You answered a question last week about bank KiwiSaver schemes that had varying levels of money invested in the bank's own deposits. One example in your answer highlights an important issue. You said that, of the top 10 investments by value in the BNZ's cash fund, 100 per cent comprised deposits in the BNZ itself.
It prompted me to look at the annual accounts for the BNZ scheme. As at March 31, 100 per cent of the whole cash fund or $66.8 million was in a "BNZ Bank Account" on "normal commercial terms". But that's not all: the other four BNZ funds each had a "BNZ Bank Account" listed in the "related party transactions", and all five accounts totalled $142.4 million at March 31.
Let's argue that the BNZ falls over. It shouldn't happen, but taxpayers have ridden to the BNZ's rescue on at least two occasions (1894 and 1989).
You have said that the KiwiSaver assets are "ring-fenced if a provider collapsed", but I think they should be ring-fenced at all times, not just after the collapse. In other words, a provider should not be allowed to put its customers' KiwiSaver money into its own business.
You quoted the FMA as saying that the "legislation does not prohibit KiwiSaver fund managers, who are also banks, from investing in cash in their own deposit accounts." That may be true (no formal prohibition), but I wonder if a court would say that a bank's KiwiSaver scheme has satisfied its fiduciary obligations by investing big sums of money in the bank's own business. That looks like self-investment to me and dilutes the reason for having the investments held outside the promoter's business.
Just think of the temptation before a bank fails when its withdrawals start exceeding deposits. Who would know until too late that, at the same time, the KiwiSaver scheme's investment committee decided to increase the proportions held in cash? It would be naive to suggest that couldn't happen.
A: In BNZ's KiwiSaver cash fund, we seem to have not just all the eggs in one basket, but the basket is made by the egg farmer!
Last week I said that perhaps it didn't make much difference whether we looked at a bank KiwiSaver provider that has filled its cash fund with its own deposits or a non-bank provider that invests in only one bank's deposits. But your letter has made me rethink that.
For other readers, "fiduciary obligations" are legal duties to act in the best interests of someone else. In this context, a KiwiSaver provider is legally obliged to act in the best interests of its members.
So has the BNZ satisfied its fiduciary obligations, particularly in its cash fund investments? Donna Nicolof, head of BNZ's wealth and private banking, replies, "Yes absolutely. Transparency is important and we have fully disclosed in our offer documents (both investment statement and prospectus) that cash investments are currently managed by BNZ."
She adds, "Our performance is monitored by an independent licensed trustee (now called a supervisor) who acts in the best interests of the members of BNZ KiwiSaver scheme.
"The BNZ KiwiSaver Scheme is actively reviewed (including the cash fund) and this looks at things such as the competitiveness of the returns on the deposits and the security provided by the deposits. The BNZ deposits are rated by S&P Ratings at AA-, which is strong compared to the other larger banks."
My comments: The S&P rating is actually the same as that of ANZ, ASB and Westpac. Kiwibank has a slightly lower rating of A+.
The BNZ KiwiSaver Scheme is actively reviewed (including the cash fund) and this looks at things such as the competitiveness of the returns on the deposits and the security provided by the deposits. The BNZ deposits are rated by S&P Ratings at AA-, which is strong compared to the other larger banks.
And while transparency, monitoring by a trustee, competitiveness and security are all good, I still don't think it's credible for the bank to claim that it considered the most suitable deposits available from all banks, and that BNZ deposits were always the best.
As noted last week, around half of the investments in ANZ's three low-risk funds are in its own deposits -- which I think is still too high. The percentages are considerably lower for ASB and Westpac. And Kiwibank's Kiwi Wealth cash fund holds no Kiwibank deposits. That suggests that at least ASB, Westpac and Kiwibank are objectively choosing what they think are the best investments.
Nor can BNZ claim that its cash fund returns have been superior. The scheme has been around for not much more than two years -- too short a time to judge performance. But it's all the data we've got. From April 2013 to March 2014, the fund returned 2.37 per cent, comfortably above the 1.67 per cent average for low-risk funds according to Sorted's KiwiSaver Fund Finder. But from April 2014 to June 2015, its 2.29 per cent was well below the 3.94 per cent average.
There's also the issue, discussed last week, of what would happen if BNZ got into financial trouble and the Reserve Bank applied Open Bank Resolution. In a fund holding only BNZ deposits, every investment would lose value.
However, the scenario in your last paragraph seems extremely unlikely. Says Nicolof, "There are strict controls around any changes to a KiwiSaver scheme investment policy, and we need to notify the trustee before any changes take effect. If the changes are enough to make a member reconsider their investment choice then we need to notify existing members before any changes to the investment policies take effect.
