10% KiwiSaver

June 18th, 2012 at 1:00 pm by David Farrar

Stuff reports:

 Politicians are divided over a suggestion by the Financial Services Council for an increase in contributions to 10 per cent of incomes to help pay for .

The council, which represents investment and life insurance companies, says raising KiwiSaver contributions by 1 per cent a year will enable people to still retire at 65, despite the growing costs of the scheme because of the ageing population.

There may be merit in an increase in KiwiSave contributions, but it is important to note the not inconsiderable self-interest the FSC has in the proposal. It would see KiwiSaver funds and revenue for their members triple.

Chief executive Peter Neilson said New Zealanders surveyed by the council said they could not live on the current Super payment of $349 a week.

Expanding KiwiSaver would enable them to use that saving to pay for their retirement at 65 until the future eligibility age, of perhaps 67, kicked in.

It would also enable people to double the amount they received in Super.

The trade off is not that simple. First of all, we do need to look at retirements savings as a whole. You should not treat superannuation and KiwiSaver separately. What no politicians have done is look at whether the current floor for super should be lower in future – in recognition of the level of private savings in KiwiSaver.

For someone on the average wage, they would under this proposal have a higher net income in retirement than they would have had while working. Now that is actually nuts, as when you are working you have the greater expenses, and are raising a family etc.

This is why we need a first principles review – what is the minimum and what is the desirable level of retirement savings, and how much should come from public super, from workplace super and from private super.

NZ First leader Winston Peters said the council’s call was “hopeless”.

“We offered people a straight tax-break so they could painlessly save.”

The crisis in Super was “manufactured” by certain elements in the finance sector, he said.

The council’s idea was the first step in privatising Super, Mr Peters said, but would not elaborate how.

Now this is ironic, as Winston championed the 1997 referendum which would have essentially privatised superannuation entirely.

It was fair that over 65-year-olds who were still working received the pension.

“For decades we all believed in a universal scheme whereby if you worked hard and you saved, you should not be punished.”

Why should Winston get public superannuation while an MP? That’s outrageous. And when he leaves again, he’ll get his gold plated parliamentary pension plus his public super.

Public superannuation should be used to assist those who do not have adequate savings of their own. It should not be used to give Winston an extra $15,000 a year income.

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54 Responses to “10% KiwiSaver”

  1. Paulus (2,485 comments) says:

    Remember Peter Nielsen is a former Labour Cabinet Minister.

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  2. dime (9,351 comments) says:

    do we know if winston claims it?

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  3. Spoon (101 comments) says:

    For those that have contributed for 45+ years it’d be nice to finally get something back with Super. Of course whether Winston has contributed is questionable…

    Removing it for those with good savings/income would essentially be another tax on the financially sensible (which isn’t necessarily the rich ones).

    With the more immediate question, I wouldn’t be keen for 10% Kiwisaver. I’m young and have a mortgage. It’s far more financially sound to put the majority of “spare” cash towards the mortgage, then save a higher amount (15%+) once I’m free of that.

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  4. Kimble (4,374 comments) says:

    There may be merit in an increase in KiwiSave contributions, but it is important to note the not inconsiderable self-interest the FSC has in the proposal.

    The original structure of KiwiSaver was not going to provide people with decent retirement savings. I always assumed it was a foot-in-the-door, thin-edge-of-the-wedge to get people saving, and that it would be inevitable that the contributions would increase.

    GFC hit and the contributions were halved, but again I figured that was just to help establish the scheme.

    I still believe that the contributions will increase, slowly but surely. And I believe they have to for the Scheme to make a real difference.

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  5. Kimble (4,374 comments) says:

    For those that have contributed for 45+ years it’d be nice to finally get something back with Super.

    Unfortunately, you didnt contribute for 45+ years. You just paid for someone else’s super for 45+ years. When you draw it, it wont be YOUR money you will be drawing down. It will be the taxpayers at that times money.

    That unfairness is an inherent problem with the scheme, and I dont know why you guys didnt kick up a stink about it decades ago.

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  6. iMP (2,231 comments) says:

    There has to be a limit to how much the State demands people pay compulsory taxes. We are already forced to pay, without choice:
    a) 19% income tax (or higher)
    b) 15% GST
    c) EQC Insurance levies
    d) Rates if we own homes
    e) ACC levies if we own businesses
    f) Dog licenses (if we own dogs)
    g) Car WoF
    h) Car MVL
    i) Rd User Charges (if we own diesel)
    j) Kiwisaver
    k) a host of other user pays if we want to use things.
    l) PLEASE ADD………

    It has to reach a limit where the relationship between compulsion at State level stops, and people’s sovereignty and choice is left alone. TOO MUCH GOVT.

