By Diana Clement
How safe is my money?
It’s a question asked by many KiwiSavers. Plenty of New Zealanders have lost their life savings in recent years thanks to the collapse of financial services companies. (See our Deep Freeze list here for full details).
It’s not surprising therefore that fear holds some people back from joining KiwiSaver. The truthful answer to the safety question is that you can never say never when it comes to any investment – including KiwiSaver. If banks and governments can fail, so can KiwiSaver providers. Lift the lid on KiwiSaver, however, and it becomes clear that it’s designed to be a lot safer than finance company debentures, and even regular superannuation schemes.
The first point to make is that investors are often confused by the concepts of volatility and risk. Volatility is the fluctuation of a market price. Risk is the chance of losing money. KiwiSaver investments that contain bonds and or shares (that's most of them) will go up and down in value in the short term, but should track up in value over time. Investors experienced this volatility “risk” in 2008/2009 when share prices dropped dramatically in the world’s leading markets.
The important point is that the investors didn’t “lose” money, unless they were among the small minority withdrawing it while prices were down due to either financial hardship or because of the now defunct mortgage diversion scheme. Risk resulting in the loss of money, which is all the more serious, can come from two main sources:
1. the risk of an investment or investments within your KiwiSaver fund losing some or all of its value permanently and
2. the risk that your KiwiSaver manager goes to the wall and takes your money with it
Choosing a well-diversified fund protects against the first. The second is more concerning. Could your KiwiSaver provider go to the wall with your entire retirement pot? There is no government guarantee for KiwiSaver and big companies can and do fail. Just think of the Lehman Brothers collapse.
KiwiSaver schemes guarded
Fortunately this spectre is less likely than it may appear. KiwiSaver funds are held at a greater arm’s length to the provider or manager than many other similar investments including some superannuation schemes and certainly bank deposits. That’s because KiwiSaver fund managers are overseen by trustees such as Guardian Trust and the Public Trust. It’s true that the very same trustee companies dropped the ball with finance companies, which they oversaw. KiwiSaver funds are better protected because the total administrative responsibility, not just oversight, lies with the trustees.
Just how much fund managers can borrow (leverage), for example, and the types of investments money is channeled into, is in theory, something that the trustee must sign off. Crucially, the trustee controls the accounts where your funds are deposited. This means if your manager goes belly-up as a company, the investment fund holding your money is independent and the trustee can transfer the management of it to another KiwiSaver provider.
The Securities Trustees and Statutory Supervisors Bill now making its way through Parliament is expected to strengthen the regulatory oversight of KiwiSaver providers further. Yet protections can only go so far. Rogues can be found in all types of businesses and criminals find ways to circumvent systems.
One issue that may become a concern as your KiwiSaver pot grows is that you’ll have all your eggs with one manager, which could amount to hundreds of thousands of dollars for some people, if KiwiSaver works as it’s intended. Finally, investors should always be aware of what their KiwiSaver manager invests in and of the manager’s financial stability. You can always switch providers if you’re not happy.