Opinion: As the Government stymies BNZ's mortgage off-set KiwiSaver plans, acquisition may be the best route for this late comer to enter the market

Opinion: As the Government stymies BNZ's mortgage off-set KiwiSaver plans, acquisition may be the best route for this late comer to enter the market

By Gareth Vaughan

Having been the only big bank to miss the boat when KiwiSaver launched in 2007, BNZ came up with an innovative way to crash the party.

The bank was plotting to launch a KiwiSaver scheme through which customers would've been able to use their savings to off-set their mortgage. This sounds like an advance on BNZ's TotalMoney home loans where the combined balances of a customer's accounts are taken and subtracted from the total owing on their mortgage, thus reducing the amount of interest they pay.

However, the government, likely after lobbying from rivals, has stymied BNZ's plans with amendments to KiwiSaver regulations that, among other things, specifically prevent arrangements such as nil-return investment policies for KiwiSaver schemes that are linked to external financial advantages, such as mortgage off-setting.

Effectively the bureaucrats have acted to prevent KiwiSaver schemes operating counter to the objective of  money being locked in until retirement, even though BNZ's scheme would've encouraged saving. And even though KiwiSaver members who signed up before June 1, 2009 are still allowed to use up to half their KiwiSaver money for mortgage payments.

So with its innovative, late market entry path blocked, what other options does BNZ have to get a KiwiSaver scheme of its own up and running, and to borrow from bank speak, make sure it's a compelling proposition?

There's the risky option of coming up with another innovative idea and hoping to actually get that one past the government. Then there's the option of launching a vanilla offering, perhaps with the help of parent National Australia Bank's wealth management arm MLC, but undercutting rivals on fees and out doing them with user friendly online service features. Or there's the copy Kiwibank route and buy an existing KiwiSaver provider.

The latter option would not come cheap but may now be the best option open to BNZ if it wants a decent foothold in the KiwiSaver market anytime soon, especially given the growth of KiwiSaver membership,which has just reached two million, is now slowing, more than five year's after the scheme's July 2007 launch.

Paying up

Kiwibank's parent New Zealand Post is paying up to NZ$58 million for Gareth Morgan Investments, with NZ$43.5 million paid up front and another NZ$14.5 million dependent on future performance milestones being met. The deal did, however, transform Kiwibank into a major KiwiSaver player with its KiwiSaver funds under management surging by NZ$650 million to more than NZ$700 million, lifting Kiwibank's previously fledgling KiwiSaver operations to the country's sixth biggest, albeit still behind ANZ's OnePath, ASB and Westpac.

So who could BNZ buy? Candidates might include Tower, especially with Guinness Peat Group looking to sell its 34% stake, SuperLife, or possibly a Fisher Funds Management or Milford Asset Management if the owners of those two firms, popular with retail investors, could be persuaded to sell and stay on.

But with the smallest of those money managers, Milford having about NZ$667 million under management including around NZ$68 million in KiwiSaver plus a strong reputation, and Tower the biggest having NZ$1.4 billion including about NZ$825 million in KiwiSaver, BNZ would have to cough up tens, if not hundreds, of millions of dollars to pull off such a deal.

Given NAB's widely publicised problems in Britain where its 25 year foray through the Clydesdale and Yorkshire banks has cost it billions, and the move to bolster BNZ's capital base ahead of the introduction of the Basel III capital adequacy standards - it raised NZ$400 million by issuing 400 million NZ$1 shares to NAB in May - splashing out big on an acquisition doesn't seem likely just now.

There's certainly no doubt BNZ has been serious about entering the KiwiSaver market. The bank's now departing head of private banking & wealth, Tracey Berry, told interest.co.nz in January when asked whether BNZ would launch its own KiwiSaver scheme: "I ran wealth for Westpac when we launched their KiwiSaver scheme, I also set up Kiwibank's wealth division. I've recently taken on Sharon McKay who was intimately involved in launching ASB's KiwiSaver scheme. So you can draw your own conclusion from that."

There are also suggestions that BNZ, which currently offers the AXA KiwiSaver scheme to its retail customers and AMP's to employers, has lined up Russell Investments to manage its own scheme.

Why the Government blocked BNZ

As for preventing BNZ's move to launch a KiwiSaver scheme where customers could use savings to off-set their mortgage, a spokesman for the Ministry of Business, Innovation and Employment told interest.co.nz the fundamental purpose of KiwiSaver is to assist people to save for retirement, with the Government having a clear objective of  money being locked in until that time.

"We became aware, during recent engagements with stakeholders, that the KiwiSaver Act 2006 did not necessarily ensure that profits generated by assets in KiwiSaver remained in the scheme," the ministry spokesman said.

"The (new) regulations clarify that returns in a KiwiSaver account accrue to the member’s account and may not be used for other purposes before retirement. The amendments provide clarity to the market and ensure the regulatory environment reflects the fundamental purpose of KiwiSaver. The regulations apply equally to all KiwiSaver schemes."

For BNZ's part, a spokesman said the bank wouldn't comment on "speculation," but is always "looking at innovative ways to benefit our customers across a wide range of products and services."

