Mary Holm: 10 per cent too good to be true

High-yielding bonds It has come to my notice that ANZ and BNZ are offering bonds that yield interest rates close to 10 per cent, and interest is paid half-yearly by ANZ and quarterly by BNZ.

Their interest rates are far higher than fixed-term deposits. Can you explain why it is so, and what are the risks of buying these bonds, please.

I'm afraid I'm going to rain on your parade - on two counts. These investments are a fair bit riskier than bank term deposits, and you won't get close to 10 per cent on them.

ANZ calls these creatures "ANZ perpetual callable subordinated bonds", while BNZ calls its "BNZ Income Securities and BNZ Income Securities 2s perpetual non-cumulative shares" - which means they pay dividends, not interest. Other similar investments are sometimes called preference shares.

The two banks' securities are slightly different, but both have the following features:

* The bank - or, to be legally correct, the issuer - pays you regular interest or a predetermined dividend. There is no maturity date - hence the word "perpetual" in the names. If the issuer wishes, it can repay you at various times after an initial fixed period, but you can't get your money back from the issuer when it suits you. The way to withdraw your money is to sell the securities to another investor, via the NZ Exchange. You would normally pay brokerage to do this.

* If you buy now, you won't receive anywhere near 10 per cent on your investment. That was the going rate when the banks first issued the securities some years ago. But now you'll have to buy on market, and since the securities were issued, market interest rates have fallen. That makes the securities attractive, so you'll have to pay more than face value for them.

* How does that affect your return? Let's look at a simple example. On the issue date, a $1000 security pays 10 per cent interest, so the holder receives $100 a year. If interest rates later fall to around 8 per cent, a new buyer might be willing to pay $1200 for the security. They would still receive $100 a year on it, but on a $1200 investment that amounts to a return of 8.33 per cent.

* When you sell, you will almost certainly receive either more or less than you paid. If market interest rates have risen since you bought the securities, they won't be attractive to buyers, so you'll get less than you paid. But if interest rates have fallen, buyers will like what you have to offer, and you'll get more than you paid.

* The sale price could also be affected by a change in the creditworthiness of the bank or in investor confidence in general. If, for instance, the bank's credit rating was lowered, the value of the securities would fall, regardless of what's happening to interest rates.

* There's another risk, too - that the bank will default. While this seems unlikely, anything is possible. If the bank got into trouble it would fully pay its depositors and probably some other creditors before you got a cent back - although you would be paid before shareholders got anything. ANZ's use of the word "subordinated", and the fact that BNZ calls its securities shares not bonds, indicates that holders rank below depositors in times of trouble.

* But it's not all gloom. Because these securities are fairly risky, they will pretty much always pay a higher return than bank term deposits.

* High enough? Not for some experts, who suggest people should avoid "perpetuals", as opposed to ordinary bonds. The latter have a maturity date, at which time you will receive your principal back regardless of what has happened to interest rates in the meantime - unless the company defaults. With perpetuals you are at the mercy of the market.

KiwiSaver switch delay

I am pleased to say I joined KiwiSaver a couple of years ago. The provider was Asteron, and all went well.

A few months ago Asteron decided to close its scheme and I was moved to Grosvenor. Initially I was told the money would be realised in July, then August and then September. Apparently Asteron has been slow at doing the final accounts and cannot release the money.

Three things annoy me:

* Asteron is still collecting management fees. It is incentivised to be slow at releasing the money.

* Asteron has moved the assets to cash so I am no longer in my chosen asset class, so if markets go up then I miss out on the rise.

* It keeps giving me strange excuses for the delay.

* What can we do about this? I realise it takes time, but five months to produce wind-up accounts - and two-plus months later than promised - seems ridiculous.

* Can you get Asteron to reimburse the fund management fees it has been charging?

Asteron has given some relief on fees. More on that in a minute.

The company is quick to acknowledge this isn't quite what was planned. "We sympathise with your reader's position," says spokeswoman Angela Tiy.

"The six-to-eight-week delay was not something that we had expected either."

The Asteron KiwiSaver funds were wound up last May 31, "and we had originally scheduled to finalise accounts in August. We are now looking at October for finalisation," she says.

