Think of your cash going into a hospital or a new highway. Photo / NZME
OPINION:
Q: If KiwiSaver fund managers charge a performance fee for returns above market average, should they not provide a credit /refund for performance below market average?
A benchmark (based on average market returns) should be set where both performance fees or refunds/credit kick in.
A: I can see where you're coming from. And the Financial Markets Authority, which monitors KiwiSaver fees to make sure they are "not unreasonable", has issued "guidance" on performance fees to address these issues.
For a start, the FMA says KiwiSaver fund managers that charge performance fees must set a "hurdle rate of return" using a benchmark based on a market index that matches the risk level of the fund. The managers have to earn more than the hurdle to get the performance fee.
But the managers don't give investors a refund when they do badly. I suppose they could argue that they need a basic income — their ordinary non-performance-based fee — to keep the business running.
However, managers are expected to set a "high water mark". This is the fund's highest ever unit price or net asset value — the price you pay when investing in a fund.
If the fund performs poorly, and this price falls, the managers can't receive a performance fee again until they have fully recovered from that drop. And the fee is based only on the extent to which they exceed the high water mark.
So in a way the fund managers are "punished" for performing badly. They've got to do really well next time to get back into performance-fee territory.
Still, I'm not keen on performance fees. As I said last week, they can encourage over-emphasis on the short term and overly risky investing. And the managers that charge them tend to receive relatively high ordinary fees anyway.
If a fund manager keeps performing well, that will attract more investors. The manager can get their reward from the ordinary fees they receive from these new investors.
I should add here that I hope readers of this column wouldn't move to funds because they have performed well, as that might not continue. But there will always be unwise people who follow past performance.
Q: I refer to the Tax Dodgers Q&A last Saturday, in which the writer opined that folk should pay rather than dodge their taxes for the betterment of their country and fellow mankind.
We have generally shared that view but have recently been less well-disposed. We purchased three residential units six years ago with the intention of refurbishing and re-selling them, i.e. they were purchased for profit and therefore the net gains were taxable.
Our programme was delayed, so it was not until last year that we sold them — one to a first-home buyer. Together with the increase in values over that period, we made a tidy profit and incurred a tax bill of $300,000-plus, on top of the GST paid on the sales.
We felt $300,000 was quite significant, and had visions that it might go a tiny way towards building a hospital or highway or assisting with mental health or the likes.
However, we then read that the cost of keeping the homeless and beneficiaries in motels is now about $1 million per day. Therefore our contribution would merely meet much less than half a day's payments to motel owners, which to us was a bit like doing the proverbial into the wind with what was once our money.
But probably the worst of this experience is that we now feel much less noble about paying tax and more inclined to explore the loophole options and become a "dodger".
A: Over the years I've heard many reluctant taxpayers argue that their money is going to government spending they don't like. It's too easy an argument.
Nobody will ever approve of every item in a government's budget. But most of our tax money goes towards goods and services that we want.
If you don't like what the Government is doing, tell MPs or vote them out. Tax dodging is not an effective protest.
You've paid way more tax than most of us — because you've made more. Good on you. But please go back to picturing your money going into hospitals, highways, mental health and other good stuff. It probably is.
Q: I am 61 with only four years to the release of my KiwiSaver. Currently I'm mortgage-free.
Why would I not draw $100,000 or even $200,000 (depending on one's appetite for risk) from my home loan account? I would then pay it back at about 2.9 per cent, and put this lump sum into my KiwiSaver, which is currently returning about 10 per cent a year.
I just know you are going to have the most obviously simple answer, which will have me slapping my forehead, feeling embarrassed that I even asked.
A: In reply, here's another question: how would you feel if your KiwiSaver account has a year or two of negative returns? Your debt is sitting there, and your savings are going backwards. What's more, the mortgage interest rate could well rise over the next few years.
If your KiwiSaver fund has been earning about 10 per cent over any length of time, it must be in a middle to higher-risk fund — a balanced, growth or aggressive fund. Those funds invest largely in shares, and share values sometimes go down, as we saw in March 2020.
What's more, they don't always recover as quickly as they did last year. Sometimes it takes several years.
Of course that won't necessarily happen. Your strategy might work brilliantly. But if you plan to spend the KiwiSaver money within the next, say, 10 years, I suggest you don't take the risk.