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An unbelieveable try on by the BNZ.  And so good the bureaucrats have stopped them dead Trying to circumvent the intention of Kiwisaver.- Really.  Rampant and arrogant  behaviour like this means this bank has no regard to the interest of New Zealand and New Zealanders.  Time to cancel their bank license as well.

Really, KH? Really?!  A bank trying to help people pay their mortgages off faster is arrogant behaviour with no regard to the interests of New Zealanders? Really???? Gosh, here I was thinking that most home loan holders in NZ would be keen to pay their loans off faster. Sounds just like what people want. As it was, one of the intentions of Kiwisaver, origainally, WAS to help people pay their loans off faster. That's why there were deviations. It's only subsequent governments that have decided that that is not the intention of Kiwibank.
Sounds like your head might be in the sand a little. Or up a National MPs butt.

No thanks for the offensive comments.  Such undermines your argument.
There is a range of behaviours of course, but there are far too many NZers who have no idea, and who are not in fact reducing debt.  And the careful NZers will be having to fork out to support those ones after retirement.
Only dreamers think they can get by with no savings, and increasing debt all their working lives.  Reality is that we need to lock in savings so that there is some money there at retirement.
You will have to reduce your mortgage at the same time.  Sorry but  there is a need for locked in Kiwisaver (because you can't be trusted) and mortgage reduction, both together at the same time.  So fewer flat screens - sorry.
Of course there is nothing currently to stop the dreamers building up a massive mortgage in excess of their kiwisaver balance.  So effectively they will still be broke at 65 and needing my taxes.  I don't want to pay for them, but am not allowed to shoot them.  So it remains a problem.

What are you talking about?  This product would not mean no savings.  You'd only get the benefit of the mortgage reduction if you have savings in your KiwiSaver account.  So this is a product that does precisely what you want - both reduce mortgages and build up retirement savings.  How do flat screens come into it?

Lets be real here about the intentions of the banks.  The banks are out to sell more of their drug.  ie debt.   If the naive borrower, of which there are legions, has access to some money flow, extra from their Kiwisaver what do you think the bank will say to them.  I believe the bank will say to the suckers, "you have a greater money flow, so you can have a much bigger mortgage."  Hooked in one.
The product won't mean more savings.  KS accounts will be less than they would have been.  Mortgages will be bigger.  The borrrowers will have more overseas trips (or big flat screens)  and we will have just as many as now hitting retirement without having provided for it.  And the taxpayer will continue to get hit. 
M de M.  Tell me if you don't think this will happen.  But I think it will.

Still don't see how the flat screens come into it.  This product does not create a greater money flow.  It does not enable you to get money out of your KiwiSaver account.   It does reduce or eliminate the investment returns that go into your KiwiSaver account, but that money does not come to you - it goes into paying off your mortgage faster than you could otherwise have done.  
Yes, perhaps it will encourage some people to take on a mortgage bigger than they would otherwise have been able to.  Then they will end up - for the same cost - with a more valuable property than they would have had otherwise.   That's a good investment  - home ownership makes a substantial difference to wellbeing in retirement.
Yes, perhaps some people, once they have paid off their mortgage a few years early, will spend the money that they now do not have to spend on servicing their mortgage, on fripperies and worthlessness. 
And some other people may put the money into their KiwiSaver account, or invest it in a better education for their children, or donate it to a native forest restoration project.  The fact that some people may use something foolishly is not an argument for not letting anybody have it - particularly not when other people could derive real and substantial benefits from it. 
As for the cost to the taxpayer of people who have not provided for their own retirement - well, they cost the taxpayer exactly the same as people who have provided for their own retirement, ie the cost of New Zealand Superannuation. The main losers when people don't provide for their retirement are themselves.
 
 
 
 
 
 
 
 
 
 
 
 

I think you are taking an exceedingly cynical approach to this KH. BNZ has been offsetting loans under their own offering for several years now - saving customers huge amounts and the majority of these customers are not taking more debt on as they pay it off faster. Yes, there are still customers who continue to borrow and borrow - but to be fair the majority of these guys are not enrolled in Kiwisaver!! Additionally - the days of chomping up equity have waned significantly since the mid 2000s. Additionally, the banks make far more money from their liabilities (ie term deposits) than they do their loans. Helping customers pay off their lending faster will encourage these customers to continue to invest with them.
I find it interesting that you consider the approach arrogant when surely it would encourage more people into Kiwisaver and surely that has to be a good thing. Certainly I would join Kiwisaver if I could offset my mortgage. Right now I am offsetting it by holding it in my account.

 

Think about it KH - banks earm more from splitting investments and debt than netting the two off.

KH - you either I disagree and think its a great idea. I hope the BNZ keeps pushing this idea as it makes no sense to pay 5 to 6% interest on borrowings and recieve less than that from funds invested in KiwiSaver. With the right protections in place this investment makes complete commercial sense.