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  7. Kimble (4,374 comments) says:

    It’s far more financially sound to put the majority of “spare” cash towards the mortgage, then save a higher amount (15%+) once I’m free of that.

    What if the contributions and returns were tax free?

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  8. Kimble (4,374 comments) says:

    iMP, surely that situation is better than the alternative; one tax, levied on all, regardless of each individuals behaviour or choices.

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  9. m@tt (587 comments) says:

    “Public superannuation should be used to assist those who do not have adequate savings of their own.”

    So you support means testing for super?

    Take two people on the average wage. One saves for retirement his whole life and lives on just that in retirement, thanks to means testing.
    The other saves not a penny towards his own retirement, spends all his income each week, then lives off the taxpayer in his retirement. The second guy is the smarter one.

    I actually think that ultimately we’ll end up with some kind of means testing, but first we need to go to compulsory super so that there is no excuse for that second guy to leech of others by choice.

    [DPF: They key is to have a moderate abatement rate so those with private savings will still have an overall income considerably higher than those who saved nothing]

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  10. CJPhoto (213 comments) says:

    My view is that Super should be means (income and/or asset) tested. The trade off for the ‘rich’ for not receiving super is lower taxes during their working life. It makes no sense that taxpayers are paying super to those earning a lot or with huge amounts of assets.

    Thresholds, abatement and avoidance are all issues but WFF has exactly the same problems.
    Disincentive to save? – get the threasholds and abate right and this isn’t an issue. If people think they can live on $15k, then they dont have to save.

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  11. Kimble (4,374 comments) says:

    The second guy is the smarter one.

    Assuming the second and first guy both get the same amount. And even then all you are arguing for is a high threshhold.

    Having the threshold at a level at which the super payments are trivial in comparison to the other income would avoid the situation you describe.

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  12. rouppe (911 comments) says:

    How about we tie it on a pro-rata basis to the amount of tax paid over the individual’s lifetime compared to all other retirees on the scheme..

    That would solve Winston’s problem and also be ‘fair’

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  13. Alan Johnstone (1,054 comments) says:

    Let’s abolish NZ Super now for anyone born after 1970 and write everyone a cheque based on what they’ve put in.

    Let them squander it or save it as they see fit.

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  14. dubya (214 comments) says:

    You can pretty much guarantee if super was mean-tested, the ever-precious family home would be exempted. Then we’d just end up with elderly people holding on to larger properties and inflating prices for the ones that do come to market. No doubt future Grey Power will complain about the large rates and utilities bills faced by the empty-nesters, too- it’s a never ending cycle of entitlement that needs to be stopped.

    I’d prefer compulsory savings with private providers, at around 10%, and eventually phase out Government Super altogether.

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  15. Colville (2,056 comments) says:

    How many here actually have Kiwisaver? I dont.

    No freaking way I want to be handing over 10% into Govt control when they will no doubt either steal it or change the rules. I am 44 now. In 26 years there is no way the NZ govt is gonna be handing out money to white rich pricks!

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  16. Alan Johnstone (1,054 comments) says:

    Kiwisaver funds aren’t under any form of government control. Your money is in an account run by a bank.

    Same as any other form of investment.

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  17. Manolo (13,297 comments) says:

    How many here actually have Kiwisaver? I dont.

    Neither do I.
    I prefer to look after my retirement money without any “help” from the thieving government.

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  18. KH (687 comments) says:

    10% – it should be 15%
    And universally compulsory, even these for on benefits. And horrors – compulsory for Kiwibloggers.
    So it’s a reduction our our spending power, well thats the reality.
    And if we run that for about 30 years we can abolish Super altogether. 2045.
    And the reason for it being compulsory for all is to protect me. Like all those wise, investing Kiwibloggers above, I don’t really need to be in Kiwisaver.
    But without universal complusion I will be forced later to pay tax for all the lowlifes, the unwise and the unfortunate.

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  19. Alan Johnstone (1,054 comments) says:

    Of course i have Kiwisaver, why wouldn’t I be in a scheme where I get (now reduced) tax kick backs and compulsory employer contributions.

    Unless you are self employed it’s almost impossible to run a set of numbers that suggest it’s a bad thing. Not being a member is simply leaving money on the table. i’ve done maximum contributions from day 1.

