NZ Herald 31 October 2015

ACome now. At your age you can ski free.

Just kidding! Skiing always costs plenty — even with free lift tickets for pensioners, as does swimming with whales and many of the other things you no doubt get up to.

I often point out that many retired people say they spend less in their 80s and 90s than in early retirement. Therefore, the newly retired shouldn’t be too frugal. They may later regret not travelling or getting out and about while they’re fit enough to do so.

But perhaps your spending won’t decrease until Queen’s telegram time. Good on you.

AThere are two aspects to this:

• The quality of the assets in which a KiwiSaver fund invests.

  In any KiwiSaver fund, we would expect most of the assets to be reasonably sound investments. But they might include a few “dogs” — with apologies to Fido. Examples are shares whose value has plunged, or bonds whose issuers have defaulted.

  It’s possible — although currently unlikely — that they would also include bank deposits that are frozen under the Reserve Bank’s Open Bank Resolution (OBR), because the bank has failed. In due course, the Reserve Bank would probably unfreeze some of that money, but the fund — and hence the investors — would lose some money.

• The strength of a KiwiSaver provider.

  If a KiwiSaver provider — bank or non-bank — went belly up, that shouldn’t be a big concern because the KiwiSaver scheme’s assets are ring-fenced. Some time later, everyone’s KiwiSaver accounts would be moved to another provider.

If some — or possibly all — of the assets in those accounts were bank deposits frozen under OBR, the value of those deposits would be reduced. That would be reflected in the lower value of the members’ accounts before they are moved to the new provider.

You’re concerned about a double whammy. Let’s say a bank KiwiSaver provider fails. Its KiwiSaver members would be moved to another provider. But if its KiwiSaver investments are largely in its own bank deposits, a big portion of its investments will be frozen under OBR.

It’s important to note that it would be similar if any other KiwiSaver provider made a large proportion of their investments in a single bank’s deposits and the bank failed. True, members wouldn’t have to cope with a provider switch as well. But that shouldn’t be a big worry. The bigger problem is a fall in the value of the fund’s investments.

So the question is not so much whether banks put a lot of their KiwiSaver money into their own deposits, but whether any provider concentrates too much on one bank’s deposits.

I looked at the top ten investments on June 30 2015 of the lower risk funds in the KiwiSaver Fund Finder on www.sorted.org.nz. These funds have the largest bank deposit holdings. The two fund types are as follows:

• Defensive funds, which hold just zero to 9.9 per cent growth assets, such as shares and property. They include cash funds.

Bank-run defensive funds with a high proportion of deposits in their own bank were: the BNZ Cash Fund, with 100 per cent of its top ten investments in BNZ; the ANZ Default Cash Fund with 63 per cent in ANZ; the ANZ Cash Fund with 49 per cent; and ANZ’s One Answer fund with 47 per cent.

With less concentration were: the ASB Cash Fund at 34 per cent; and the Westpac Cash Fund at 28 per cent. Kiwi Wealth’s cash fund, which is run by Kiwibank, held no Kiwibank deposits.

What about defensive funds run by non-banks? Most have an admirable spread of bank deposit investments. But Forsyth Barr’s small Personal Choice Cash Management fund is 100 per cent invested in Westpac deposits, and SuperLife’s tiny UK Cash Fund is 100 per cent in ASB deposits (although this is a 19-member special-interest fund, and SuperLife’s main Cash Fund has a wide spread of bank deposits.) Also, the AMP Cash Fund has 43 per cent in Westpac.

• Conservative funds, which hold 10 to 34.9 per cent growth assets, and include all the default funds.

Bank investments in these funds were more diversified. However, BNZ’s Conservative Fund still had 81 per cent of its top ten investments in BNZ deposits, and Smartshares’ small smartkiwi Conservative Fund had 80 per cent in BNZ.

As noted earlier, it seems highly unlikely a major New Zealand bank will fail, at least in the near future.

As a Reserve Bank spokesperson said in this column in July, “Investments in bank deposits remain low-risk relative to many other investments that KiwiSaver funds may invest in, and therefore the probability of incurring a loss through this route remains low.”

Let’s move on to your question about whether the Financial Markets Authority should look into bank KiwiSaver providers investing heavily in their own deposits.

“The legislation does not prohibit KiwiSaver fund managers, who are also banks, from investing in cash in their own deposit accounts,” says FMA spokesman Andrew Park.

“Where a KiwiSaver cash fund deposits cash with a bank, the licensed supervisor and custodian holds that investment on trust on behalf of the members in the same way as any other investment. This safeguard is also maintained even in circumstances where a bank is both the KiwiSaver provider and the cash deposits are held with the same bank.

“An OBR situation may apply to the deposits if the bank fails. While all the scheme’s assets are held separately from the balance sheet of the KiwiSaver provider, those assets are still exposed to the market and investment risk that they may reduce in value.”

Where does this leave us? Bank KiwiSaver providers can invest in their own deposits. The BNZ and to a lesser extent ANZ have a strong tendency to do this.

Normally this is probably not a big problem. But it’s possible that someone fully invested in one of the lower-risk BNZ or ANZ funds could see a big drop in their account if the bank got into trouble.

In any case, I like to see bank providers investing in a wide range of different banks’ deposits. After all, it’s hard to believe that any given bank’s own products are always the best ones for their KiwiSaver investors.

Footnote: If you’re looking at your fund or others in the KiwiSaver Fund Finder — which is a great idea — you might notice that some other funds have a big investment in one institution. But usually that investment is in a trust or other type of fund that, in itself, holds many investments. So that’s not a problem. Other times a fund has large holdings in New Zealand government stock, which again shouldn’t be a problem.

AA cynical response would be, “You would say that, given that you seem to be in the business of offering such advice!”

Still, your points sound valid to me. Apartment purchasing sounds complex.

AThat’s good to hear, as this is an important service for many retired KiwiSavers. Our list of providers that offer it now reads: AMP, ANZ, Civic, Fisher, Grosvenor, Kiwi Wealth, Medical Assurance, Milford, NZ Anglican Church, SuperLife and Westpac. Any others out there?

If you’re with another provider and would like to make regular withdrawals in retirement, ask if you can. If not, switch to one of the above providers.

AWell done to all of you.

The Auckland housing market is not quite a Ponzi scheme — in which earlier investors are paid out with deposits from later investors. But how about the Greater Fool theory? This means that a person is prepared to pay a silly price for something, in the belief that someone else — a greater fool — will later pay even more. This usually ends in tears.