NZ Herald 25 June 2011

AI’m puzzled that you sought my advice, given that you think I’m an investment company and therefore likely to be self-serving. But luckily I’m not, as you can see at the bottom of this column.

I gain nothing from your being in KiwiSaver — in fact, as a taxpayer, I lose. However, YOU will almost certainly come out ahead.

Already, you must have much more in your account — because of government and perhaps employer contributions — than you have put in yourself.

That doesn’t mean, though, that we shouldn’t be critical if a provider performs badly. So how has yours done? It’s too early to tell. Your fund includes shares, and they often perform badly over short periods. You really need ten years or more before you can judge a share investment.

When KiwiSaver started, I worried about members switching providers to chase high short-term returns. And it does happen, with some people flitting like butterflies from flower to flower, depending on which bloom is most beautiful at the moment.

But just as the loveliest flowers often fade first, high-performing funds often do badly soon after. Similarly, some low performers do well soon after. So no, I wouldn’t suggest you move schemes because of poor short-term or even medium-term returns.

Under what circumstances should you switch providers? Firstly, if the fees are high. Low fees can make a big difference to returns, especially over longer periods.

The KiwiSaver fee calculator on www.sorted.org.nz is on leave for a while, to adjust for changes in the Budget, but keep an eye on it as it’s unbiased and useful. And — in response to another reader’s concerns about all the different fees in KiwiSaver — this calculator incorporates all of them.

Secondly, communication is really important. If you don’t receive clear, easily understood messages from your provider, you might want to switch to a good communicator.

How do you tell? Check out their website or literature. Then ring them or email them with a question and note how quickly and well they reply. Also, ask for a sample statement showing how they regularly report to members and check that you can follow it.

It should be pretty easy to switch providers. Just tell the one you want to move to. They will contact your current provider and, if you are an employee, notify Inland Revenue to send your money in the right direction.

By the way, if you really are keen on bank term deposits, you could switch to a KiwiSaver cash fund that invests in them and similar low-risk securities. However, if you are in KiwiSaver for more than five years — and especially if it’s much more — you are highly likely to do better in a riskier fund.

AIndeed it will.

If your contributions have been the same throughout, your balance by now is probably somewhere around $20,000 — perhaps more. That means your return is nothing exceptional.

But you’re looking at it the right way. If you consider the returns on just the money you have contributed, they are great. And that’s the relevant measure. After all, if you were investing elsewhere, you wouldn’t have contributions from others.

It would be good if we could get you chatting to the previous correspondent.

AWe’ve gone from a KiwiSaver grouch in the first letter to a realist in the second letter, and now we have an over-enthusiast!

The 100 per cent — and later 50 per cent — returns on your contributions apply only to the amount you put in each year. The rest of the money in your account, which was contributed in earlier years, simply earns whatever your KiwiSaver fund earns, often somewhere between zero and 10 per cent a year. That waters down your total return increasingly each year as your balance grows.

That’s not to say you’re not doing well. Under the current tax credits, which double your own contributions, you end up with a balance twice as big as in a similar non-KiwiSaver fund. And with the new smaller tax credit you will still end up with a balance one and a half times as big. Not to be sneezed at.

But it’s not quite accurate to say your total return will be 50 per cent in years to come.

While I’m being a wet blanket, you might not realise that the tax credits will stop when you turn 65 or, if you joined KiwiSaver after 60, five years after you joined. After that you can continue to contribute, or just leave the money there, or withdraw some or all of it. But without the tax credits, I’m afraid the really high returns will be a thing of the past — unless your fund does extraordinarily well.

On NZ Super tinkering, I disagree if you are talking about what is often proposed — the gradual raising of the age at which NZ Super starts. Current recipients and people over about 55 wouldn’t be affected. And it seems to me that younger people already expect a less generous deal.

You might be right, though, if you are talking about reducing NZ Super payments — although a cash-strapped government might get away with cutting annual increases. Currently, NZ Super increases with wages, but it could be changed to increase with inflation, which usually grows more slowly.

P.S. Please don’t stop being happy!

AGood on you for getting in while you could — before turning 65. It sounds as if you are not an employee, so your only incentive, now that you have received the $1000 kick-start, will be the tax credit.

That means that any contributions above $20 a week — the maximum that receives the tax credit — will just be ordinary investments, earning whatever your KiwiSaver fund earns.

You could do just as well by putting that money in a similar non-KiwiSaver fund, perhaps run by your provider. And you will be able to withdraw the money whenever you like, whereas in KiwiSaver you’ll have to wait until five years after joining.

On the other hand, having all the savings in the one account is a bit simpler. And if tying up the money doesn’t bother you — perhaps because you have plenty of other savings — there’s no good reason not to boost your KiwiSaver contributions.

AThe prices of shares in the index — the same as ever.

I assume you mean that everyone who directly owns shares would sell them and put the proceeds in the index fund. What would the index fund do with that money? Buy shares. With the supply from the individuals equaling demand from the fund, share prices probably wouldn’t change much.

We would have a problem, though. As I said last week, the efficient market depends on vigilant professional investors buying or selling shares the minute news about a company is announced. That means the price of any share pretty much always reflects all information the public has about the company.

In your scenario, nobody would be watching the markets, so pricing would end up being out of whack.

But hang on a minute. That means some shares would be really good buys. Something tells me that at least some expert investors would realise that, and break away from the index fund to scoop up the bargains. In a free market, there will always be those aiming to beat market performance.

Active share fund managers — the ones who don’t follow indexes — have occasionally told me off for recommending index funds. They say index investors are bludging from active investors, because they count on them to keep the market efficient.

My response: “Nobody is forcing you to use active management. Clearly you don’t do it as a favour to me, but because you think you can profit from it. I wish you good luck, but I don’t think I need to thank you.”