    As the sums of cash in it increase it becomes harder to touch politically. It’s becoming the third rail of NZ politics.

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  20. Pete George (22,713 comments) says:

    Of course i have Kiwisaver, why wouldn’t I be in a scheme where I get (now reduced) tax kick backs and compulsory employer contributions.

    Same, it’s a no brainer. It’s not ideal, essentially a convoluted tax credit, but still too good to not take, despite it being reduced.

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  21. Colville (2,056 comments) says:

    Alan Johnstone… so like any bank account I cant just wander along and cash it up if I feel the need?

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  22. Mr_Blobby (106 comments) says:

    Speaking personally. I would like to get something out of the Ponzie scheme that I have been forced to contribute to all of my working life.
    The state pension should, in fairness to those who have contributed most to it through taxation, remain universal.
    They may want to look at the retirement age but has anybody thought about not increasing the pension with the message that you top it up from your own investments, if you require or want more.
    Or payments based on the amount contributed during your working life. Personally I would have qualified about a decade ago.
    Forcing everyone into kiwi saver (ponzie next generation) only benefits those collecting fees and commissions and creates a huge locked in fund for the financial fraudsters and Banksters not to mention greedy Governments who may decide to means test kiwi saver funds.

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  23. Mr_Blobby (106 comments) says:

    Don’t count on it Allan Johnstone and no Colville it is locked up until you turn 65. As the sums increase it will be increasingly harder for Governments NOT to want to meddle with it. First the return is not Guaranteed. It may well be that you want to retire during a market collapse only to find your fund has shrunk massively, if not wiped out. Worse you may see the collapse coming and be powerless to react to it. A Government my decide that means testing is back and if you have a Kiwi Saver account then you don’t need a state pension, despite having contributed to it. You will have very little, if any, control over what your funds are invested in. The fees likewise will be out of your control. Look at the scale of the Frauds being carried out around the World, expect similar here. The numbers may stack up today but how about 20, 30, 40 years from now. Like all good cons you won’t see it coming. Look at the financial markets over the last 10 Years, would you want to be retiring in 2009. Stick your head in the sand today and you may well be a passenger with front seats in a train wreck latter.

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  24. Manolo (13,297 comments) says:

    … and no Colville it is locked up until you turn 65.

    Which is exactly the point Colville raised. Why would leave your money in Kiwisaver when you can invest it and look after it yourself?

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  25. Alan Johnstone (1,054 comments) says:

    Because of the additional returns i’ll get when the tax kick backs, employer contributions and lower management costs are factored in. Which is exactly the answer to your point.

    Now, If I could get a matching employer contribution without being in Kiwi Saver i’d consider it, but i can’t. This additional input makes it compelling. I’d need to have 100% greater returns in a self managed fund to compensate. I accept the ability to have full control has a value, but it’s even close to 100%

    If I retire during a market collapse and don’t have the bulk of my funds in defensive positions like cash then i’m a retard that deserves what I get.

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  26. Colville (2,056 comments) says:

    Mr Blobby, I knew the answer but I thought I would ask the question anyways :-)

    The fucking Gweens will steal the cash and invest it in something fluffy and nice (for our own good of course!) and it will be all gone.

    Fuck that.

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  27. Colville (2,056 comments) says:

    Manolo. Exactly.
    I remember sitting in Cusco in sept ’08 watching the yanks crying over the stockmarket meltdown and knowing they were going home to half of the wealth they left behind.

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  28. Cunningham (811 comments) says:

    You don’t have to cash it at 65 do you? I want to save up some dosh so I don’t need it at 65 and cash it in sometime between 65 and 70 when I think it is at a good value. Anyone complaining about it please tell us all what other kind of investment essentially doubles. Money for nothing! I am resigned to the fact I will get no pension so I see this as some way to get back the tax I pay. Being classified as a high income earnermeans getting perks like this are few and far between (despite the amount of tax I pay). Kiwisaver is a no brainer and there is no way in hell any government will touch it. Muldoon ensured that there is no chance kiwis will put up with that happening again.

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  29. Mr_Blobby (106 comments) says:

    Alan Johnstone “i’m a retard that deserves what I get.” Well said, hope your wrong. Hopefully your provider won’t be a retard and chasing commissions or worse a fraudster. But some people may fell that they have the confidence to run there own affairs, it may not workout in every case but they should have the choice.

    When enough people have signed up the tax refund will just dissapear an employer contribution is nice but at what cost less wages, so who pays really. The cost/risk from my point of giving somebody else control of my future is to high.

