This article was published on 26 April 2008. Some information may be out of date.

Q&As

  • KiwiSaver the last straw for employer of “whinging, incompetent” New Zealanders
  • Reserve Bank offers some reassurance for reader worried that NZ banks could be caught up in their foreign parent’s woes…
  • …But if you’re still worried, consider the safest investments of all, government securities.

QI am at a loss to understand the rationale behind an employer being required to contribute as part of KiwiSaver.

Despite the ludicrous government suggestion that contributions will be negotiated “in good faith” as part of salary discussions, it simply comes down to another tax, directly and indirectly (compliance management) on the employer.

I am so fed up with the whinging, incompetent New Zealand employee. If an individual is so incapable at managing their financial lives, spending more than they earn, why tax an employer?

Thanks to the internet, we will take our business offshore, to those who want to work. Let the pathetic New Zealander flounder in their own self-induced miserable financial situation. It’s time for employers to take a stand.

AIt’s probably a good idea to move overseas, if that’s how you feel. Something tells me that most New Zealand employees wouldn’t be lining up to work for you anyway.

It sounds as if you don’t realise that employers are reimbursed for their contributions to employees’ KiwiSaver accounts, up to the amount they put in for each employee or $1043, whichever is lower.

That means that, at the current compulsory employer contribution of 1 per cent of pay, employers will be fully reimbursed for all employees earning $104,000 or less, and partially reimbursed for people earning more.

From next April, when employer contributions are 2 per cent of pay, the cutoff salary will be $52,000. And by April 2011, at 4 per cent of pay, it will be $26,000.

That’s low. But by then employers will have had several years during which they could give smaller pay rises than they otherwise would have given, to compensate for KiwiSaver contributions.

Having said that, I do sympathise with employers, who were expected to accommodate KiwiSaver — not just the money but also the admin — at really short notice. While employers in other countries contribute to similar schemes, I bet their schemes were introduced more gradually.

It’s interesting to see different employer reactions to KiwiSaver. You’re at one extreme, while others are embracing it as a chance to help their employees.

One company recently told me that their move straight to 4 per cent employer contributions is an attraction for would-be new employees when they are recruiting. It might make all the difference in a tight employment market.

Maybe — before giving up on New Zealand — you could try the generous approach? You might be surprised at how it could transform incompetent whingers.

QI’m very conscious that the National Bank is owned abroad, and if trouble occurred New Zealand would be at the bottom of the priority list.

I sometimes wonder whether Kiwibank is a safer option. I don’t suppose the government would let that fall over unless the waves were actually lapping at Mt Cook.

AI’m sure the government wouldn’t say that now, but you might be right. However, future governments might be less inclined to view Kiwibank as their “baby”.

It’s worth noting that Kiwibank has a slightly lower Standard & Poors credit rating than the other major banks. And I’m sure the rating agency would take into account the risk of a foreign-owned bank being harmed by its parent company’s problems.

How big is that risk? Well, our Reserve Bank is certainly aware of it, closely following the government monitoring of the parent banks in their home countries.

“In particular, the Reserve Bank attaches a high degree of importance to monitoring developments in Australia and to its relationship with the Australian regulator, APRA, and its work within the Trans-Tasman Banking Council,” says a spokesman.

The Reserve Bank has also taken two specific steps to reduce the risk:

  • All major banks must be incorporated in New Zealand. This makes it easier for the Reserve Bank to limit bank lending and so on, and “provides a degree of separation between the subsidiary and the parent.”

    Incorporation also gives the Reserve Bank more certain legal powers if a bank gets into trouble. And it “makes it much more difficult, legally and practically, for assets to be removed from the local operation to the parent bank.”

  • New Zealand banks can’t be “overly reliant” on a parent bank. This “ensures that large banks operate with adequate legal and practical control over their core functions, which enables the Reserve Bank to effectively manage a crisis.”

