By Jenée Tibshraeny
Here’s a hypothetical scenario that’s becoming increasingly common:
Jim and Judy are 63 years old. They’ve paid off their mortgage and their kids have finally become financially independent.
They’re on track to spend more time on the golf course and less in the office.
But they’re not there yet. Realistically they don’t have enough in the kitty to see them through 30 years of retirement. They’re fit and able, socially engaged with their workplaces, and not ready to completely throw in the towel.
Yet one day calamity strikes. Jim is pushed out of the business strategy job he has had at a big firm for 15 years. The company’s undergone a major restructure, and he has been told he’s no longer ‘the right fit’.
Judy’s part-time job doing the books for a local mechanic provides hardly enough income for them to pay their weekly bills, let alone add to their retirement nest egg.
Jim - who has hired a number of people in his time - is now scrambling to put a CV together. Equipped with 40 years of experience, he has a ‘Bachelor in Life’, but nothing close to the Masters degrees the others gunning for the jobs he’s applying for have.
Jim has worked his way up to earning $90,000 a year, but he’s not even getting interviews for jobs offering this sort of salary.
He can either take a $30,000 pay cut to get a mid-level job, retrain, or start his own business. Neither of these options featured in his life plan.
What’s more, he’ll probably need to work for an extra few years - maybe to age 70.
Judy will also have to get another job so she has full time work. This will once again be a tall order as the book-keeping she has been doing has been largely paper-based, so she’ll have to learn how to use a new computer system to do a similar job elsewhere.
Jim and Judy arguably face a ‘first world problem’, when compared to the number of New Zealanders physically unable to work or those on much lower wages, but their situation is problematic nonetheless.
If there are enough Jims and Judys among our ageing population, their ‘first world problems’ also accumulate to become a big national problem.
Our workforce is ageing with our population
Speaking at an ageing workforce forum put on by the Commission for Financial Capability this week, Massey University’s Pro Vice Chancellor, Paul Spoonley, highlighted the fact 6% of our labour force is made up of people over the age of 65, as 22% of people in this demographic still do paid work.
This figure is expected to jump to 9%-13% by 2038, as the participation rate of over 65s in the labour force is expected to increase to as much as 31%.
Independent economist Shamubeel Eaqub says: “This is the magic year. We are going to have more old people than young people this year; more over 65s than under 15s.
“New Zealand will never be young again. The question is not so much what will happen in terms of our ageing population, but what will we do with it?”
Ageism in the workplace
Greg McAllister, the general manager of the recruitment consultancy OCG, is concerned a number of people simply don’t have enough money to retire at 65.
In fact, a large portion of New Zealanders are already working past 65 in comparison to other OECD countries. For example, the participation rate of over 65s in the labour force in the UK is only 10% and Australia, 12% (as at 2013).
Yet McAllister says whether people are working for longer because they have to, or because they want to; the environment they are in is tough.
“I can tell you about the 50-year-olds, the 60-year-olds, the 70-year-olds who want to work, who are able to work and who are willing to work. And they are perplexed when they talk to prospective employers… about why it is that an individual with so much experience, so much to offer, so willing to be flexible, so willing to reduce their expectations around salary, can’t get their résumé through the gate, can’t get a conversation with a hiring manager and are given throw away lines like, ‘you’re simply too experienced’,” he says.
“I don’t think we deliberately discriminate, and I think in the public domain we would be very careful about words that even reflected that possibility, but I’m telling you now I am quite sure there is age-related bias everywhere.”
The Commission for Financial Capability’s David Boyle says: “Older workers bring skills, experience and, often, loyalty to an organisation. Their input can be invaluable, but they can need support, such as training or flexibility around their role, in order for them to keep working.
“It’s a question of attitude as well. I’ve heard from people in their 60s and even their 50s who say they feel invisible or overlooked in favour of younger workers.”
Regional New Zealanders hit hardest
The difficulties those in their 50s, 60s and 70s face getting jobs are exaggerated in smaller towns suffering from de-population and thus jobs droughts.
Massey’s Spoonley says that while there are still slightly more under 15s than over 65s in Auckland, it’s a different story in other parts of the country, where there is more growth among the over 65s than there is among the under 15s.
For example, the number of over 65s in Taranaki overtook the number of under 15s last year, and Hawke’s Bay is expected to follow suit next year.
Eaqub notes young people, leaving the regions for better opportunities elsewhere, are major contributors to the population drain New Zealand’s towns are suffering from.
“In places that are depopulating, it’s very difficult for them [people nearing retirement] to have access to work even if they want to. And try selling a house in Eketahuna and moving up to Auckland for a job.”
Eaqub makes a passing comment that perhaps the Government should give those who would like to leave a dying town a $5000 relocation grant, rather than offering this to beneficiaries who leave Auckland.
The risks around the rise of the 65-year-old new business owner
The general manager of Business Mentors New Zealand, Lisa Ford, is concerned a striking number of those over the age of 60 are hesitantly starting their own businesses, because they’re unable to get work elsewhere.
She says those with specialised skills are starting their own consultancy businesses, while others are starting businesses in areas where they have no experience.
In fact, 28% of the small to mediums sized enterprise (SME) owners over the age of 60 that Business Mentors NZ has worked with, have had their businesses for less than a year.
Only 17% have been in business for more than 20 years and 51% work from home.
The thing that concerns Ford is that 76% don’t have business plans, let alone exit strategies around how they’re going to get some value from their businesses when they eventually want to retire.
People who don’t have the financial literacy are getting into business at a time they can’t afford to make financial mistakes, because they feel they have no other option.
We can’t afford to be ageist
Yet research shows New Zealand employers can’t afford to be ageist.
Of the 500 companies - ranging from those with fewer than five employees to those with more than 200 - that the Commission for Financial Capability has surveyed, 69% agree there is a shortage of highly experienced workers in their industries. The same portion is concerned about losing skills and experience when older workers retire.
Yet 83% have no policies or strategies in place for workers aged over 50, regardless of whether they’re engaged with manual or office work, or whether they’re large or small organisations.
Changing with the times
The Commission’s Boyle says: “As we live longer and the age of our workforce increases it’s clear that employers need to consider how they manage – and benefit from – their older employees.
“Of those who have introduced strategies or policies, they include flexible working hours, job design, an organisational culture that is supportive of older workers and planned phased retirement such as moving to part-time work.
“I know of some companies that make work more flexible for their older staff, for example with part-time mentoring roles to tap into that experience. It’s often a win-win for everyone.
“But I also speak to people who feel like they’ve been put on the scrap heap, and would like to work but can’t, when they still have a lot to offer. Continuing to work can give them purpose and greater self-esteem, as well as helping their financial wellbeing.”
McAllister agrees, adding employers also need to help younger managers manage their older workers, and better approach the issues older workers face.
On the flipside, he maintains older workers also need to recalibrate their expectations.
