NZ Herald 5 November 2022

AIt’s hard to know how much spending money your daughter will need at uni, but it sounds as if she will manage well, given what she has achieved already. Very impressive.

If she can keep saving while studying, that gives her a buffer — along with the $4,000 she has already saved — if things don’t go so well for a while.

She might want to check she has the highest-earning bank accounts for her spending money and short-term savings. Interest.co.nz lists the different banks’ accounts.

But my ideas for her are mainly around KiwiSaver. It’s great when people make the most of the scheme from when they are young. They can build up big balances, perhaps to buy a first home, and then for retirement. Here are some thoughts for your girl:

• Join KiwiSaver now. Some employers contribute to under-18s’ KiwiSaver funds, even though they don’t have to. Putting in 3 per cent of a part-time teenager’s pay isn’t going to break anybody. If you earn, say, $300 a week, the boss puts in only $9 a week. But it’s encouraging for you to see your balance growing. You could perhaps point this out to your boss.
• Choose a low-fee KiwiSaver provider, and invest in a higher-risk growth or aggressive fund until you get within ten years of possibly spending the money on a first home deposit. At that point you should gradually reduce your risk, so you’re not caught out the way some people have been lately — finding their KiwiSaver first home withdrawal is smaller because of volatile markets.
• From age 18, try to contribute at least $1,042 into your KiwiSaver account every July-June year. That will give you the maximum government contribution. If you need to dip into your savings to do that, it’s worth it.
• Perhaps most importantly, make time for some fun. Studying and working part-time can be a hard slog. And time out doesn’t have to cost much. Go for a bush walk, or to the beach, or just hang out with friends.

I remember years ago one of New Zealand’s top surgeons said his biggest regret was that he didn’t spend more time having fun with his fellow students back when he did his degree.

AIf your granddaughter has savings she could use to continue her contributions, it would be great to do that, even though she won’t be getting any employer contributions. It all adds up over they years.

But if it will be struggle to contribute during this time, it wouldn’t be a big deal for her to stop, provided that:

• She restarts contributions as soon as she gets another job.
• She contributes at least $1,042 between 1 July 2022 and 30 June 2023, so she receives the maximum government contribution.

ALet’s start with a clarification. The OCR was indeed 0.25 per cent in December 2020, when the FLP started, and stayed there until October 2021. Since then, though, it has risen fast, to 3.5 per cent.

But that doesn’t alter your main argument: that the banks haven’t played fair, and the Reserve Bank hasn’t monitored them closely enough.

What is the Reserve Bank’s response?.

“Banks set their own prices for loans, based on a range of factors including their funding costs, competitive pressures, and demand for credit,” says a Reserve Bank spokesperson.

“The RBNZ’s policy actions during the COVID period reduced bank funding costs and thereby the rates at which households and firms could borrow. The RBNZ monitors the pricing of bank borrowing and lending to understand how monetary policy is transmitting to the economy, and takes this into account when calibrating policy settings.

“We have regularly reported on trends in pricing in our Monetary Policy Statements. The strong funding position of banks has meant that higher wholesale interest rates have yet to be fully reflected in retail interest rates. Deposit rates are expected to rise as funding conditions become less accommodative and banks compete for funding.”

The spokesperson adds that Reserve Bank Governor Adrian Orr said in a recent speech titled Testing our Resilience: “In regards to our monetary policy objective, we have our eyes firmly focused on meeting our inflation target. We’ll be back at the end of November with our full Monetary Policy Statement and outlook ahead.

“Our work reviewing our monetary policy in the past 5 years is also near delivery. This will canvass what the Monetary Policy Committee did and why, what worked, and what we could have done better — the lessons from our experience. The work is being reviewed by independent experts and our new Board, and will be published mid-November.”

So there’s more info to come soon.

What about bank responses? Says NZ Bankers’ Association chief executive Roger Beaumont, “Bank profits seem big because banks are big businesses in New Zealand. Our banks have 9.5 million unique customers, and employ over 27,000 people. Last year they made a direct contribution of $8.52 billion to the New Zealand economy by spending $6.12 billion running their businesses here and by paying $2.4 billion in tax. The total contribution is more than their combined profits.

“Under the FLP, the Reserve Bank has made available a certain amount of funding to banks at the official cash rate. Banks may or may not have drawn on their allocation of that funding. Where they have, they may have used it for a range of targeted lending at special rates, for example for first home buyers, business and rural customers, and also to fund infrastructure projects.”

How much has each bank taken part in the FLP? Gareth Vaughan reports on interest.co.nz that as of July this year, “ASB has borrowed $3.8 billion, BNZ $2.1 billion, ANZ $1.75 billion, and Kiwibank $1.1 billion.” And “Westpac’s latest general disclosure statement shows that, as of March 31, it had accessed $2 billion through the FLP,” with possibly more since then.

Vaughan continues, “When launching the FLP the Reserve Bank said it would make banks less reliant on more expensive deposits and wholesale borrowing, thus lowering their overall funding costs. Banks could then pass these reductions on to their borrower customers through lower mortgage and business lending rates.”

He adds, “The FLP hasn’t been good for savers and it’s not designed to be, given the aim of reducing banks’ funding costs including the deposit rates they pay savers. In its February Monetary Policy Statement the Reserve Bank noted: ‘Term deposit interest rates fell to historical lows in 2020, in part due to monetary policy actions including the Funding for Lending Programme.’.”

You can read more on this, including what the different banks say they have used the FLP money for, in Vaughan’s article here.

AGreat question. We should say “higher volatility” rather than “higher risk”, as that’s what we’re talking about. Balances in those funds can fall a lot, but I reckon you can be confident they will always recover, given time.

While KiwiSaver is not government guaranteed, the Financial Markets Authority and providers’ supervisors — which are separate companies — monitor providers. I would be astonished to see KiwiSaver investors permanently lose their money.

ASwitch providers at any time, including now. As long as you move to another fund at the same risk level, it doesn’t matter what’s happening in the markets.

It’s like property. When house prices fall everywhere, it’s fine to move house, as you’re selling and buying in the same market.

It would be different if you were reducing your risk — sorry, volatility! — either with the same provider or a new one. In the current market, you would then be selling units at a low price, and buying at a price that hasn’t dropped. That would be like selling your house when prices have fallen and moving to an area where prices haven’t dropped. Not good.