    Colville. Greens in power. What was the question again.

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  30. rouppe (911 comments) says:

    Colville and Manolo. Come on….

    First IRD is a channelling entity only. The money is forwarded to a private investment company where it is invested in your name. Just like if you went to any investment company directly yourself. The only way a government can get to it is if they nationalise the investment entities like Tower and AMP. Maybe it could happen but there would be blood in the streets.

    You do it because of the kick-backs as outlined by others. You only do it to the extent you get the maximum kickback for the minimum investment. You do not direct all your discretionary investment income to it. That would be as stupid as not getting kickbacks at all.

    Sounds like you prefer to not use an investment manager at all, and invest directly yourself. If you’re so good at it why don’t you start your own investment company, attract investment funds and cream fees yourself as well as the investment gains that you (always?) make?

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  31. Kimble (4,374 comments) says:

    As the sums increase it will be increasingly harder for Governments NOT to want to meddle with it.

    The fucking Gweens will steal the cash and invest it in something fluffy and nice (for our own good of course!) and it will be all gone.

    You should be equally concerned that the government will take the money you have saved in the bank.

    First the return is not Guaranteed.

    Why should it be?

    It may well be that you want to retire during a market collapse only to find your fund has shrunk massively, if not wiped out.

    So you dont think the funds should invest in risky assets? Or maybe you have been misinformed and believe that once you choose your fund, you can never change it?

    Worse you may see the collapse coming and be powerless to react to it.

    Well, you could put it into a cash KiwiSaver fund. They exist. So… yeah.

    A Government my decide that means testing is back and if you have a Kiwi Saver account then you don’t need a state pension, despite having contributed to it.

    1. You dont contribute to a state pension.
    2. There is ALWAYS the risk that governments cut the state pension. In fact, I see it as an absolute necessity for many countries in Europe.
    3. They cant cut your KiwiSaver savings.

    You will have very little, if any, control over what your funds are invested in.

    A compulsory system would probably come with a self-managed option. But even then you wouldnt be able to go crazy with it, i.e. you wouldnt be able to invest 100% in a single company, or give it all to that hedge fund guy, whats his name Mabboff, or something?

    The fees likewise will be out of your control.

    So? The price of milk is out of your control too. So is the price of everything you arent selling yourself. The fees charged vary between each provider. There are cheap options, and expensive options. You have control over which one you choose.

    Look at the scale of the Frauds being carried out around the World, expect similar here.

    Fraud is always a problem, in everything. I reckon it is LESS likely in KiwiSaver. Given that, the ability for everyone to invest wherever they like, is more likely to increase exposure to fraud.

    The numbers may stack up today but how about 20, 30, 40 years from now. Like all good cons you won’t see it coming. Look at the financial markets over the last 10 Years, would you want to be retiring in 2009.

    Depends. Was I invested in a high-risk fund exposed to lots of equities? Or a low-risk one, exposed mostly to cash and bonds? You may know all about the performance of the high risk ones, those are the ones the media laments, but do you know what low-risk funds averaged over that period? I do.

    Stick your head in the sand today and you may well be a passenger with front seats in a train wreck latter.

    Stick your head in the sand today and you miss out of 100% (or 50%?) instant return on your invested capital. Keep your head in the sand and you will miss out when salaries ex-KS are adjusted to reflect the KS contributions which you dont get. Looks a little like a train wreck right now.

    I dont care whether you invest in KiwiSaver or not. But your ill-informed opinions could lead others to make ill-informed decisions, in my opinion, to their detriment.

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  32. Mr_Blobby (106 comments) says:

    Cunningham. My point is circumstances change you may not be in a position to defer your kiwisaver for 5 or 10 years, while it tries to recover from some financial shock. “No way in hell any Government will touch it,” Ask the Greek people how it is in Hell at the moment or Spain, Portugal, Italy Ireland, Iceland, France etc. I have heard this argument on just about every level “The currency markets are to big for Governments to control.” “No Government would do this or that.”
    Governments can, do and will meddle in anything and everything.

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  33. Kimble (4,374 comments) says:

    Hopefully your provider won’t be a retard and chasing commissions or worse a fraudster.

    Chasing commissions? Fraudster?

    I now think you are basing your opinion of KiwiSaver on discussions from the TradeMe forums on financial advisers and finance company directors.

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  34. Kimble (4,374 comments) says:

    My point is circumstances change you may not be in a position to defer your kiwisaver for 5 or 10 years, while it tries to recover from some financial shock.