He sees opportunities for older workers to get more contractual or part-time work, as OCG’s research shows there’s been a rise in the number of these contingent workers over the past year, with projections for the next five years indicating the number of contingent workers will continue to rise.
With baby boomers already a critical part of this segment of the labour force, he calls for employers to keep older workers in mind when filling these roles.
Business Mentors’ Ford agrees flexibility is key for this demographic, suggesting older workers could even job share with young mums for example.
Yet she recognises the practicalities of this are difficult, particularly for SMEs that have limited resources. She maintains some Government policy adjustments may be needed to help businesses facilitate more flexibility.
By Terry Baucher*
As you might expect I read Simon Swallow’s article on the new regime for the taxation of foreign superannuation scheme (“FSS”) transfers/withdrawals with interest. So, do I think the new regime and Inland Revenue’s response is fair?
My short answer is “No”. My longer answer is “Mostly, no”.
There are three groups of persons affected by the rules. Firstly, those who transferred/withdrew funds before mid-2011 when the complexity of the tax treatment of FSS transfers started to become generally known.
For this first group Inland Revenue’s amnesty proposal is a bit like saying: “Yeah, sorry about that, the rules were very complicated to understand even for us, so how about we call it even and just tax 15% of the transfer. All good eh?” When you are being assessed for tax 10 or more years after the transaction, I doubt you’ll feel reasonably well disposed towards Inland Revenue.
The second group consists of persons who made a transfer or a withdrawal after mid-2011. It’s fair to say they “ought” to have known, or certainly should have been advised, that the transaction had complex tax implications.
The remainder are those who hadn’t made a transfer before 13th May 2013 (when the new rules were introduced into Parliament), but weren’t in breach of the foreign investment fund (“FIF”) rules because they were outside the FIF regime at that time. At a stroke those within this last group had the tax rules for their pension schemes changed with retrospective effect. This doesn’t strike me as particularly fair.
Within all three groups is a subset of persons who have either transferred schemes or wish to do so, but because of a combination of factors may not be able to access the transferred funds for several years after transfer. If they transfer a scheme they face the dilemma of paying tax on the transfer but without the means to meet that liability.
This is the group most harshly affected by the changes. In my view they are perfectly justified in complaining about unfair treatment, particularly since Parliament was warned about this possibility at the time the law was changed in 2013.
In fact, as the law stands, it’s entirely possible that someone may pay the tax on transfer but then die before being able to access the transferred funds. Not only does this seem a particularly perverse result, it raises the question as to how the transfer should be deemed to constitute income in the first place.
On the other hand the rules applying to post 31 March 2014 transfers are more transparent and generally less complex. Foreign superannuation schemes are now outside the FIF regime and subject to a separate set of rules. No-one now can argue that they were unaware there would be any tax consequences from a pension transfer. But problems remain with complexity, and the retrospective application noted above.
In response to complaints about fairness, Simon observes
“At the end of the day everyone before 1 April 2014 had an obligation to be declaring his or her holding in a UK pension while it was in the UK. ‘No one else did’ or ‘I didn’t know about it’ are not valid defences for not paying the tax.”
This sounds fine but ignores the question: “What was Inland Revenue doing to inform people of their obligations?” The answer was not very much prior to 2011. And the evidence for that is the stat in Simon’s graphic showing 90% non-compliance.
In fact Inland Revenue knew the FIF treatment of superannuation schemes was problematic as far back as May 2006. Page 35 of the commentary to the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill introduced that year noted:
“Consultation with the private sector has indicated that people with Australian superannuation interests may not be complying correctly with their tax obligations under the FIF rules and, indeed, might not even be aware that they have to account for tax. This non-compliance is not unique to people with Australian superannuation interests. For those people who are aware of their tax responsibilities, determining whether they have a FIF obligation can involve high compliance costs. Although the current exemptions provide some relief from these rules, members may have difficulty in determining which exemption applies to them and what their future obligations are.” (My emphasis)
Accordingly, Inland Revenue therefore proposed exempting holders of Australian superannuation funds from the FIF regime. Furthermore, this exemption was back dated to 1993-94 and the start of the FIF regime.
It’s a recipe for confusion to admit the application of the FIF rules to superannuation schemes is complicated and “can involve high compliance costs,” but then only grant an exemption in respect of some schemes.
In hindsight, 2006 was probably the point at which Inland Revenue should have rethought the whole tax treatment of FSS transfers. In November of that year it promised the Finance and Expenditure Select Committee it would review the issue but the matter went on the backburner (also known as the “too hard basket”) until it all blew up in mid-2011. At the very least Inland Revenue should have done more to alert taxpayers as to their potential obligations.
The somewhat two-faced approach to Australian superannuation funds still continues. Post 1 April 2014, the transfer of an interest in an Australian superannuation scheme into a KiwiSaver scheme is not taxable. Why isn’t that exemption available to non-Australian foreign superannuation schemes?
Inland Revenue’s justification is that if this was allowed people would hold off transferring tax preferred foreign superannuation schemes until just prior to when they could access those funds. In Inland Revenue’s view this would not be fair as the savings would then possibly avoid income tax entirely.
Surely that argument is also true of anyone transferring an Australian superannuation scheme into a KiwiSaver fund? The matter of generous superannuation tax concessions is an issue in the current Australian general election. Why exempt one type of scheme transfer but not the other?
Foreign superannuation schemes comprise savings made OUTSIDE New Zealand by non-residents. The transfer of the funds into New Zealand is therefore an economic gain for the country. Why should we tax such a transaction? What is the policy rationale for doing so? Are we not effectively taxing the importation of capital?
The rules for the taxation of FSS originally stem from recommendations regarding a comparative value FIF regime made in 1988 in the same discussion document as introduced New Zealand’s controversial trust taxation regime.
The Consultative Committee on International Tax Reform suggested the application of the comparative value FIF regime should be limited to investments in tax havens. In doing so it raised the following concerns about a comparative value FIF regime:
“In some cases, taxation would be levied on amounts that were well beyond the income to which a taxpayer had any reasonable chance of access. Moreover, at some point, the administration and compliance costs would be excessive relative to the revenue that could be expected. [Para 1.5.6] …
“[The proposals give] too little weight to the importance, in a tax system based on voluntary compliance, of acknowledging taxpayer perceptions of “fairness”. If the [comparative value] regime were implemented as proposed, it would encourage evasion and stretch the limits of avoidance because taxpayers would regard it as very unfair. The objective of retaining taxpayer goodwill should be kept in mind.” [Para 1.5.8]
The Consultative Committee’s alternative to the comparative value FIF regime? “The taxation of the gains, other than dividends, that residents derive from offshore investments should await the introduction of a general capital gains tax.” [Para 3.1.3] (The Consultative Committee had LOTS to say about a capital gains tax).
And this points to arguably the biggest unfairness of all. Why are FSS transfers taxable yet residential property investors can buy and sell with relative impunity, outside the “brightline” test?
