Get Sorted: Follow the money

Many think KiwiSaver is somehow guaranteed by the government: it's not and never has been. Photo / Thinkstock

As you pump money into your KiwiSaver with each pay, where exactly does it flow to?

Not long ago I met a retired couple whose savings had evaporated after their finance company went belly up. They had come through that disaster with dignity, but I could tell it had been devastating.

This got me wondering about KiwiSaver: where does all the money we're putting in go? After all, we've got contributions going in from ourselves, the government and (if you're an employee) our employers. It's a sweet deal, but show me the money, please.

So I had a look under the bonnet a bit.

Many think KiwiSaver is somehow guaranteed by the government: it's not and never has been.

Many think KiwiSaver is somehow guaranteed by the government: it's not and never has been. True, it was set up by government legislation, and Inland Revenue helps it happen, but KiwiSaver funds are entirely managed by private providers like banks and investment houses.

With KiwiSaver, your money is pooled with other members' money and invested by fund managers. To see who's managing your money, look up your fund in the KiwiSaver fund finder.

There are always risks involved with investing, and the value of any fund's investments can go up or down over time. How much you get back in the end will depend on whether the ups are bigger than the downs.

But in the meantime, where is our money kept?

The important thing to know is that KiwiSaver schemes are trusts - meaning that the assets are held in trusts for us that are entirely separate from the provider. And in publicly offered KiwiSaver schemes, the trustee (which must be completely independent of the provider) also has the role of checking whether the provider complies with its legal obligations. You can find out who acts as the trustee of your KiwiSaver fund in your investment statement.

So as opposed to that retired couple, who had basically loaned their savings to a finance company and then couldn't get it back when the company folded, our KiwiSaver money is tucked away in a trust and stays ours (never the provider's).

That means if a KiwiSaver provider's business were to get into difficulty, our money held in trust would be "ring-fenced" - protected from their troubles. Your investments would not be affected, even though the provider's own business or shares might plummet.

We wouldn't be required to pay anything to anyone if that happened, and if the provider's business failed the trustee could step in and appoint a new manager for our money.

And we would still be on track to reach our goals.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators at Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.