    If you are concerned with financial shocks then more your money to funds which are less exposed to financial shocks.

    Do NOT raise this point again. It has been demolished enough times already.

    Ask the Greek people how it is in Hell at the moment or Spain, Portugal, Italy Ireland, Iceland, France etc.

    KiwiSaver money is YOUR money. The only way the government can get it is through taxation or straight up stealing it. Both of which they are equally capable of doing to the funds in your bank account.

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  35. Mr_Blobby (106 comments) says:

    Kimble you sound like a shepherd looking to lead the sheeple.
    People should and do make there own decisions. Who are you to tell me that I am ill informed? Who are you to tell me not to express my opinion?
    The only ill informed are the muppets that hang of the word of fools like you and believe everything you tell them without question.
    People have lost fortunes, and will continue to do so, listening to the word of fools who say I am the way all others are wrong.
    No Fuck you. I will call it as I see it and if you don’t like it happy to tell you were to go.

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  36. slijmbal (1,210 comments) says:

    Some of us already save and frankly wouldn’t want too much more in what are generally pretty mediocre savings schemes only worth investing in because of the bribe.

    Yet to see means testing that wouldn’t be a disincentive to save unless it was reasonably generous, which tends to make it a waste of time. Many people decide that unless they can save above X, which needs to be quite a large figure for many then it’s not worth saving.

    …. or people spend a lot of time hiding money.

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  37. Kimble (4,374 comments) says:

    Who are you to tell me that I am ill informed?

    Someone better informed who can see that you are not well informed (or are lying).

    The fact that not a single one of your points stands up to scrutiny, your exclusive fear of KiwiSaver fraud (a la finance companies), and nonsensical claim that KiwiSaver providers chase commissions (an accusation usually slung at financial advisers) all combine to show that you dont understand the topic.

    Who are you to tell me not to express my opinion?

    You raised the same point multiple times, and not once did you respond to the counterpoint. So yes, stop expressing your stupid opinion (claiming it as fact even) that KiwiSaver funds are all massively risky.

    People have lost fortunes, and will continue to do so, listening to the word of fools who say I am the way all others are wrong.

    Aren’t YOU saying just that?

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  38. Viking2 (11,125 comments) says:

    Here’s the problem with super funds.

    If you bother to look back, (yep history is the teacher), then you will be able to see that the NZ economy was stuffed by mostly Australian Super funds lending huge amounts of money to various leveraging organizations so the could buy up out assets at unreal prices. Commercial buildings and office buildings, businesses like waste mamagement, metro glass and many many others (yellow pages by the Canadian pension fund.), all to the detrement of our economy.
    Many are either broke, almost broke or being sold off at fire sale prices now to say, the Chinese, leaving those same pension funds billions out of pocket which explains two things.
    1 Why we had an assett bubble leaving us indebited forever.
    2. Why Austrailans who want to retire now have no pension funds left.

    And you may just think its an aberation but no, the same thing happened in the good ol USA just 10 years ago and left pension funds empty.

    Pension funds are a misuse of money. They agregate that money on a weekly basis and they just have to lend it spend it or waste it.

    Remember, they are what is left of the Life Insurance industry and they were charlatans forever.

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  39. orewa1 (428 comments) says:

    Never mind the substance of the argument, nor the clear self-interest – lets just congratulate these people.

    At least they have shown genuine leadership by entering a debate from which the politicians – who are meant to safeguard the public interest – shrink for their own narrow self-serving reasons.

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  40. Mr_Blobby (106 comments) says:

    Kimble. I didn’t bother to respond to any of your counter points because they were just opinions.
    You sound like you are an insider pushing for a compulsory scheme so you don’t have to work so hard to get investors money for your ponzie scheme.
    So why don’t you go and play with yourself somewhere else. I will never support any kind of compulsory scheme regardless of the bribes to get in. I will also be the one to choose when and how I retire not you or anybody else.

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  41. Mr_Blobby (106 comments) says:

    Kimble, Viking2 is right add the japanese to that as well.

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  42. Kimble (4,374 comments) says:

    You didnt respond because I only gave “opinions”? I will get to that in a second, but first I want to point out how you have ill-informed opinions which you are stating as facts.

    Now then, Mr_Blobby lets just pick one of my “opinions”:

    So? The price of milk is out of your control too. So is the price of everything you arent selling yourself. The fees charged vary between each provider. There are cheap options, and expensive options. You have control over which one you choose.