It’s a pity the Consultative Committee’s prescient warnings about a FIF regime have been ignored. The consequences are as it predicted; the law is seen as unfair resulting in a loss of taxpayer goodwill. Inland Revenue will need to work hard to restore that goodwill.
*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »
By Simon Swallow*
Much has been made recently of people getting tax notices from the Inland Revenue for pensions that they had transferred to New Zealand.
Should everyone be crying for people that have received tax bills?
Should everyone be worried about the Inland Revenue chasing more people for tax?
Or should we all just bury our heads in the sand and hope that the problem will disappear?
There are lots of thorny issues floating around these questions. Many of which have been raised in recent press articles - Like, should financial advisers have given tax advice on pension transfers? And what ways can people pay the tax bills the Inland Revenue are sending?
To understand the answers you have to understand the history
The history of pension transfers in New Zealand can be split into two periods: before the 1 April 2014 tax changes, and; after the tax changes. The infographic below attempts to simply and in general terms capture the state of the nation in each of these periods.
In a nutshell, before the changes anyone with a UK pension had to notify the Inland Revenue of it and pay tax on the gain in value every year. So there is no confusion this was for any pension regardless of whether or not it was in payment.
So if Cheryl had an NHS pension, for example, every year she would have written to the NHS and asked them to send a valuation of her plan. She would then work out how much it had gone up by and put that value as income in her tax return. Even though she could not access that pension she had a yearly tax liability on it.
Because Cheryl, and many like her, never thought that having a pension not in payment would lead to a tax liability they never returned anything in their tax return. The Inland Revenue woke up to this and realised that the current system was not working. They thought that they would introduce a new system that got rid of this yearly requirement and simplified everything.
The new system would only tax when a payment was made out of a UK pension scheme, that are usually an income payment or a transfer to a New Zealand scheme. Income payments are already covered under income tax rules. That just left them with a new system to develop for taxing pension transfers.
The solution they developed was pretty clear that tax would only apply when a UK pension transfer arrived in New Zealand. The system for calculating and paying the tax is, however, confusing and a subject for another day.
So the Inland Revenue had a new (slightly less confusing and more time saving) solution. The problem that they had was what about all the people that had transferred before the new regulations came in on 1 April 2014. Should they let them off with their prior indiscretions of not paying tax. Simple answer was: No! (well sort of)
So is the Inland Revenue being mean?
The solution that the Inland Revenue came up with was to let everyone either sort out their old tax situation or declare under an ‘amnesty’. The ‘amnesty’ let’s people declare 15% of their transfer as income and then pay tax on it. For someone who had been in New Zealand a long time this looked like a good deal compared with having to calculate years of back tax.
So the Inland Revenue sent out notices to people telling them to cough up on the previous transfers at the ‘amnesty’ rates. These letters have been sent as very few people had volunteered to pay under the ‘amnesty’ – to be fair the Inland Revenue never really people know about it.
Like it or not the act of transferring a UK pension to NZ before 1 April 2014 was not what has caused the tax bills
So getting back to some of the original questions. The main one going around seems to be the blame game for who should have told people the Inland Revenue was about to send a letter asking for a whole lotta cash. People have blamed the financial advisers, the schemes that they transferred into and whole lot of others. At the end of the day everyone before 1 April 2014 had an obligation to be declaring his or her holding in a UK pension while it was in the UK. ‘No one else did’ or ‘I didn’t know about it’ are not valid defenses for not paying the tax. So people can either take the ‘amnesty’ or calculate the tax they should have paid.
Thankfully things are now simplier
For everyone that has not transferred their UK pension to New Zealand the tax rules are now simplier and you can assess them as part of the transfer decision. Any qualified pension transfer specialist will let their clients know what their tax liability on the pension transfer will be (under two methods) and how they will have to pay the tax. It is important to know this as it effects many people’s decisions on pension transfers.
If you have received a notice of audit from the IRD you should know that there are many potential avenues for you to follow to get resolution on it and the best place to start is either an expert tax adviser or pension specialist.
Augusta Funds Management's latest property syndicate is forecast to provide investors with an initial pre-tax cash return of 7%, but potential investors need to be aware of the upfront costs and think carefully about the long term outlook for the building's major tenant.
The scheme is being structured as a limited partnership which will acquire a new office building located on Graham Street, which runs off Victoria Street West in Auckland's CBD, for $115.8 million.
The scheme's start up expenses add another $6.3 million of costs, which takes the total that needs to be raised to $122.1 million, of which $70 million is to be raised from investors (at $50,000 per partnership interest) with ASB providing an interest-only mortgage for the remaining $52.1 million.
Augusta's forecasts show investors should receive a pre-tax cash return equivalent to 7% a year, with increasing rental income pushing that up by 0.25% a year to 8.0% in the syndicate's fifth year of operation.
The cash distributions are to be paid monthly, which makes it likely to appeal to people such as retired folk seeking a regular income stream.
Like most New Zealand property syndicates, this scheme does not offer a redemption facility and does not have a fixed termination date.
Investors will get their capital back when 75% of investor interests (one vote per $50,000 partnership interest) vote to sell the building and wind the scheme up.
If investors want to cash up and exit the scheme early, they can offer their interests privately to other potential investors, although such a sale may be difficult to achieve, particularly if market conditions are unfavourable.
Most syndicates are wound up after 5-10 years, so investors should be prepared to have their money tied up in them for the long term.
The cash distributions investors receive each month will come from the rental income stream and do not include any allowance for capital gains (or capital losses).
Investors will take capital gains or losses when the scheme is wound up and for this reason they should consider the effect its upfront costs will have on their equity.
Syndicates tend to have high set up costs, which come straight out of investors' equity.
Fees, fees & more fees
The Graham Street scheme has up front costs of $6.3 million, the biggest of which is the offeror's fee of $2.198 million which is paid to Augusta for setting the scheme up.
The other major upfront costs include brokerage of $1.4 million, to be paid to real estate agency Bayleys for selling down the scheme to investors.
And the offer is being fully underwritten by Augusta Funds Management's parent company, NZX-listed Augusta Capital, along with Bayley Corporation, which owns Bayleys Real Estate, and various other entities associated with other individuals, including businessman Peter Francis, who is the father of Augusta's chief executive Mark Francis.
Between them the 11 companies or people underwriting the offer will receive $2.1 million in underwriting fees, with Augusta Capital's share of that being $750,000.
The Graham Street building is being purchased at a discount to its valuation, which helps lift investors' equity and reduce the effects of upfront costs.
That means that based on the property's valuation of $119.85 million, the scheme would have net asset backing of 96.8 cents for every dollar provided by investors.
But some investors prefer to use a property's purchase price to perform that calculation, because a valuation, no matter how well founded, is a theoretical figure, while the purchase price was the actual figure that was agreed between a willing buyer and a willing seller.
Using the purchase price for the property's value reduces the scheme's net asset value to 91 cents per dollar invested.
That will reduce the amount of capital gains, or increase any capital losses, that investors would otherwise receive, when the building is eventually sold.