The delay is because of "an unexpected external auditing requirement", which Tiy briefly described to me, but which I won't repeat here - for risk of sending readers to sleep.

Anyone who wants to read it can email me and I'll forward it to you.

Tiy continues: "The consolidation requirement was unexpected and has delayed production of the wind-up accounts for all nine funds. We sought permission to waive the requirement. However, it wasn't granted. Obviously we're not happy about the delay either and we're doing everything we can to speed up the process." She confirms that the assets in the Asteron KiwiSaver funds were sold during August. "All nine funds are now 100 per cent in cash in a call account with a major trading bank."

As you say, this means that your money is no longer invested where you want it to be. "We appreciate why your reader might feel concerned about this, and we considered it very carefully when planning the timing of the transfer to ensure the risks were mitigated.

In short, we kept the funds invested on mandate for as long as possible," says Tiy.

However, Asteron wanted to give the fund managers a reasonable time to sell the assets, "so that they could maximise the returns for the funds, and most importantly not be in the position of being a rushed seller".

I wouldn't worry too much about this. You could miss a market downturn almost as easily as an upturn.

Over the long haul, being out of the market for a couple of months is unlikely to greatly affect your total savings.

On fees, Tiy says, "Annual management fees have been reduced, not stopped, to reflect the move into holding cash assets. We stopped charging member contribution fees in June." She adds that you are not being charged a wind-up fee, but I wouldn't have expected that anyway.

Again, I suggest you don't lose sleep over the fees, although I can understand your annoyance.

I should add, though, that when I asked Government Actuary David Benison - who oversees this sort of thing - to comment on your letter, his first statement was, "I do not think the situation is as extreme as your reader makes out."

For one thing, you weren't moved to Grosvenor with no choice in the matter. Asteron made it clear you could move to a different provider, and gave guidelines on how to do that.

Benison continues: "The process is appropriate and follows the legislation. The trustee is winding up the scheme and it is imperative that tax and other matters are correctly dealt with and that the members' transfer values are correctly calculated.

"It matches the processes followed when IRIS and EO [two other KiwiSaver providers] were wound up.

"The accounting delay you have identified concerns accounting standards (IFRS) and is outside the control of the regulator!"

In other KiwiSaver provider wind-ups, it may not be necessary for the fund assets to be sold, says Benison. Sometimes, the shares, bonds, property and so on might be moved, as is, from one provider to another.

However, the transfer must not negatively affect any members, and the new scheme has to want the assets in which the old scheme invested.

The legislation "is designed to ease the process of bulk transfer of members from one provider to another.

To be possible the before and after situation on transfer had to be virtually identical. One reason is that the member has the right to object. It was deemed not appropriate for this case," says Benison.

All in all, your situation seems more of a short-term irritation than something likely to have much long-term impact.

First-home withdrawal

A quick comment on a recent KiwiSaver Q and A - about market timing for first-home withdrawal.

As a general rule of thumb, those saving for a first-home withdrawal within the next five years should be invested in a conservative option for greater certainty. Many people only look at their age, and forget about this earlier need for redemption.

I quite agree. Generally, young people are advised to invest in riskier KiwiSaver funds, which are likely to grow more over the long term. But that's bad advice if they plan a first-home withdrawal not just within five years, but within 10 to 12 years. Over the short term, there's too big a chance the balance in a riskier fund will fall.

While we're on KiwiSaver, I pointed out last week that it's relatively painless for employees to join KiwiSaver in the next week or so - but given that last weekend's Business section didn't get to everyone, I'll repeat the point here.

As a result of the October 1 tax cuts, every employee will take home at least 2 per cent extra - more if they earn over $14,000. And 2 per cent is the minimum employee contribution to KiwiSaver. If you join KiwiSaver, then, your take-home pay won't decrease, and in most cases will still increase.

True, GST is rising from 12.5 to 15 per cent on the same day, pushing up prices. But higher income people will still be better off, even after joining KiwiSaver. And I'm suggesting those on lower incomes try to cope with the higher prices - encouraged by the fact that their pay cheque hasn't changed or has grown even after joining KiwiSaver.

To see how the tax cuts and GST numbers will work for you, use the calculator at www.taxguide.co.nz

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 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 (pref. daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

Want to learn more about your home finances?
Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.