The spokesman also points out that the strong presence of foreign banks in New Zealand has its pluses — such as the development of new banking products and services. And if there were a “domestic economic shock” — such as a major earthquake or foot and mouth outbreak — we might welcome support from our banks’ foreign parents.

Still, no bank is invincible. If that leaves you tossing and turning, read on.

QIn a recent column you responded to questions about the safety of banks and gave some options.

One option you did not mention, and which is rarely considered these days by investors or advisers, is NZ government stock. This is the most secure investment a resident New Zealander can buy, backed up by the government — that is unless you think the government is going to go belly up!

The stock is readily bought and sold on the stock exchange, interest is paid half-yearly and the capital repaid in full at maturity — although the market value during its life might vary depending upon prevailing interest rates. So you won’t get a capital gain — but there is an inflation-adjusted option.

Of course, being such a secure investment, the interest rate will be lower than most other fixed interest options.

It is a sad fact that many people chase high returns without seriously considering risk. Which is why, I guess, government stock is not particularly sought after by the average investor. But it’s better than putting it under the bed.

AGood point. But Cam Watson, chief investment officer at sharebroker ABN AMRO Craigs, disagrees that such investments are rarely considered.

“The uncertainty arising from the credit crisis has seen a flight to quality which has made government securities even more popular than usual,” he says. “They are also the investment of choice for overseas investors wanting to buy NZ dollar-denominated investments. Buying pressure from both of these sources has pushed up the price of government bonds.”

Adds Phil Combes, treasurer of the government’s Debt Management Office, which issues the securities, “Over the last eight months or so, interest has been steadily growing.”

There are two types of government securities available to individuals. One is government stock, sometimes called government bonds. Financial institutions buy these from the government for a minimum of $1 million, but then break them up to sell to individuals for a minimum of $10,000.

Apart from security, one reason for their appeal is that — like corporate bonds — you can sell them at any time. Another is their long terms, which suit investors who want to know where they stand for years to come. Currently you can buy government bonds — many originally issued some time ago — that mature on various dates from July 15 2008 to December 2017.

At the time of writing, yields on the bonds — the equivalent to interest rates after taking into account varying bond prices — ranged from 7.85 per cent on July 2008 bonds to 6.43 per cent on December 2017 bonds.

The other government securities are Kiwi Bonds, available for $1,000 or more. These are more like bank term deposits, with interest paid quarterly. There is no formal market for selling them, although you can transfer them to someone else if you wish. In a bind, you can request early repayment, but your interest will be cut by two percentage points.

Currently, six-month Kiwi Bonds pay 7.5 per cent; one-year bonds pay 7 per cent, and two-year bonds pay 6.75 per cent.

Note that on both government bonds and Kiwi Bonds interest is higher for the short term than the long term. This is somewhat unusual. Most of the time you get more interest the longer you tie up your money.

But that doesn’t necessarily mean it’s better to invest for the shortest period and then reinvest. Whenever short-term interest is higher, that shows the market thinks rates will probably fall. You may well find when you reinvest that the rate has dropped so much that you would have been better off choosing a longer term in the first place.

A couple more points:

  • As noted, government bond values vary. If interest rates rise after a bond is issued, the bond is less appealing. So if you want to sell before maturity, you will get less than face value. On the other hand, if rates fall, you will get more than face value.

    But don’t let fluctuating value put you off too much. You can always hold the bond until maturity, when you will get back its face value.

  • Our correspondent mentioned inflation-indexed bonds. The principal on these bonds rises with inflation — which sounds great, but this is offset by a lower interest rate.

    The government issued these bonds only from 1996 to 1999, and they all mature in 2016. The only way to get one is to buy from another investor. “These are reasonably easy to buy, and trade regularly in the secondary market,” says Watson.

You can buy inflation-indexed and ordinary government bonds through sharebrokers. Application forms for Kiwi Bonds are available from banks, sharebrokers and some accountants, solicitors and investment advisers. Adds Watson, “The commission paid by the Crown to agents is set, so it should be the same the world over.”

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.