So the scheme's investors will feel the effects of its upfront costs on their wallets at the end of its life when it is wound up.
Investors should also give some thought to the building's tenants.
Augusta arranged to purchase the building from its developers, Mansons, before it was fully leased, and one floor is still vacant.
To sweeten the deal, Mansons has leased the vacant space until 2025 (with rent secured by a bank bond) while it looks for a tenant.
While that arrangement secures the scheme's rental income, it leaves some uncertainty about the mix and strength of tenants that will eventually fully occupy the building.
Other tenants include the New Zealand arm of multinational liquor company Pernod Ricard, law firm Meredith Connell and APN Holdings NZ (trading as NZME).
Anchor tenant's challenges
Potential investors should pay particular attention to the challenges facing NZME because it is the building's anchor tenant and will provide about 48% of the building's total rental income.
Although NZME's lease runs until 2030, it is operating in a challenging environment and is potentially facing a major restructure.
NZME's main assets are various newspapers and websites, including The New Zealand Herald, plus a stable of radio stations including NewsTalk ZB and Radio Sport.
The current media environment is a tough one and NZME's Australian parent is looking to spin off the company by floating it on the NZX and merging it with fellow media company Fairfax NZ,.
Both companies face similar challenges of coping with falling revenue streams from their traditional newspaper operations while trying to build up revenue from their digital businesses.
But regardless of whether the merger with Fairfax NZ proceeds or not, NZME is likely to be a very different company in say five to 10 years time, when the building is eventually put on the market prior to the scheme being wound up.
And whatever shape NZME is in by then will likely influence the building's value, for better or worse, and effect how much capital is eventually paid out to investors.
The risks posed by the possibility of NZME's financial situation worsening are clearly outlined in the scheme's Product Disclosure Statement, which lists it is a key risk, ahead of the risk of higher interest rates in five years' time when the initial fixed rate mortgage arrangements will expire.
The Product Disclosure Statement says:
"If NZME and its guarantor were to suffer liquidity or other financial problems of a significant nature, any resulting failure to pay rental and outgoings under the NZME leases would have a material detrimental impact on the ability of the LP [Limited Partnership] to pay returns to investors.
"If the NZME leases were cancelled (and no replacement tenants found, or there was a material delay in re-letting), it would materially impact the capital value of building A, the consequent ability for investors to recoup their original investment, and would continue to materially affect the LP's ability to pay returns to investors."
Below is a summary of the scheme's key features and here's a link to its Product Disclosure Statement.
Building A Graham Street Limited Partnership
|Type of investment||Commercial property syndicate, structured as a Limited Partnership|
|Type of property||A new, six level office building in Auckland's CBD|
|Scheme's promoter||Augusta Funds Management|
|Forecast pre-tax cash return||7.0% in year one, rising to 8.0% in year five, distributions to be paid monthly|
|Property's purchase price||$115,818,265|
|Total to be raised||$122,124,500|
|To be funded by:|
|Loan to Valuation Ratio||43.5%|
|Initial Net Asset Backing:||
96.8 cents per $1 invested (at property's valuation)
91.0 cents per dollar invested (at property's purchase price)
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By Grant Duncan*
In December 2017, we will mark the 50th anniversary of the Royal Commission report Compensation for Personal Injury in New Zealand, commonly known as the Woodhouse Report after its chair, the late Sir Owen.
This pioneering report led to New Zealand’s unique universal 24-hour accident compensation and rehabilitation scheme, the ACC, which opened for business in 1974. Consequently, all suits for compensation for personal injury were barred from our courts.
ACC was initiated by successive National and Labour governments. In spite of failed efforts to privatise it, it survives as a state monopoly to this day. The scheme is now in fine financial health due to its reserve funds that cover the outstanding claims liability. As at 30 June 2015, ACC’s investment fund was $32 billion. Buying 25% of Kiwibank is no problem! And it raked in $4 billion in investment income that financial year – almost as much as the levy revenues.
Most important though is that many New Zealanders get assistance from ACC for losses incurred from personal injury, including return-to-work assistance. That’s over 1.8 million registered claims in the 2015 year, 1.5 million of which were for medical fees only. About 100,000 claims included weekly compensation for lost earnings, normally at 80% of previous earnings. ACC accepted 235 new ‘serious injury’ claims, and 1,057 fatality claims. The year’s expenditure on rehabilitation and compensation came to a total of about $3.2 billion.
But, if you are unlucky enough to be severely disabled due to a congenital disorder, or due to a chronic illness that was not caused in employment, then you are not covered by ACC. You get lower public-health subsidies, leaner and meaner rehabilitation support, and means-tested welfare assistance. The Supported Living Payment (SLP) for those who have ‘a health condition, injury or disability that severely limits their ability to work on a long-term basis’ is paid to about 94,000 people, almost a third of whom qualify due to ‘psychological or psychiatric conditions’. Anyone financially supported by a spouse, however, is ineligible due to means-testing.
In Trevethick v Ministry of Health, the Court of Appeal found that the disparity between disability covered by ACC and disability covered by health and welfare is prima facie discrimination. But the Court ruled that the discrimination was justifiable under the NZ Bill of Rights Act. It regarded ACC law as substituting the right to sue with various no-fault entitlements for personal injury, while the costs of illness could legitimately be treated separately. Such is the law, and the injustice to the disability community remains.
Now, a founding principle of the ACC is that it should not matter when a personal injury occurred or what the cause was. The losses to the victim, the employer and the community are the same, regardless. We should address the injury and its consequences without wasting time in litigation over who is to blame or who should pay. We should support the injured, and return them to work and other normal activities as soon as we can. Indeed, in 1967, Sir Owen was so far ahead of his time that he also envisaged going a step further to include all disability and incapacity, regardless of cause, sickness or injury. What held him back from making a recommendation encompassing all incapacity was the need to take one step at a time and to gather the necessary statistics. Otherwise, the report states, ‘the proposals put forward for injury leave the way entirely open for sickness to follow’. Sir Owen’s comments about the eventual inclusion of illness in the compensation scheme have yet to be put into practice.
The 1988 Royal Commission on Social Policy did note, however, the inequity between disabilities caused by accident and those due to sickness, and it recommended bridging the gap. Subsequently, the Rehabilitation and Incapacity Bill, introduced into parliament by the Hon Dr Michael Cullen in 1990, applied to all incapacity for employment regardless of the circumstances from which it arose or whether it was a physical or mental condition. This legislation did not survive the change of government later that year.
ACC is now fully-funded and continues to provide vocational and social rehabilitation for personal injury. It has a mandate to support injury prevention programmes. There is some evidence that, compared with the mean-tested welfare system, ACC gets those incapacitated for work back into employment sooner. From an Economics 101 viewpoint this is counterintuitive, as ACC applies a higher wage-replacement rate than welfare. But perhaps the better support early on means better outcomes. What we do know (thanks to regular comparative monitoring reports) is that ACC’s return-to-work rates for injured employees are closely comparable with the Australian states.