    XX Fact. Fact. Fact, Fact, fact. Fact.

    Let pick another.

    Well, you could put it into a cash KiwiSaver fund. They exist. So… yeah.

    Well, fact. Fact. So…yeah.

    Last one.

    1. You dont contribute to a state pension.
    2. There is ALWAYS the risk that governments cut the state pension. In fact, I see it as an absolute necessity for many countries in Europe.
    3. They cant cut your KiwiSaver savings.

    1. Fact
    2. Fact. Opinion
    3. Fact.

    As for what Viking2 said, well these are such clangers they could have been written by you.

    1 Why we had an assett bubble leaving us indebited forever.
    2. Why Austrailans who want to retire now have no pension funds left.

    1. Forever, huh? Wrong.
    2. No pension funds left? Flat out wrong. Observably wrong.

    Back to you.

    I will never support any kind of compulsory scheme regardless of the bribes to get in.

    Except a state pension it seems.

    I will also be the one to choose when and how I retire not you or anybody else.

    Good for you. KiwiSaver is optional.

    Quite frankly you were perfectly willing to leave money on the table on the basis of irrational paranoia. If you got anyone else to do the same, you did them wrong.

    I will ask one last question, answer it or lose the debate (doesnt have to be a good answer, but if you dont even address it, I win):

    Why did you think that KiwiSaver PROVIDERS would be CHASING commissions?

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  43. Paulus (2,485 comments) says:

    Some years ago upon early retirement, for health reasons, I gave my pension to be managed by one of the leading default Kiwisaver Fund Managers.
    We lost over 7 years almost a third of our capital – a substantial six figure sum. The fund manager took his fees every year from a depreciating capital sum. Unfortunately we were locked in for the first five years.
    Manage your own retirement.
    The only real winner is the Fund Manager who takes his cut quarterly from the capital, irrespective of the earnings or loss result.
    No wonder they want a larger KiwiFund scheme.
    They have a very vested financial interest.

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  44. Kimble (4,374 comments) says:

    Paulus, your story raises a lot of questions.

    If you were so worried about capital loss, why did you put your money in a risky investment?

    How much of your investment experience was due to the fund managers actions, and how much was explained by movements in markets in general?

    Why should the investment manager be forced to take on YOUR investment risk? (Now, in certain circumstances I think this is fine, but you seem to think it is a desirable default structure.)

    Does the fact that KiwiSaver managers make more money the more people give them to invest make them wrong that the current savings rate is too low to satisfy most people?

    What makes you think that your experience would be better if you managed your own retirement funds? (I see a lot of people saying this, and it looks like one of those “90% of people think they are above average” type things.)

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  45. slijmbal (1,210 comments) says:

    I think Paulus’s point is more around the expectations people have that fund managers will look after their money for them, look to reduce losses etc. Whereas they are predominantly mechanisms to do a particular type of investment for a charge. If that mechanism tanks or succeeds then it relates to the particular movement of the investment that fund is in. You can argue that this is naivety on investors’ parts but the investment industry doesn’t promote itself particularly accurately and is happy to be seen as safe place for the man in the street.

    Considering how little value most funds managers add their fees seem excessive from a straight value perspective even if they reflect true cost, which I believe they do. If we then take into account the huge difference fees make over the long term most funds really are poor investment mechanisms. Their saving grace is that they make you save and are better than no investment mechanism. However, with some simple steps of self management an awful lot of people WOULD be above average funds precisely because of fees.

    Of course, one is pretty much forced to use investment vehicles to perform certain types of investments e.g. emerging markets, so they cannot be avoided but my advice would be to minimise them.

    One can get decent diversification and exposure to a broad range of markets with a mixture of direct investment (shares and fixed interest), ETFs and funds but it requires hard work and knowledge and the ability to live through the poor market times. This will lead to minimising fees and diversified savings that will follow the markets as well as most funds but with a lot less fees.

    Why people don’t do that is beyond me – anyone earning reasonable amounts will have larger 6 figure sums of funds saved up one would hope. A typical fund will charge 1-2% p.a. On 500K of savings that’s maybe 10K a year. Think of it as paying yourself.

    People also have long memories and remember the wild west of NZ share markets and how some of the older savings mechanisms and advisors pretty much rorted investors. There are still issues truly understanding fees in investment funds. All of this gets confused in a big mish-mash of not unreasonable concern as the investment industry hasn’t exactly crowned itself in glory.

