Kiwibank any time soon.

Transparent transfer

I'm a KiwiSaver provider. I've noticed an increasing number of our KiwiSaver members are being "stolen" by the banks - leaving the clients significantly worse off.

People go into a bank to open an account, take out a mortgage, etc, and end up transferring their KiwiSaver scheme. When we write to them to arrange the transfer out from our scheme, they are surprised and claim that they never joined the ABC Bank scheme.

However, the paperwork says otherwise. Clearly it wasn't explained.

I think that all providers should be required to set out a comparison of the schemes - theirs and the one the person is currently in - before being allowed to transfer a person. I suspect that the number of transfers would go down and that this would benefit the members.

A cynic would say that of course you would think people are worse off if they leave you - but that might not be the way the clients see it.

However, something is clearly wrong if someone doesn't even know they've made the move. And while I could say that people who sign forms they don't understand deserve whatever comes to them, taking on a mortgage can involve vast amounts of paper.

Nonetheless, that's not a good excuse. The first message here has got to be: know what you are signing. If you're overwhelmed by all the forms, ask if you can take the papers away to review them. If the bank is reluctant, something's fishy.

I must say, too, that I don't like the idea of bank employees receiving extra pay for signing people up to KiwiSaver - and other products. I suspect many people think their banks work in the best interests of their customers, but that might not always be so.

While almost everyone will benefit from being in KiwiSaver, they may not benefit from transferring schemes, as you say. And beyond KiwiSaver, I've heard too many stories of banks signing up customers to unsuitable investment products.

It would be great if banks abandoned these employee incentives. How about it, bankers? Then you could advertise that: "We are the bank that looks after our customers first - before our bottom line." We live in hope.

Your suggestion about providers having to give would-be transferors a comparison of KiwiSaver schemes is interesting, but would it work? How would a provider gather information about the other provider? And wouldn't they simply present the information so it puts them in a better light?

There's a crying need for independent comparisons of KiwiSaver schemes.

The KiwiSaver fee calculator on www.sorted.org.nz is a good start, and I suggest everyone uses it - whether joining KiwiSaver, considering a transfer or just wondering if you're getting a good deal. While fees are not the only consideration, lower fees can make a big difference to KiwiSaver growth.

Take, for example, a non-employee who invests $20 a week - $1043 a year - in a fund that returns 6 per cent a year after tax. If fees are 0.5 per cent, after 30 years the savings will total about $162,000. But if the fees are 2 per cent, the savings will total just $124,000.

What about other factors, such as: quality of provider communications; flexibility of contributions; local or overseas management; availability of ethical funds or funds that adjust risk according to your age; and whether the top boss is in his or her own scheme? The only independent source I know of on such topics is my book The Complete KiwiSaver.

However, the Government and the Retirement Commission are looking into providing more comparative information. The sooner, the better.

Repaying debt is saving

I am single, mid-30s and earn $140,000 a year. My goal is to pay off my mortgage ASAP so I have some financial security when I stop work to have kids. Also, I doubt I will continue to earn this well, so I need to make hay while the sun shines.

As I am trying to get rid of my debt (I have a good chunk of equity in my house now), I have no savings at all. I do have a revolving line of credit, which means I can access $100,000 should I need it - as an emergency fund, etc - which makes me feel a little more secure in case I lost my job.

Do you think it's risky not having a separate savings account? I am worried the bank could decide one day to remove my revolving line of credit, and I would be left with no buffer or emergency fund.

I doubt if you have anything to worry about. If you repay a mortgage faster than necessary and later find you need that money, the lender will often let you borrow back the extra payments. Why not ask your lender, and get that in writing?

If you are still worried, you could put $10,000 or $20,000 into a short-term deposit, and keep rolling it over. The return won't be as good as repaying your mortgage - which has an effective return of whatever the mortgage rate is. But you are in such a strong financial position that sacrificing a little return to gain peace of mind wouldn't be silly. Why be rich and scared?

A couple more comments:

* I define saving as doing anything to increase your net worth - your assets minus your debts. So it's misleading to say that you or anyone else repaying debt is not saving.While I'm on that topic, a recent RaboDirect survey found 46 per cent of New Zealanders over 18 are not saving. It didn't say, though, that if it included people repaying debt, only 34 per cent are not saving.

Furthermore, the survey was worded in a way that effectively excluded KiwiSaver savings. And, I would argue, RaboDirect should also have defined saving to include investing in a business or spending on education - which usually boosts future income.

Overall, in my opinion the survey considerably overstated the numbers not saving - although whether people are saving enough is another question.

* Over the long term, you will almost certainly be better off joining KiwiSaver, though that will reduce your extra mortgage repayments.

You'll need to contribute $2800 a year and so will your employer, while the Government will contribute $1043 a year - as well as the $1000 kick-start. With well over twice as much as your own contributions going in, you'll end up with well over twice as much in retirement, compared with an ordinary savings plan.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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