The point now is to re-think our approach to disability and to take Sir Owen’s vision seriously. That is, to shift sickness-related disability out of the MSD model and into ACC cover.
Predictably, people will say it’s ‘unaffordable’. But, we are paying taxes for illness-related disability anyway, through MSD – currently over $1.5 billion per annum on the SLP. Illness caused in employment is already covered by ACC, on the other hand. There are many more who are disabled due to illness and yet are ineligible for either ACC or Work and Income benefits, but surely the community stands to benefit from addressing the rehabilitation needs of these citizens.
Of course, ACC expenditure, and hence levies, would rise if it were to cover illness-related incapacity – but not, it must be said, the employers’ levy, as work-related illness is already covered by that. As MSD’s sickness-related benefits costs are reduced, and as ACC picks up more of the public-health expenses, there would be some off-setting savings on the government’s budget. To cope with the rather lengthy transition period, ACC reserves are sufficiently large to absorb a temporary fluctuation in expenditure.
The next step, as Sir Owen said, is to gather the statistics needed to make a rational judgement about the cost and feasibility of extending ACC cover to illnesses. We need more in-depth research and analysis of this concept.
Potentially, it means affordable income-replacement insurance and rehabilitation for all New Zealanders incapacitated due to any form of illness or injury.
Grant Duncan is an Associate Professor in the School of People, Environment and Planning, at Massey University. This article was first published on AUT's Briefing Papers series. It is here with permission.
By Gareth Vaughan
Should TSB Bank be fully transparent on just what its relationship with peer-to-peer (P2P) lender Harmoney is?
This is a question I first mulled in February when writing the article pasted in below in full, which appeared in interest.co.nz's subscriber email that month.
That article stemmed from an interview with Harmoney founder Neil Roberts. He said a second bank, alongside Harmoney shareholder Heartland, was now lending/investing money through Harmoney's online platform. Although Roberts couldn't name the second bank, he described it as a New Zealand domiciled challenger bank that's not one of the big four.
From there a simple process of elimination, as outlined below, sees all roads lead to TSB.
When TSB's annual report dropped late last week I looked for any mention of Harmoney. This was in case the bank had offered up some disclosure on its relationship with the P2P lender, something CEO Kevin Murphy wasn't prepared to do in February. There was none.
Responding to questions seeking more disclosure yesterday, TSB spokesperson Zaneta Ewashko provided the following;
"As previously advised, TSB Bank maintains a position whereby we choose not to disclose the specific details of our investment portfolio. This is for reasons related to commercial sensitivity."
"I can assure you, like a number of other banks, we do retain a diversified portfolio with a moderate to conservative investment strategy. This is because we believe this is in the best interest of our stakeholders," Ewashko said.
A Solid Energy inflicted knock
In the big picture of a bank with total assets of $6.4 billion and gross lending of $3.85 billion, TSB's exposure to Harmoney is likely to be a small slice of the overall pie. However, if I was among savers to have deposited $5.8 billion with TSB, I'd probably like to know some details of the bank's relationship with Harmoney.
TSB's reputation is that of a conservative financial institution with strong capital that's well liked by its customers. However, the reputation took a knock when the bank's exposure to bonds issued by State Owned Enterprise Solid Energy blew up spectacularly in its face. Last year's annual results saw TSB writing off its entire $53.9 million exposure to Solid Energy.
March 2015 year net profit after tax almost halved to $25.5 million, TSB's annual dividends, paid to the TSB Community Trust, more than halved to $5.03 million, and the bank's return on shareholder's equity slumped to just 5.13% from 10.46% the previous year.
The December quarter of TSB's 2015 financial year magnified the Solid Energy impact even more. For that quarter the bank sank to an unaudited $18.3 million loss, total shareholder's equity fell by $18.3 million, and TSB's key regulatory capital ratios also fell with its common equity tier one capital ratio dropping 154 basis points to 13.21%.
By the quirks of accounting rules TSB has been able to write-back $13.7 million of its Solid Energy provisioning, thrusting the bank to record annual pre-tax profit for the March 2016 year of $85.6 million. And the bank's capital adequacy ratios remain well above the Reserve Bank mandated minimums. At March 31 TSB's common equity tier one capital ratio stood at 14.52%, more than double the minimum required 7%.
Nonetheless lending money through a peer-to-peer loan facilitator like Harmoney, which acts as a middleman matching borrowers with lenders, is a major new step for TSB to take. P2P lending is in its infancy in New Zealand. Harmoney, far and away the biggest of a handful of P2P lenders licensed by the Financial Markets Authority to date, is growing fast. According to its website, Harmoney has now facilitated $258 million worth of loans since launching in September 2014.
A key appeal of P2P is interest rates paid to savers/lenders that are higher than bank deposit rates, currently repressed in a low interest rate world. However, the NZ regime overseeing P2P lending is a light touch one by international standards, something that has faced some criticism. It's also outside Reserve Bank oversight, and the prudential regulator of banks including TSB has no plans to dip its oar into the P2P world at this stage.
Earlier this year, KPMG’s annual Financial Institutions Performance Survey noted P2P lenders have launched in NZ during a benign period with interest rates at an all-time low, employment strong, and the performance of NZ’s economy among the best in the OECD.
“Many feel the real test for the P2P lenders will be when they go through a down part of the cycle and pressure comes on the accuracy of their credit modelling and/or a liquidity event occurs. This will be a very real test of the P2P sub-sector, and whether its investors understand the risk-reward equation and whether the credit modelling is correct,” KPMG said.
P2P hits rough seas in the US
Overseas two of the behemoths of the more mature United States P2P sector are facing significant challenges. Lending Club last month announced the shock resignation of its chairman and CEO, Renaud Laplanche, after an internal probe turned up improprieties in the company's lending process, which included the altering of millions of dollars worth of loans. Shares in the sharemarket listed Lending Club tanked 34% in one day.
Law firm Schubert Jonckheer & Kolbe LLP now says it has launched an investigation into whether officers and directors of Lending Club breached their fiduciary duties to the company and its shareholders by failing to implement adequate internal controls over financial reporting and disclosure procedures.
And Prosper, another major US player, has hired investment banks as it seeks capital to shore up its funding base, and considers options including selling a stake in the company, Reuters reports.
Lending Club and Prosper's issues in the US don't necessarily have any direct implications for the P2P sector here in NZ. But they do highlight that this is a new industry and there will be ups and downs as it gets established.
Full disclosure from Heartland
Heartland Bank, which has a 9.41% shareholding in Harmoney and is listed on the sharemarket, has been much more open than TSB in terms of its lending through Harmoney. In interim results in February Heartland said it had lent $34.5 million through Harmoney to date and had negotiated an extra $35 million of lending capacity. Heartland chief financial officer Simon Owen says his bank has an agreement to lend up to $85 million through Harmoney in total.
Thus based on Roberts' comments in the story below, TSB's likely to lend tens of millions of dollars through Harmoney.
