This article was published on 10 May 2008. Some information may be out of date.

Q&As

  • Grandma will help grandson more by opening her own KiwiSaver account and giving him the savings.
  • Ultraconservative KiwiSaver funds are as safe as bank accounts, and bring much higher returns.
  • Is lack of self control more prevalent now than in the past?
  • Government bonds have their place for the ordinary investor.

QMy daughter who is a New Zealander is married to a Brit and lives in London.

I would like to set up a KiwiSaver account for their son. Is this possible? I guess not as everyone would be doing it.

Guess my only option would be to set one up for myself (I work part-time and am very near retirement) and then transfer the funds to him when he is 18 (a sort of saving scheme).

Are there any other suggestions you have for grandchildren involving the KiwiSaver scheme?

AIf your grandson were a New Zealand resident you certainly could set up a scheme for him. Everyone — or at least many people — actually are doing it.

But unless he moves to this country, that’s not an option for you. Funnily enough, though, your second choice — opening an account for yourself — is better anyway, as long as you are under 65 and therefore eligible to join.

This is because children under 18 don’t get the government tax credit, matching the KiwiSaver member’s contributions up to $1,043 a year. In your case, too, you will get contributions from your employer while you are still working.

That means the money will grow much faster in your account than it would in your grandson’s account.

And there’s nothing to stop you transferring the money to him once you reach 65, or five years after you join if you are over 60 now. It’s yours to do whatever you want with.

QThe KiwiSaver question uppermost in my mind has been “I want a conservative return, so why can’t I just invest in a bank deposit account like ASB’s Fastsaver, (which currently returns 8 per cent at call), or 90 day bills?”

Instead I have to deal with some provider, who takes fees from me, and — judging by recently published performances — can’t seem to produce any profit at all. Are there any alternatives?

ASeveral. And you’ll do a lot better than in a bank savings account, with equal risk. The only downside is that your KiwiSaver money is tied up.

But first, let’s look at why returns, even on conservative KiwiSaver funds, have been so bad. The typical conservative fund invests mostly in cash and bonds — usually government bonds and high-quality corporate bonds — with a smaller proportion in shares and perhaps property.

This normally works well. If either the bond or share market falls that is frequently offset by a rise in the other market. But not so in the first three months of this year.

“This quarter was one of those unfortunate, but thankfully rare, periods when both equities (shares) and bonds fell in value concurrently,” says Cameron Watson, ABN AMRO Craigs chief investment officer, in a recent publication.

Global uncertainties led to sharp declines in New Zealand and overseas shares. And “rising interest rates and widening credit spreads have pulled down the current value of corporate bonds,” says Watson. The last time both markets feel to the same degree was back in 1994, he adds.

While the other assets in conservative funds — government bonds and cash — performed well, that wasn’t enough to counter all the bad news. Most of the time these funds will do much better.

However, there’s another type of KiwiSaver fund that is even more conservative. A survey I’m doing for an upcoming book reveals that about a dozen providers offer ultraconservative funds, usually called “cash funds” or similar.

Many are as secure as bank term deposits or close to it. And their returns, at first glance, are similar.

Seeing you’ve mentioned ASB, let’s look at their two cash funds. Returns were 4.1 per cent and 4.2 per cent for the six months ending March. That’s an annual rate of more than 8 per cent — topping Fastsaver.

But wait, there’s more. It’s important to remember that KiwiSaver returns are on all the money — not just your contributions but also the government’s kickstart and, if you’re an employee, your boss’s contributions. And once the first tax credits are deposited — probably around August or September — you’ll get returns on that money, too.

Let’s say you put in $2,000 and others put in $2,000, and the return on the $4,000 is 8 per cent before fees and tax. That comes to $320. But if you look at $320 on just the $2,000 you put in, that’s a 16 per cent effective return. In some cases, other contributions will be higher than yours, pushing your effective return up even more.

And that’s effective return is what you should compare with bank account interest.

