This article was published on 27 February 2010. Some information may be out of date.

Q&As

  • KiwiSaver trustee change raises questions about how much trustees protect members
  • Hazards of dealing with an overseas sharebroker
  • What’s the difference between investing and gambling?

QI received notification that my KiwiSaver provider has decided to change its trustee. This was done without consultation with its scheme members. Here is the message: “(Name of scheme) has decided to change the Scheme’s trustee” from one trustee company to another.

The scheme management has made what appears to be a unilateral decision.

I have contacted the scheme provider for an explanation as to why. But given the fact that many trustees dropped the ball in finance companies, I would have thought the position of trustee would be a decision for the scheme members to vote on.

AGovernment Actuary David Benison, who is in charge of this, says each KiwiSaver provider has a trust deed that covers how trustees are changed.

“No vote is necessary,” he says, although the government actuary has to be notified, and a notice put in the next annual report to members.

The lack of a vote doesn’t worry me too much. If members voted, the cost of that would end up in higher fees. And I wonder how many members would have a clue what they were voting on, anyway.

But I do think your provider should tell you why they changed.

I’m guessing that it might be Gareth Morgan KiwiSaver (GMK), which switched trustees from Perpetual Trust to the Public Trust on February 18.

“Public Trust are the trustees for our other superannuation scheme (started since KiwiSaver), and we decided that it made sense to consolidate our trustees for both schemes,” says GMK.

Did that affect fees? “The fees that are passed on to the members of our KiwiSaver scheme for trustee services remain unchanged. The trustee fee is 0.05 per cent of the member’s account balance per annum.”

Executive Andrew Gawith adds that GMK was the only KiwiSaver scheme using Perpetual Trust, whereas the Public Trust has several other KiwiSaver clients, “and so it has a greater depth of knowledge on KiwiSaver.”

He declined to comment on whether the move was connected to the fact that Perpetual Trust is the trustee for several failed finance companies.

If you don’t like your scheme’s new trustee, or the way the provider went about changing trustee, you can always move to another provider.

This brings up a broader issue. There have been some scaremongering comments lately about the possibility of KiwiSaver schemes’ collapsing like finance companies. This throws the spotlight on the role of KiwiSaver trustees — who are charged with making sure schemes do what they say they are doing.

“Unlike unit trusts and finance company debentures, under the KiwiSaver Act the total administrative responsibility for schemes lies in the trustees,” says Gavin Quigan, manager of the Insurance and Superannuation Unit at the Ministry of Economic Development, which oversees KiwiSaver schemes.

“Trustees can delegate some of their responsibilities, by tendering out services, but the trustees are ultimately responsible for the administration of the assets.”

Trustees’ duties include setting policies for day-to-day management, and they often formally sign off on the scheme’s statement of investment policy and objectives, or SIPO. This lists what types of assets each fund will invest in, and covers such issues as whether the fund can invest in derivatives or use leverage — borrowing to make investments.

“The trustees are responsible for ensuring the investment manager complies with that, on an ongoing basis,” says Quigan.

KiwiSaver schemes also differ from finance companies in that the latter borrow money at an agreed interest rate to invest in their own business activities on a commercial basis — typically lending to property developers or offering consumer finance.

On the other hand, KiwiSaver schemes receive savings, invest the money under trust, and return the investment earnings to their members. To my knowledge, every KiwiSaver scheme invests broadly and generally at arm’s length — usually in publicly listed shares, bonds and properties, although some bank-run schemes invest in their own bank deposits.

A finance company’s ability to repay investors depends on how well the finance company runs its business. But a KiwiSaver provider’s ability depends on how the many different companies it invests in run their businesses.

While it would not be impossible for a finance company to set up a KiwiSaver scheme, I don’t think any have.

It’s fair to say, then, that KiwiSaver schemes are generally safer than finance companies. But there can never be a guarantee in any financial dealings — even with a bank — that someone isn’t committing fraud or otherwise misbehaving. And some in the KiwiSaver industry — who don’t want to be named for fear of making enemies in the government — question whether trustees can actually do much to protect investors.

“From a practical perspective, all an external trustee can do is read the quarterly or monthly reports and ask questions,” says one man. “They are more like a mop than a policeman.”