For TSB, its depositors and those hoping to benefit from TSB's dividends paid to the TSB Community Trust, this is great if the returns remain strong. But if some of the loans go sour, there may be a nasty surprise in store.
In the interests of full disclosure, it would be good to at least know what TSB has on the line with Harmoney to give a clear picture of what the risks and rewards could be.
Below is our story from February;
Who is the 2nd bank lending via Harmoney? Draw your own conclusion
By Gareth Vaughan
A New Zealand domiciled challenger bank that's not one of the big four.
This is the description, provided by Harmoney co-CEO and founder Neil Roberts, of a second bank that's lending money to borrowers via Harmoney's online platform.
His description leads to a short list of Kiwibank, TSB Bank, SBS Bank and the Co-operative Bank.
Heartland Bank, which would otherwise fit the description, is already known to be an 11% shareholder in Harmoney having bought its stake in September 2014 around the time Harmoney launched. Last year Heartland disclosed it had lent $32.8 million through Harmoney's platform by June 30.
Thus interest.co.nz put questions about Harmoney to the four banks short listed above. Below are their responses.
"Not us," said SBS chief financial officer Tim Loan.
"Not Kiwibank," said Kiwibank spokesman Bruce Thompson.
"Not us," said Co-operative Bank chief executive Bruce McLachlan.
"As you are aware TSB Bank has an investment portfolio of in excess of $2 billion. Due to commercial sensitivity we do not make comment on specific investments within this portfolio," said TSB managing director Kevin Murphy.
Of the second bank, Roberts said it's not going to become a Harmoney shareholder at this stage.
"They (the bank) couldn't access the technology or product we have, or couldn't afford to build that themselves or wouldn't want to. They've got national reach - lending through Harmoney gives them national spread," he said.
"Two challenger banks, not the big four, have invested (loaned) $60 million between them in our platform, which we're really pleased about," Roberts added.
"We believe we'll have access from those two banks to about $175 million in the next 12 months, fractionalised, they take the index, and they follow retail (investors)."
The charts below are taken from Harmoney's marketplace statistics page, where significant additional disclosure can be found.
*This article first appeared in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
The Retirement Commissioner says our “love affair” with property is preventing New Zealand's suite of financial products for retirees from growing like it needs to.
Diane Maxwell warns there are not enough ways for retirees to generate income from their assets and savings, yet says consumers are partly to blame.
“We get a bit worried about things beyond the property sector. We don’t put money into them, so they don’t exist,” she says.
For example, there is only one annuity product in New Zealand - Lifetime Income Fund - which was launched at the beginning of the year. There are also only a couple of providers, like Heartland Bank, that offer reverse mortgages.
Maxwell recognises there are often good reasons for retirees to be wary of these options, but says: “My big concern is we don’t have enough choices with these products… In a really good mature market we should have at least five providers we can choose from and then things get really competitive.”
“The problem is we’ve thrown so much money into property. We’re a bit nervous about the share market because people have been burnt in the past. We’re not really wanting to pay for financial advice, so we tend to stay away from some of those more complex products.
“And so we tend to be a bit of a one trick pony in terms of where we put our money. That’s not a great thing. It inflates the housing market.
“It also means that we don’t have those big pots of money that make decumulation products attractive to providers. Unfortunately, where the money is, is then where the providers are. We haven’t had the money there for the providers to innovate and drive and build the products to secure that money. So it’s a bit of a vicious circle in some respects.”
In saying so, Maxwell is not disregarding the benefits of property ownership when it comes to retirement. In fact, she’s previously spoken out in favour of young people getting on the property ladder if they can, as many would be better off working towards paying off a mortgage than blowing their cash on things they don’t need.
More competition needed in the annuity and reverse mortgage market
Maxwell makes these comments as the Commission for Financial Capability takes a fresh approach to this year completing its triennial retirement income policy. Rather than publishing a report at the end of the year, it’s taking a more staged approach to get people engaged.
It’s conducting research, hosting forums and talking with people in the community about a different aspect of retirement planning each month from April to October, and posting all its findings on its website.
Last month the theme was KiwiSaver and this month it’s decumulation - converting retirement savings into income.
Commenting on annuities, Maxwell says people are “suspicious” as many have been burnt by these in the past. Yet more options need to be made available.
“Other markets would have a plethora of annuities markets.”
As for reserve mortgages, Maxwell says: “The ones that we saw 10 years ago; we were a little worried about… These ones today are much better. They’ve got more guarantees.
She says the terms around the reverse mortgages being offered have been tightened, so you won’t be ousted from your house.
Yet the thing to remember with a home equity release or a reverse mortgage is that your interest compounds.
“It will chip into the equity of your home - there’s no way round that. But for some people they say, ‘You know what - that’s ok, I’m prepared to live with that because I can stay in my home’,” Maxwell says.
“In the UK it’s a pretty significant product. It’s becoming more popular and I think it probably will here inevitably.”
The other option retirees have is to release equity from their homes by downsizing.
Maxwell has received some positive feedback from people who have gone into retirement homes, but recognises smaller housing options aren’t always a whole lot cheaper, particularly if they’re newer and have better facilities.
The risks that stem from chasing yields in a low interest rate environment
She recognises retirees taking the safe option and contributing towards the $153.9 billion in term deposits held across the country, aren’t getting much bang for their buck in this low interest rate environment.
“The problem with a low yield environment… is that people chase yield and that means they can get sucked into scams more easily… It is a time where people do unfortunately put their money into some of the crazier options and the worry is that they lose it and they’re not going to be able to earn it back.”
Maxwell urges people to be wary of schemes they haven’t heard much about, or are based online or overseas. She reminds people to read the terms and conditions carefully, check the legitimacy of a scheme’s website and talk to people about it.
“No investment should ever be a secret. If it is, something’s gone wrong.”
As for investing in peer-to-peer lending platforms such as Harmoney or Squirrel, Maxwell says: “You can get bigger returns, you can have bigger risks. That’s the point. There’s a correlation between risk and return - always.”
She urges people to go in with their “eyes open” and do their homework.
“I worry when people rush into things,” Maxwell says, referring to investors who were rushed into investing in Blue Chip and then lost their money.
As for KiwiSaver, Maxwell admits withdrawals are fairly low at the moment, averaging at around $20,000.
Yet she’s sure that as the scheme matures and balances grow, financial service providers will put more effort into keeping funds secure and driving higher returns.
“I’m confident we’ll see a bit more innovation. I certainly hope we will - I’ll be calling for innovation.”
Regaining public trust in financial advisers
Maxwell recognises that if we want retirees to engage with a broader range of financial products to convert their savings into income, more emphasis needs to be placed on getting financial advice.
She echoes the comments an AMP director, Blair Vernon, made to Interest.co.nz last week, saying how shocked she is by the way people are prepared to spend money on all sorts of things, other than advice.
Maxwell’s concerned people often don’t know the difference between Authorised and Registered Financial Advisers, and how this affects what they have to disclose in terms of how much they’re paid and by whom (ie commissions).