It’s true that you have to pay KiwiSaver fees, but there is a fee subsidy, and tax is lower for many people in KiwiSaver. Together, these factors won’t nearly cancel out the advantages of government and perhaps employer contributions.

KiwiSaver cash funds aren’t for everyone. Riskier funds are sure to bring higher average returns over the long term, despite the unusually bad recent performances.

But if you can’t cope with market volatility, a cash fund is the way to go.

QYour correspondent who bemoans the lack of self control in the management of private finances and hence the need for KiwiSaver is several generations out of date.

At least 20 years ago I saw self control described as a quaint old-fashioned term that has no part in present day affairs. Present examples: road rage, drink driving, unmotivated violence, mugging, binge drinking, and so on, not to mention the well documented antics of those with the funds to do whatever they like. Why does a certain person spring to mind, punching reporters and flouting speed restrictions in his car?

It is precisely the lack of self control in the lifestyle of unfettered consumerism that funds business cash flows and makes KiwiSaver a public good.

AAt the risk of turning this column into a debate about social behaviour, I reckon you’ll find similar goings on in every generation.

Certainly drink driving, then called drunk driving, was worse when I was young. And violence was more tolerated.

As a young newspaper reporter on the Saturday police beat, I remember a policeman telling me to ignore some reports of bashings because “those are just domestics.”

All that aside, I think last week’s correspondent feels that KiwiSaver is pandering to people’s lack of self control. They have to be “bribed” to save.

But it certainly could be worse, if the government made KiwiSaver compulsory. As it stands, people have to decide to join KiwiSaver — or not to opt out if they join when starting a new job. And they later have to decide whether to keep contributing or not.

For many people, sticking with contributing is going to take quite a measure of self control.

QI refer to your recent column about government bonds and Kiwi Bonds.

As a general principle I do not think that the government’s inflation-proof bonds are suitable for the average mum and dad investor. There are several reasons:

  • You have to buy them on the market and the brokers charge too much for mum and dads — the only return that counts is the net of tax and net of costs return.
  • While you receive inflation growth, it is taxable. Therefore if inflation takes off you do not get a net real return after tax. And if you went to sell them before maturity the market would price this in. Most people are better to take the inflation risk, particularly because of tax.
  • There are times when the market misprices these securities, as the big firms do not follow them, so you might get a bargain. But these instances are few and far between.

On government bonds in general, you should only buy them in certain circumstances:

  • Liquidity is important to you, and government bonds are yielding above bank term deposits and above their long term expected average yield, or
  • You think that yields on government bonds will go lower, so you can sell them at a gain before maturity, or
  • Security is the only important criterion for you.

Few mum and dads should buy government bonds, as in reality the investment grade corporate bonds have more than adequate security and a higher yield, and liquidity can be managed by duration diversification.

AGovernment bonds are versatile creatures. They can be used in quite sophisticated ways by savvy people, but they can also be used simply by people who know little about finance. It would be a pity to scare off that second group from buying any government bonds.

I take your point that the inflation-proof bonds are not generally suitable for them. Nor will they be able to forecast long-term yields on ordinary government bonds, as mentioned in your second list.

Nonetheless, I suspect that in the current environment no small number of unsophisticated investors might want to buy government bonds for your third reason. Security matters a lot.

True, investment grade corporate bonds (rated BBB or higher) are generally regarded as pretty safe. Investors lose their money only if the company goes belly up, and highly graded bonds are issued by solid companies.

And as you say, these bonds have higher yields than government bonds. But that simply reflects that they are somewhat riskier. If nervous investors want the top-of-the-line security of government bonds, I’m not going to get in their way.

For the benefit of others: Our correspondent refers to liquidity — the fact that government bonds may be easier to sell quickly than corporate bonds.

But as he says, you can diversify the duration of your corporate bonds. That means buying several bonds so that you have one maturing, say, every six months or every year. Then, if you need the money, some will come free shortly, so you may not have to sell any bonds before maturity.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and 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 [email protected] or click here. 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.