In light of all this, KiwiSavers might want to ask:

  • Do I know what my KiwiSaver fund invests in?

This should be outlined in the investment statement and prospectus — although those documents are unlikely to give much detail. A good provider should also make it clear on their website, including such information as whether a fund invests only in publicly listed shares or includes unlisted companies, which are generally smaller.

If you’re not sure, email or ring your provider and ask. If they don’t respond promptly and in a way you understand, consider moving to another provider whose communication is good. You can form a view on a provider’s communications by looking at their website and written materials.

  • Do I feel comfortable with the trustee?

Again, information on who is the trustee is in the investment statement.

Many KiwiSaver schemes use statutory trustee companies, but they don’t have to. While the reputations of some of these trustee companies have been tarnished through their work for failed finance companies, the way trustee companies operate is likely to change soon.

“The trustee oversight of investment products is being reviewed by the Ministry of Economic Development,” says Quigan. “There will be new legislation, with the Securities Commission taking a more active role in supervising trustees.” Some in the industry question how much practical difference this can make. Fingers crossed.

The providers that don’t use corporate trustees generally use another type of limited liability company. And some argue this is better. It costs less, which should lead to lower fees. And some providers say it allows the trustees to be closer to the action and have more in-depth knowledge of what is happening.

KiwiSavers might want to do an internet search on their trustees.

Superannuation industry experience of the individuals involved is a plus. “Some players have been around for many years,” says Quigan. “They have procedures in place to ensure the money is properly invested. The new players don’t necessarily understand the lines of responsibility and when they should be telling others about their transactions.”

He adds that we would hope a provider — particularly one that has considerable business beyond KiwiSaver — would make good any losses from fraud or similar misbehaviour. “The credibility of the whole institution is at stake. You should look at who’s running the scheme,” says Quigan. Others note, though, that such bailouts haven’t always happened in similar situations in the past.

If you’re still worried, try asking your provider directly what their trustees do — how often they meet, what issues are discussed, and so on. Come to think of it, it wouldn’t hurt for providers to volunteer this information in their next communications to their members. How about it, you guys?

So where are we? It seems much less likely that KiwiSavers will lose money through provider shenanigans than did finance company investors. But it’s not impossible.

Do a bit of research. If you’re unhappy, switch provider. If none of them makes you happy, stop your KiwiSaver contributions — which non-employees can do any time, and employees can do after a year in the scheme.

Save instead in a bank savings account or government bonds — and miss out on the KiwiSaver incentives. Anywhere else is likely to be at least as risky as KiwiSaver.

QI thought that Stephen Jonas of Craigs Investment Partners was very restrained in your column last week when helping identify the potential pitfalls of using an overseas sharebroking account.

The first issue faced by any investor is how to confirm that an overseas account is genuine and not a scam, often only determined years later when the money is returned, or not. I don’t have any easy answer to this problem, but I am sure that the overseas scam artists will have many cunning ways to encourage an investor to send more money.

Even when dealing with a genuine enterprise overseas, problems can still occur, and it is often hard if not impossible to obtain redress, either direct or via overseas authorities.

The difficulties of using overseas service providers are starkly evident to Telecom and its customers at this time when the overseas solution to a customer problem is to send a brief rude text message.

AGood point. There’s no doubt that it’s much harder to right a wrong with somebody offshore.

QIs it not time to change the heading on your page to gamblers’ corner? So many of the people that write in to you do not seem to understand that they are gambling with their money, just as they would be at a roulette wheel. And some people are even paying others to pick the numbers for them.

AUS money manager Marshall Delano observed, “Some people feel that there really is no difference” between investing and gambling. “These are usually people who have done poorly in the stock market.” I hope that doesn’t apply to you.

There are certainly overlaps between investing and gambling, but Delano and others have put some thought into the differences. A major one is that when you gamble, the odds are against you. The house wins more often than the gamblers. With investing, most people gain most of the time.

What’s more, if you lose in an investment, you will often recover at least some of your losses if you hang in there. Once you’ve lost at the roulette wheel, that money is gone. Also, you can reduce investment risk by diversifying, which you can’t really do with gambling.

It all adds up to this: investing usually — although by no means always — builds wealth; gambling usually erodes wealth.

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.