How can you know your KiwiSaver money is safe?

Wednesday, 7 November 2018

There are still lots of gaps in our understanding of KiwiSaver. First published in 2018.

This story was first published in 2018 but is being republished due to some KiwiSaver members' concern about their investments.

New Zealand KiwiSaver balances are growing.

If you've got an increasingly sizeable chunk sitting in your account, you might wonder how safe that money is.

First things first: There is no absolute guarantee.

In the same way that the government doesn't guarantee the money you have in your bank account, there's no government guarantee backing KiwiSaver.

* Dispelling the KiwiSaver fog

* AMP's personalised video bid to engage its KiwiSavers**

KiwiSaver schemes are operated by independent, private providers such as banks and investment managers.

If one were to catastrophically fail, they could take some investors down with them.

But there are a few reasons why that's unlikely.

Licensing

All fund managers, including KiwiSaver providers, have to be licensed by the Financial Markets Authority (FMA).

This means, among other things, that directors and senior managers of the schemes must be deemed 'fit and proper', the business must be capable of performing its job properly and the FMA must have no reason to think that it will breach any of its obligations to clients.

'This ensures that providers must meet regulatory standards and act with their customers' interests in mind,' said Craig Mulholland, ANZ managing director of wealth.

As with bank accounts, there's no government guarantee of KiwiSaver schemes.

They don't actually hold your money

Part of that licensing process requires fund managers to have client money held by a third party.

'The assets of all the KiwiSaver schemes are held in trust, meaning the assets are not directly owned by the provider itself,' Mulholand said.

Sharon Mackay, BNZ manager of wealth and private bank strategy and products, said that meant if a fund manger went into bankruptcy or some other sort of business failure they could not call on the client money to bail them out.

That's a key difference from the situation with finance companies, which burned many investors a decade ago.

In that case, investors were basically giving their money direct to the firms to lend.

They have a supervisor or other independent custodian

Mulholland said all schemes had an independent, licensed supervisor or custodian keeping an eye on them.

'A supervisor of the scheme, independent of the manager represents the investors' interests and monitors whether the manager is complying with its various obligations to investors. If a provider were to be unable to continue operating, the KiwiSaver assets held by the trust would be protected. The supervisor or FMA would be able to appoint a new manager.'

KiwiSaver schemes diversify - so even if one company you have shares in collapses, you'll own others.

They diversify

The biggest risk for KiwiSaver investors is that their money is put into an investment that then flounders.

'Like any time of investment, when share prices go up KiwiSaver generally goes up and when share prices go down, KiwiSaver is down,' Mackay said.

Shares declining in value isn't a problem - you still own as many of them as you ever did and they should recover over time. But if a business totally failed, it is feasible that its shares could stop trading and eventually be worth nothing, wiping out your investment.

But the key reason why this scenario isn't likely to ruin your savings entirely is that managed funds do not put all their funds into one asset.

They will usually be invested in a mixture of a range of shares, bonds, and other assets.

'If you have a portfolio of 1000 shares and there's a problem with one it's much different to if you have a portfolio of 30 shares… I can't think of any case where the whole marketplace has collapsed,' Mackay said.

She said if a company went bankrupt, even then the investor should get some money back eventually, as liquidators looked to extract value for creditors.

Money that is placed by KiwiSaver schemes in term deposits or other bank products could potentially be at risk if a bank failed but that is an unlikely scenario and is offset by diversification, too.

They can sell their books of business

Mackay said someone who needed to stop providing KiwiSaver would probably sell their scheme to another manager.

'We've seen examples of that in the market already where someone has decided to exit the business and has sold to someone else.'

If they could not get a buyer for their scheme they could transfer it to the Inland Revenue, which would then pass them on to a default provider.

Government can't tap into it

This is a misconception that's proving surprisingly hard to shake. The government cannot access your money.

It is in your name and privately held – well away form the government's reach. It could change the scheme so it no longer offers any incentive, or it might choose to change the rules again. But it can't just take your money if it is worried about its bills.