"Under the KiwiSaver Act the trustee must refuse to act on a direction of the manager to buy or sell scheme investments if the trustee considers it is manifestly not in the best interest of the members."
It seems that both the bank and the trustee would have to be seriously breaking rules.
In any case, change is coming to BNZ's KiwiSaver cash and other funds.
"The growth in the BNZ KiwiSaver scheme funds has now reached a level where the manager is considering appointing a third-party investment manager to manage the schemes' investment in New Zealand cash," says Nicolof. "We indicated this in our most recent investment statement dated September 2015."
And it looks as if the Financial Markets Authority may have nudged it in this direction.
Says FMA spokesman Andrew Park, "We have engaged directly with BNZ over recent months regarding the concentration of funds in the BNZ KiwiSaver cash fund, and specifically asked whether it was appropriate for the assets in this fund -- which has now been operating for a little over two years -- to continue to be invested solely with BNZ. Having expressed our concerns with BNZ it has already signalled its intention to introduce a greater level of diversity into its cash fund."
That's good news. Now, ANZ, how about watering down your ANZ low-risk fund holdings too?
Q: I am fairly new to KiwiSaver and just have a question about KiwiSaver processing times. As of the end of October I still have not received my employer contribution for August (or September, but I understand that is within processing timeframes).
I emailed them through the secure website on October 9 and they confirmed they had it and might take up to six weeks to process it. To date it is still not showing in my KiwiSaver account.
This is, of course, money that could be in my KiwiSaver fund, growing hopefully. Are there any rules around the processing times for IRD?
A: Says Inland Revenue, "It takes about three months for a KiwiSaver contribution to reach your KiwiSaver account." That seems ridiculous, but the process is explained at tinyurl.com/kscontribs
It's something you have to put up with, knowing that in the long run you should do well in KiwiSaver.
Levelling the playing field
Q: Is it greed when you have enough to cover basic living requirements and still hanker for some extra comfort? Or is the quest to get a better life the driving force in a free economy?
The people who "play the market" can look after themselves (and obviously do), but we need to help the young couples who are bringing up the next generation.
We are told that a capital gains tax is not that simple and/or cost-effective. Why can we not apply a stamp duty to all property sales -- exempting first family homes if feasible? I believe they have been levied (presumably successfully) in Australia for many years.
Assistance could be given on first family homes by allowing a tax claim for mortgage interest paid. Again, I think this would not be without precedents in other countries.
It seems another case of unfairness when landlords can claim this interest as a deduction from their income when the aforementioned families buying their own home can't. It would level the playing field a bit when they are both competing at the same auction!
A: My replies to your first two questions are "No" and "probably yes". But much more interesting is what Treasury has to say about your two ideas, as follows:
• Stamp duty. "Transactions taxes are generally considered to be inefficient because they are not applied uniformly and they may affect behaviour by discouraging sales," says a Treasury publication.
It adds, "Because real property sales have high values, the stamp duty cost is high, which means it will be worthwhile for the seller to engage in tax planning and alter behaviour in order to avoid the tax. This tends to make stamp duties a very inefficient way of raising revenue."
A basic point here is that any tax that makes people behave differently -- such as a high income tax that discourages people from working -- makes the economy less efficient. And that means less wealth for everyone.
You mention Australian stamp duty. But, says a Treasury spokeswoman, "A recent report by a Senate Committee recommended that stamp duties be phased out, reflecting their view that stamp duties are an inefficient and inequitable way of taxing." She adds, "Having a first family home exemption may reduce some of these effects mentioned above, but the general principles would still apply."
• A tax deduction for mortgage interest paid on a first family home. "Owner-occupied housing is already significantly tax favoured," says the spokeswoman. "For the homeowner, the home is an investment, and it earns a return by providing living accommodation without the owner having to pay rent.
"If, instead, the owner put the money in the bank and earned interest, which the owner used to pay rent, the interest would be taxed. This makes investing in your own home to get rent-free accommodation tax-favoured.
"Because the home provides a benefit that is not taxable, expenses associated with owning your own home are also not deductible. This includes the mortgage interest. This reduces the total degree to which owning your own home is tax favoured."
She adds that the Government provides other help for people buying first homes, largely through KiwiSaver.
I worry about other complications, too. What happens when someone buys their first home, and then has to move soon after because they lose their job? It seems unfair that they would lose mortgage interest deductibility.
Also, do we want to give tax breaks to really wealthy first-home buyers? If not, how do we stop them from hiding their wealth, as many do in other contexts? These issues are complex.