An interesting point about your question is that many other readers who might say, "I would never do that!", are sort of doing it. While you would be acquiring a mortgage to increase your savings, that would put you in the same place as people who are saving while they have a mortgage.
I've always said that those with a mortgage should contribute to KiwiSaver, because the government contributions — plus employer contributions for many — make it too good to miss.
But beyond that, I've suggested putting any extra savings into reducing your mortgage. Paying off a 6 per cent mortgage is equivalent to earning 6 per cent on an investment after fees and tax, and it's risk-free. Not bad.
However, in the past few years readers have pointed out that doesn't work so well with a 2 or 3 per cent loan. It's a good point. In a low-interest environment, investing rather than paying down the mortgage might be worth doing under these conditions:
• You are happy in a higher-risk investment such as a growth or aggressive fund or a rental property. Only there are you likely to earn sufficiently high returns, on average, to clearly beat mortgage interest rates.
• You can tie up the money for 10 years or more, to allow time for recovery from a major downturn.
• You won't panic and reduce your risk in a downturn, cementing in your losses.
• You're in a strong financial position, and can cope if mortgage interest rates rise.
If all that applies to you, go for it. And good luck.
Q: Just sending you Bloomberg Economics' analysis of global property pricing trends. Current indicators show higher overvaluation and instability than just before the 2008 crash.
A: And guess which country is at the top, readers? Here's how New Zealand ranks in the table:
• First for the house price-to-rent ratio — ahead of second-placed Canada. New Zealand's ratio is more than twice its long-run average.
• First for the house price-to-income ratio — also ahead of Canada. New Zealand is nearly 70 per cent above its long-run average.
• First for nominal price growth, at 14.5 per cent — ahead of Sweden's 13 per cent.
• First for real (inflation-adjusted) price growth, at 13.2 per cent — well ahead of 10.7 per cent in the US.
What should we make of this? Perhaps, at the very least, that New Zealand's house price madness can't continue.
Q: Last week's item on insurance was timely as I have just had car and home contents insurance renewal notices.
The car insurance is up over 42 per cent and the contents up over 24 per cent, with no explanation as to why. When asking, I was simply told that those are the premiums, like it or lump it.
Following your suggestion to visit the Consumer NZ website I have found some less expensive quotations, but will these just be one-offs to attract a new customer?
A: Gosh, those are big price rises — especially without explanation. So good on you for looking elsewhere. The more people who do that, the better service and prices we'll all get.
You're wise, too, to check about one-off deals.
I suggest you ask the insurance companies that very question, in an email. You'll then have their reply in writing.
You might also want to check the Insurance Provider Satisfaction Survey on the Consumer website. Consumer asked its members how happy they are with their company's service for four types of insurance: house, contents and car, health, life, and travel.
Service from an insurance company is every bit as important as price.
Q: I think you are wrong on house insurance. Let the people in last week's column cancel their cover. If they have a fire, all they have to do is start a Givealittle page.
They will probably end up making a profit.
A: I suspect your tongue is firmly in your cheek. But still, you make an interesting point.
As it happens, last week's correspondent snail mailed her letter to me because the couple haven't got a computer. So they don't seem likely to set up a Givealittle page, although I suppose a friend or relative could do it for them.
Anyway, I don't like their chances of raising enough to replace a house. A February 2020 article says the two biggest campaigns on Givealittle in the previous five years raised $10.9m for the Christchurch mosque shooting victims and $2.3m to buy a beach in Abel Tasman National Park.
But the third biggest campaign raised not much more than $400,000. The average New Zealand house price is now more than $900,000.
More on insurance next week.
I was shocked to read recently that almost half of ASB's KiwiSaver members won't have contributed at least $1042 to KiwiSaver between July 1, 2020 and June 30, 2021, so they won't receive the maximum government contribution of $521. Half!
It will be similar with other providers. Some messages that are not widely understood:
• Anyone who has been in KiwiSaver more than a year will receive $521 from the Government if they get $1042 into their account by June 30. It might take a few days to process, so do it now or first thing Monday.
• This includes people on a savings suspension — not making contributions from your pay. Ask your provider how to contribute directly to them. It should be easy.
• If you can't afford $1042, put in what you can. The government will give you 50 cents for every dollar you contribute. Put in $50 and you'll get $25. It's worth doing.
• Others can help KiwiSaver members who are not employed, or work part-time, by giving them the money to contribute.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's 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. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
'Debt becomes more like a rent payment that people get so used to paying.'