    On Kiwisaver fees – many were originally set low to capture market share and because of government pressure (might have been regulated – cannot remember). It is noticeable that they are creeping up and that the few banks’ kiwisaver funds I have looked at invest via their own mechanisms to double dip on fees that do not need to be declared and/or outsource to a funds manager. I could be wrong but I believe that the fees the funds manager charges are not explicitly required to be declared and costs can be hidden – if correct another example of the investment industry’s continuing willingness to obfuscate.

    However, thanks to the bribe investing in Kiwisaver is a no brainer – just no more than required.

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  46. Kimble (4,374 comments) says:

    However, with some simple steps of self management an awful lot of people WOULD be above average funds precisely because of fees.

    Those simple steps arent as simple as they appear. How many people know that they should be diversified, or why, or even what diversification really is. Investing for retirement in a half a dozen NZ stocks is not diversification. What hope do most people have on determining their appropriate asset allocation?

    There are also many pitfalls naive investors can fall into, that professionals with commercial restrictions ought to be less likely to. Then there are implementation costs to consider, diseconomies of small scale, tax accounting, portfolio valuation and tracking, even currency management. Do these add up to 1% per year?

    Why people don’t do that is beyond me…

    The same reason they dont paint their own house, mow their own lawn, neuter their own pets, or grind their own flour.

    It is noticeable that they are creeping up and that the few banks’ kiwisaver funds I have looked at invest via their own mechanisms to double dip on fees that do not need to be declared and/or outsource to a funds manager.

    Government pressure more than anything else I think. Grabbing market share based on fees just gets you a bunch of investors who are focussed on fees. Increase the fee on those guys at your peril. As for your second point, I dont know if that is true of all managers. I know of a couple that do it, but I couldnt say they all do. Which is a problem with disclosure requirements, rather than the managed fund market.

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  47. slijmbal (1,210 comments) says:

    @Kimble

    do you work in that or a related industry? For some reason I get the impression you do based on your comments – apologies if it’s my paranoia.

    I think the investment industry is massively improved but frankly has a distance to go but responding to some of your points.

    Have to disagree with your comments around implementation costs once you get above $200K in investments:

    - valuation and tracking – run a spreadsheet – update the values when an update comes in – takes about 15 mins each time once every couple of months – one can only (and must) do a buy and hold type of approach if one self manages

    - tax accounting – if you track the details it can be done for minimal incremental cost by chucking it over to your accountant during your annual tax return – if you have any decent investments you’ll probably have to do that anyway – my accountant doesn’t charge me extra for the privilege

    - diseconomies of small scale – you can purchase approximately $OZ 5K of ETFs or shares on the Ozzie market for $30 OZ with several brokers. There are no holding costs except for ETFs and they have low fees comparatively.

    - 1% is actually about the minimum for any growth focused kiwisaver fund – it’s really larger than that if you allow for non disclosed costs – and yes if you have decent savings $10K each year and every year is worth doing it. If it takes a week a year then you are paying yourself $2K a day.

    - currency management – I appear to have a foreign currency account with no real issue and/or I purchase appropriate assets to give me some currency exposure. If by that you mean currency hedging there is decent evidence that indicates in the long term currency hedging is an actual cost and provides no overall benefit other than smoothing. If you’re in it for the long term avoid currency hedging.

    Your analogy around neutering pets and grinding flour is invalid. I need training to be a vet and a mill to grind flour. However, I can paint my house because it’s not that hard to learn how to do and the equipment is easily available. I might pay a painter because his hourly rate is less than mine but that’s a cost based argument. I argue that once you have decent savings the cost based argument kicks against funds managers. Let us remember that because of systemic issues funds managers do not beat the market in the long term.

    Learning how to invest isn’t that hard I also argue. It does need one to do some homework but in 20+ years of talking to various investment advisors I’ve rarely heard anything that wasn’t publicly available from a couple of decent books. Because it isn’t rocket science is why I am surprised people do not learn what to do. Probably part of the whole reason people don’t plan properly for retirement anyway.

    But yes I agree the lack of knowledge of the average investor is a huge issue but I also argue that that has been used by investment industry to take advantage of investors. It was utterly predictable that there was an equity bubble about to burst late last decade. I performed a massive change in my asset allocation (thank god). How many funds actually did that? The professionals don’t seem to use their professionalism for the investor in the current set-up.

    On the hidden fees issue. Why should they have to be forced to disclose costs? They should just do it. The investment industry as a group have a history of obfuscating costs and are continuing in this proud tradition.