“What a lot of people tell me is, they go to an Authorised Financial Adviser and they’re not sure if he’s good or not. They don’t know how to tell. He’s wearing a nice sharp suit and he’s looking smart and saying all the right things, but they’re not quite sure whether they can trust him. So I do think the industry’s lost a fair bit of trust.”
She hopes the Financial Advisers Act 2008 review currently underway will address some of these issues.
Bankers are popping the champagne following a High Court judge ruling it was lawful for Kiwibank to last year try to close the accounts of one of its remittance clients to reduce its exposure to money laundering risks.
The case, brought by E-Trans International Finance, sets a precedent for the way banks and money remitters operate in line with tough new rules under the Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) Act.
Justice Heath has essentially endorsed Kiwibank’s right to choose who it does business with, and decide whether or not it wants to invest in the systems necessary to monitor its remittance clients in line with the Act.
He’s discharged the interim injunction placed on Kiwibank in June last year, preventing it from closing E-Trans’ accounts.
E-Trans has been operating in New Zealand for 15 years; its focus almost exclusively on servicing customers in China, Hong Kong and Australia. It also has operations in Australia and Canada.
Justice Heath has made his call as remitters around the world accuse banks of crushing the US$600 billion industry by using a “blanket de-risking” policy to systematically get rid of them.
The Reserve Bank of New Zealand has flagged this as an issue, as a number of migrants - Pacific Islanders in particular - rely on remittance firms to send money back home.
The problem for banks is that it can be difficult for them to monitor exactly how much money is being sent between whom, when processing funds through remitters.
During the nine-day trial in February, E-Trans said that by 2014 Kiwibank was the “bank of choice” for remitters ditched by the other banks operating in New Zealand.
E-Trans accused Kiwibank of breaching: 1) its statutory duty owed to E-Trans under the AML/CFT Act, 2) the contract between the two parties, 3) the Commerce Act 1986 and 4) the Fair Trading Act 1986.
Yet Justice Heath has ruled all of E-Trans’ claims fail for the following reasons:
1) Kiwibank didn’t breach its statutory duty
Justice Heath says Kiwibank didn’t breach its statutory duty under the AML/CFT Act to supply E-Trans with banking services.
E-Trans argued Kiwibank had a legal obligation to put all the right systems in place to conduct the necessary due diligence on its customers. It said it couldn’t avoid fulfilling its obligations under the AML/CFT Act by simply refusing to do business with a class of customers.
However Justice Heath has ruled: “Although a particular class of customer might be adversely affected by a reporting entity’s decision not to do business with it, there is nothing in the legislation [AML Act] to suggest that such an entity should be entitled to bring a private claim, invoking statutory obligations.
“The public law purposes of the Anti-Money Laundering Act eliminate that possibility.”
This legality aside, Justice Heath acknowledges the headaches caused by the AML Act. He says it is “sound public policy” for the Government to crack down on the trade of dirty money, protect the ability of foreign workers to send funds to their homelands, and to promote competition in financial markets.
“The problem is that those laudable policy aims conflict. The co-existence of statutory provisions designed to promote each of those public policy goals seems to have brought about unintended consequences,” he says.
Justice Heath recognises requiring enterprises to act as reporting entities under the AML Act comes at the cost of reputational risk to financial institutions. Therefore he says it is “understandable” for banks to reduce their exposures to risks to avoid damaging their reputations.
He recognises the costs of complying with AML standards are high, and it’s likely banks would pass these down to their customers through higher fees for example.
Justice Heath adds: "The policy choices to be made are ones for Government. It is conceivable that they could be given effect through exemptions, guidance from a supervisor, some other existing statutory mechanism or a specific amendment to the Anti-Money Laundering Act."
2) Kiwibank didn’t breach the contract between the two parties
Justice Heath has upheld Kiwibank’s ability to terminate a customer’s contract without giving them a reason but providing 14 days’ notice, as outlined by the general terms and conditions of the contract that governs its relationship with E-Trans.
He’s turned down E-Trans’ argument that in terminating the contract, Kiwibank’s also bound by the New Zealand Bankers' Association’s Code, which obliges it to act “fairly and reasonably”.
The issue of whether the Code can be incorporated in the contract between a bank and customer has been contested in court cases involving Westpac and ANZ before.
Justice Heath concludes that for the Code to be adopted in the contract, someone from the bank with “actual or ostensible authority” would have had to endorse it.
“There is no evidence that the person from whom Mr Sun [E-Trans’ sole director and shareholder] obtained a copy of the 2007 version of the Code had actual authority to bind Kiwibank to a variation to its contract with E-Trans. Nor is there sufficient evidence that the person with whom he dealt had ostensible authority to do so,” Justice Heath says.
He says it’s “inherently implausible” Xiaohua Sun believed the “staff member at the counter” of the bank who gave him the Code, would’ve had the authority to bind Kiwibank to a variation of its contract with E-Trans.
3) Kiwibank didn’t behave anti-competitively
Justice Heath denies E-Trans’ claim Kiwibank behaved anti-competitively by attempting to close its account.
This is despite E-Trans arguing Kiwibank had ditched around 100 of it remittance clients [figure contested by Kiwibank] before it was E-Trans’ turn, and despite the fact remitters need bank accounts to operate.
Justice Heath says Kiwibank hadn’t “colluded in some way with other banks to eject money remitters from the relevant market, or abused market power”.
Yet his main point is that Kiwibank exercising its contractual right to terminate a contract doesn’t fall within the realm of the Commerce Act.
“A termination provision is not one that, of itself, has the purpose, or is generally likely to have the effect, of substantially lessening competition in a market,” he says.
He admits two or more terminations taken in aggregation may be anti-competitive, but “this would still require each clause to have an inherent anti-competitive effect”.
This technicality of the Commerce Act aside, he believes Kiwibank closing E-Trans’ account won’t substantially lessen competition.
He acknowledges banks’ moves to get rid of their remittance customers have “caused an appreciable decrease in the number of such entities”. Yet, “banks have the ability to fill the vacuum, at least in part, by offering money remittance services, most likely at a higher price”.
Furthermore, Justice Heath sides with Kiwibank’s lawyers in arguing Kiwibank only serviced around 30% of the money remitters in the market mid-last year.
4) Kiwibank hasn’t breached the Fair Trading Act
Justice Heath has ruled Kiwibank hasn’t breached the Fair Trading Act by giving what E-Trans says are false reasons for its decision to terminate its contract.
He says that even if Kiwibank was misleading, E-Trans’ accusation doesn’t stand under the Act.
“There is no causal link between what was said and any loss or damage suffered by E-Trans. Whatever reasons were given by Kiwibank for closing the account could not affect the legitimacy of its decision, provided it had not breached the contract or infringed some statutory obligation.”