I think you are taking an exceedingly cynical approach to this KH. BNZ has been offsetting loans under their own offering for several years now - saving customers huge amounts and the majority of these customers are not taking more debt on as they pay it off faster. Yes, there are still customers who continue to borrow and borrow - but to be fair the majority of these guys are not enrolled in Kiwisaver!! Additionally - the days of chomping up equity have waned significantly since the mid 2000s. Additionally, the banks make far more money from their liabilities (ie term deposits) than they do their loans. Helping customers pay off their lending faster will encourage these customers to continue to invest with them.
I find it interesting that you consider the approach arrogant when surely it would encourage more people into Kiwisaver and surely that has to be a good thing. Certainly I would join Kiwisaver if I could offset my mortgage. Right now I am offsetting it by holding it in my account.

Am I cynical about banks peddling debt ? I plead guilty. 

So we are to believe that Banks make more money off deposits than off loans.  Accordingly they would of  course promote such deposits.  Explain then, why the vast majority of their marketing effort is about promoting loans. 

Because although margins are lower, lending can generate business for 25 years. It cements a relationship with a Bank much more effectively than other products.

You sound like a banker KiwiL.  Good point about the longevity of lending business.  And it would seem to me that lending and borrowing are the same business anyhow.   Somebody above though said that deposits were more profitable for banks - implying that banks were not out to expand their lending.  That did not follow to me.

Of course banks are out to expand their lending. And of course BNZ would want people to move their lending to them in response to their KS offering. But their goal is to get new home loans isn't it? You get a customers loan and likely you have their accounts and credit cards, maybe their insurances too. Profitable. Banks are all about market share. Doesn't necessarily mean lending has the highest profit margins. And how often do you see banks advertising "come on, borrow some more money against your house"? No - it's all about getting NEW lending. And having the type of offerings people want. You seem to be taking two angles here though - the bad banks who want customers to continuously max out on their lending AND the idiots who choose to constantly erode their equity. Which bothers you more? Because personally, I don't see banks out doing what you suggest they are. 

Ah.  At last you get my points.
Yes.  "the bad banks who want customers to continuously max out on their lending"
And yes.  "the idiots who choose to constantly erode their equity"
Thank you for putting it so well.
As for banks promoting lending.  Where have you been ?  (Rhetorical - I assume you work in a bank)   So you have never had an unsolicited offer to raise the limit on your credit card. ?
 

Ok. But how is the ability to offset your mortgage (thus encouraging saving - and potentially enticing more people into kiwisaver) going to make this worse? And no I don't work for a bank. Another incorrect assumption. :)

As for profitability it makes sense. Customer invests with bank, bank pays interest but takes a cut and THEN gets to lend that money out and take a cut on the interest too. Double margins. With lending however, the bank has to pay someone somewhere for the sourcing of the funds to lend. Deposits are gold. Particularly with the reserve bank rules that a certain percentage I lending funds be sources locally. 

This is a great idea.  Hopefully Westpac will try this on as well.  With 5 KS accounts - should make a good impact as an offset on the mortgage.
Just really another indirect version of the original option which we were meant to have anyway - of using KS for partial mortgage repayments.

I agree, the government made the right call on this. I can see everyone using their ks to offset the interest on their mortgage and reduce the debt quicker and then just reborrow the money once they built up some equity and wasted on a overseas trip to reward the savings they have made. 

And your point is ...?   Sounds like a good plan to me!

You "can see everyone" doing this, can you.  Is that what you'd do?  And all your friends?  
And any use of money other than saving it for retirement is a waste?

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If my mortgage debt is 6% and kiwisaver is earning 3~4% before tax...wouldnt it make sense to offset?  is the offset then tax free? (I'd assume so).  It would seem to be a sensible idea....certianly Im paying off debt first and saving later....less risk as well as saving $s.   Kiwisaver can lose money and be wiped out, debt not.
regards

Sense indeed. Currently BNZ and Kiwibank are the only banks that allow you to have $$ in your own savings account but directly offsetting your home loan. My Home loan is rather large, but I am offsetting about $50k from money in 8 different accounts I have. Much much better than paying IRD tax on interest and will take years off my loan. Am growing that offset amount on a weekly basis too.
And no, I am not off buying plasma tvs just because I am offsetting and reducing my debt faster *rolls eyes at KH*

using kiwisaver to offsetting a mortgage would generate a pretax benefit of greater than 8%. i highly doubt any of the current funds could contend with a "risk free" return like that. also it would incentivise people to maxmise their kiwisaver contributions.
 

how is it better for a first home buyer to be able to withdraw their kiwisaver to purchase a house but an existing home owner is not allowed to offset their mortgage. this is plain double standards.

Good on the Z for giving it a crack and coming up with a solution that was unique.
There will be a collective sigh of relief from the other providers.
 
 
 
 
 

If I am reading this correctly, BNZ were looking to set up a nil-return KS - meaning that any money made by the KS investment would effectively be paying for bank's interest losses with the mortgage offset amount.  
The new regulations do not stop BNZ or anyone else offering to offset KS assets against a mortgage - as long as all the proceeds of the KS scheme remain in the scheme.