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KiwiSaver and capital guarantee?
 
Q.           I have resisted joining KiwiSaver as I am still paying off a mortgage. However, I started a new job recently and have been signed up automatically. I got a whole lot of information in the mail from Tower the other day. I was not impressed when I read that there was no guarantee for the money I put into KiwiSaver. I don’t think that’s good enough. Why has the Government set up a Scheme that is just about compulsory but there’s no guarantee?
 
A.            Well done on reading the information sent to you by the fund manager. Tower Managed Funds has been bought by Fisher Funds Management and is now run by them. On page 7 of the investment statement it states “none of the Crown, Tower Managed Funds, Fisher Funds, the Trustee, or any other person or company, guarantees or promises the repayment of, or returns on, investments in the Scheme.” This does not give any indication of the likelihood of losses, it simply means that there is no guarantee that can be called upon in the event of losses.  
 
As you were signed up by your employer you have been allocated to one of the six default Schemes, in your case Tower. Their default fund is called the Cash Enhanced Fund. According to the investment statement this fund “has been designed to meet the requirements of a default fund as defined by the Government. It is suitable for a …naturally cautious investor who is primarily concerned with maintaining the capital value of their investment.” That should give you some reassurance.
 
When the Labour Government set up the KiwiSaver Scheme in 2007 they wanted New Zealanders to have no illusions about the status of their investment. The legislation specifically states that “There is no Crown guarantee in respect of any KiwiSaver scheme or investment product of a KiwiSaver scheme.”
 
This is ‘business as usual’ for investors in New Zealand as our Government favours minimal intervention in the financial system and expects the market to find solutions. There are very few investments in New Zealand which come with a guarantee. You may remember back in 2008 during the Global Financial Crisis the Government set up the Retail Deposit Guarantee Scheme to avoid a run on banks and finance companies. At its height, taxpayers were guaranteeing deposits worth about NZ$130billion with 72 financial institutions. Investors flocked to put money into ‘Government Guaranteed’ finance companies such as South Canterbury Finance offering returns of up to 8%pa. A total of nine financial institutions defaulted, including South Canterbury. Depositors were refunded their money by the Government, at an end cost to taxpayers of over NZ$1 billion. 
 
The Retail Deposit Guarantee Scheme is no longer in place. New Zealand is currently the only country in the OECD with no bank deposit insurance. In contrast, bank deposits in Australia are guaranteed, up to AUD$250,000.
 
Your comments indicate that you are a cautious investor – find out for yourself by completing a risk profile questionnaire, such as the one on the Sorted website. There are dozens of different KiwiSaver funds for almost every shade of investor, from those who want to preserve every dollar to those who are happy to take lots of risk in the hope of getting double digit returns. There is even a KiwiSaver fund which offers a capital guarantee (with some terms and conditions). However, it is one of the worst performing Conservative funds, having achieved an average of 4.6%pa before tax over the past 3 years. Protection comes at a price.
 
As investors, what should we do to be confident that our KiwiSaver funds will be there when we need them? We must be in a fund that matches our risk profile and timeframe, know who is managing our money and how it is invested.
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to shelley.hanna@peak.net.nz. You can read earlier columns at www.peak.net.nz