Another one of Kiwibank's remittance clients, KlickEx, says it was last night re-issued a 14-day closure notice from Kiwibank. In April KlickEx issued High Court proceedings against Kiwibank, after the bank attempted to close its accounts. At the time, the Court issued Kiwibank with an injunction preventing it from closing the accounts pending the outcome of the E-Trans case.
*This article first appeared in our email for paying subscribers. See here for more details and how to subscribe.
An AMP director is ringing the alarm bells over the diminishing number of financial advisers in New Zealand, as our population ages and the prospect of making sure we’ll have enough money to see us through our increasingly long retirements becomes more daunting.
With less than 1000 Authorised Financial Advisers (AFAs) currently practicing in New Zealand (according to an AMP estimate), its director of advice and sales, Blair Vernon, warns this dwindling number is one of the things we should be most alert to as we look to the future.
There are a further 800 AFAs who aren't practising, as well as 8000 Registered Financial Advisers (RFAs) who are less qualified and have to meet lower reporting standards than AFAs, according to the New Zealand Institute of Economic Research.
Vernon says there simply aren’t enough people to deliver the advice required.
He points out around 15% of AMP’s distributors are carrying Gold Cards, with this portion expected to jump to 30% by 2020.
“They are unlikely to be available to help New Zealanders… We have got to figure out the issue of supply but I see a very narrow pipeline of that for some time. It could be a 10 to 30 year issue given what we see in the industry and how many are about to leave."
A long term problem
Vernon says the products or solutions to managing your money through your retirement are there - reverse mortgages, annuities or KiwiSaver for example - yet they all include a level of complexity.
“The most frequent sort of comment you hear from people who work in the adviser market [about their clients] is, ‘Will I run out of money before I run out of life?’ That’s where you need the advice component to come in.
“And I guess the challenge is, you can kind of build a product quite fast, but you can’t actually manufacture advisers. There’s a skillset and a technical knowledge, but there’s also just a straight level of experience that comes with time... This is a long-term problem.”
Vernon says that if you look at the industry for the better part of 15 years, there’s been little in the way of sustained recruitment.
This has been exacerbated by the fact a number of advisers, when the Financial Advisers Act 2008 (FAA) regime came into play, were retrenched from giving investment advice yet could move into the insurance space.
“You’ve got lots of people staying as RFAs and lots of people at the level of AFA who are thinking, ‘Why do I want the extra burden and challenge of staying in this market?’.”
The elephant in the room = commissions
Vernon recognises the way advisers generate revenue is a core part of the puzzle.
He notes the industry is going through a transition from being largely commission-based to being more reliant on fees from clients.
“The odd thing for the financial advice sector is it’s sort of survived on that [commission structure] for a large part and there’s a big transition now if you’d like to get to a model which is more about fee for service and ongoing fees for looking after a client’s financial wellbeing. And that’s a big change for advisers and clients.”
While AMP’s moving away from commissions, only spending 9% of its life insurance premiums revenue on commissions for example while most other insurers spend around 23%, the Government appears to have backed away from banning or capping commissions paid to advisers as it reviews the FAA.
“If commissions are in play, then really open transparent disclosure is a critical part of the puzzle. Commissions themselves aren’t necessarily damaging. When you don’t know the extent or value of them, that’s a problem,” he says.
“If you’ve got a profession that’s fundamentally commission-related, you’ll tend to find people who are far more transactional/sales orientated than long-cycle advice orientated.”
While Vernon believes commissions work well for the likes of real estate agents and car salespeople, he maintains taking a longer-term holistic view on a client’s finances should be paramount for advisers.
“Some advisers are quite successful in a straight fee to service approach… So the whole issue around commissions disappears. There are people experimenting with that already. There’s plenty of potential in that space.
“The question remains though, if we’re struggling to attract people to the industry, there are issues in terms of their perception of the remuneration for the effort required, versus other industries.”
Show me the money
“To put more people in the industry, there will have to be a greater pool of remuneration available.”
Vernon says the available revenue to support advisers has reduced over the last 20 years, as banks have started participating in the investments and insurance space.
“Secondly you’ve got the emergence of KiwiSaver, which is a much more economically efficient product for the client, but obviously has got much less revenue available for advisers.”
Vernon says the issues facing the New Zealand market aren’t unique, as regulatory change in the UK following the Global Financial Crisis has seen a reduction in advisers there. Australians don’t have particularly tight relationships with financial advisers either.
“There’s no single leaver. You have to see all of those dimensions - customers being prepared to pay, providers able to sustain recruitment and a pool of candidates ready to engage in that. It’s not a one or two year fix.”
The market only supplies what consumers demand
“It’s not simply a case of saying, ‘How come businesses aren’t recruiting more?’ The commercial response will play to where there’s revenue. And ultimately, most of the surveys you see say clients aren’t too keen to pay for advice. So therein lies the challenge.
“We have a wonderful DYI mentality… and it’s a bit the same with our financial affairs.
Furthermore, Vernon says people are prepared to pay for the here and now, but not their futures.
“How is it people are prepared to pay an enormous amount to go to a gym, but they aren’t prepared to pay almost anything to get some significant advice on their financial future.”
He too often encounters people nearing retirement, who haven’t put much effort into planning for their retirement in the past, so are looking for quick fixes.
They’re not looking for products or solutions, but for someone to sprinkle pixie dust over them he says.
“That’s a problem because that’s when we get people being susceptible to scams or other investment products that simply aren’t going to deliver.
“Unless we arrest some of that at a very early age, the reality is people aren’t going to have enough. It’s very hard to change your behaviour when you get to retirement if you’ve never adapted to your current budget. There are an awful lot of people who need help.”
Vernon admits the industry could do more to win the confidence of consumers, put off using advisers due to the blurred lines between their sales and advisory roles. This is another issue being addressed in the FAA Review.
Robo-advice can’t change attitudes
Vernon says we will only know whether the rise of robo-advice will the plug the gap left by retiring advisers in time.
“Even if the tool was there today - and I would contend there are lots of tools - are people actually spending any time with them?”
He admits robo-advice will have its place, but this still requires consumers being organised and plugging sufficient information into advice programmes, to get the most accurate response.
“That requires a change in consumer attitudes.”
Kiwibank has raised its "special" two year fixed mortgage rate from 3.99% to 4.15%, ending the availability of carded, or advertised, mortgage rates below 4% from the major banks, for the time being at least.
Kiwibank's standard two year fixed rate remains at 4.75%.
Kiwibank's "special" mortgage rates require a minimum 20% deposit, so borrowers with less than that will need to take out a mortgage at the higher standard rate.
This latest move by Kiwibank to raise its special rate has come as economists have been re-evaluating the likelihood that the Reserve Bank will cut the Official Cash Rate (OCR) at its next review on June 9.
Kiwibank's own economists have pushed back their expectation for when the next cut will happen to August from June. The OCR is currently at a record low of 2.25%.
Kiwibank was the last of the major banks to have still been offering a mortgage rate under 4%.
HSBC recently raised its special 18 month fixed rate from 3.95% to 4.19%.
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