    On Kiwisaver fees. What many don’t realise is that most of the default providers lost money initially and expected to need ~ 5 years to break even. This has turned out to be a very smart choice as kiwisaver investors have turned out to be ‘sticky’ with not a lot of churn.

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  48. Kimble (4,374 comments) says:

    slijmbal, rest assured I dont sell managed funds, my opinions are genuine and my own, as they always are under this handle.

    Sure if you ignore transactions then it ought to be fairly simple to track a simple portfolio. Assuming you have easy access to up to date valuations. A buy and hold strategy is one of those things naive investors find difficult. The marginal cost of employing an accountant for your taxes would be small, but what are they costs of engaging one for the purpose (which is what you are effectively paying the manager to do)? ETFs ARE cheap, and are fine if you are ok with a market return, but thats another failing of naive investors (Dunning Kruger effect, they dont know enough to realise how little they know), they chase returns.

    Your analogy around neutering pets and grinding flour is invalid.

    You COULD neuter your own pet and grind your own flour. You wouldnt do one because you perceive the capital expenditure to be too great (and the low-capex alternative seems too much work), you wouldnt do the other because there is too much at stake and you dont trust your own ability. And yes, painting the house is a relative cost thing. And mowing the lawn is a menial task. I didnt choose those things at random. While they all may not apply to you, they do apply to many other people. And that WAS the source of your confusion.

    Let us remember that because of systemic issues funds managers do not beat the market in the long term.

    I will correct you here, SOME funds may beat the market.

    Lets not just look for our keys under the street lamp (because thats where the light is). We have observable data on fund manager. How much do we have on individual investors?

    Fund managers have a headwind thanks to the fees they charge. But that doesnt mean they dont outperform the average naive punter. The question to ask is, do managers under perform on a before-fees basis? If they do, then you must conclude that the naive investors must under-perform.

    It was utterly predictable that there was an equity bubble about to burst late last decade.

    And yet it was missed by the majority of people. Something utterly predictable shouldnt be missed like that. There are hundreds of people in the NZ blogosphere who say that the GFC was predictable. But I cant help feeling that the benefit of hindsight is to thank for the bulk of their certainty.

    Why should they have to be forced to disclose costs?

    Same reason there are rules around advertising prices. Dont blame the scorpion for stinging you, Mr Frog.

    The standard on fees on underlying funds might be that they get paid from the management fee. Its not obvious that that’s the case, but the alternative isnt obvious either.

    What many don’t realise is that most of the default providers lost money initially and expected to need ~ 5 years to break even.

    I was going to bring this up, but didnt because most people dont believe it. You try telling Mr Blobby that the fat-cats in the suits sipping lattes in Auckland havent made a killing from KiwiSaver.

    Now, Im not saying that some people can manage their own investments. It is certainly possible for those with the inclination. But I also dont think it is unreasonable for people with a lot of money to pay someone else to manage their money. Nor do I think that the majority of money managed by fund managers would be better allocated by individual investors.

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  49. slijmbal (1,210 comments) says:

    Will do a last response but reckon that’s enough as we’ve done it to death

    I think we actually agree on a lot and yes the statements of some show a huge idealogical bias. I don’t think I am making my point well enough to explain that the investment industry has some significant deficiencies. I don’t see villainous intent but they’re not exactly the friend of the average investor.

    We actually DO have good evidence on individual investors and we know from this that the group response of the retail investor is actually a great example of the worst possible behaviour. As measured by dollars invested and cashed up from investments they actually maximise their losses. It is quite impressive how chasing returns has the exact opposite effect. That alone is an argument to take a brain dead dollar cost averaging approach via investment funds as at least they will make some money and some money will get saved in a manner that is less likely to chase results. However, once one allows for fees keeping it in the bank is relatively attractive as well. It has less perceived risk to the average punter and the returns aren’t that much different now we have PIE interest bearing accounts.

    I will correct you “funds managers do not beat the market in the long term” is 100% accurate – the average lucky manager or freak like Mr Buffet is mostly a measure of statistical spread or extra special ability and not a reason to use funds managers. Funds managers as a group do not beat the market – full stop. It’s all about fees, I’m afraid. That is an incredibly damning statement – these professionals cannot beat an index. Shows the efficient market theory is partially accurate, I believe.

    One of the reasons that the average investor loses money is because they chase better shares, funds etc. There is clear evidence that a fund that performs well for 2-3 years is MUCH more likely to underperform compared to the average for the next 2-3 years. The underlying asset mix that the fund is investing in is doing well or badly and funds are pretty bad at swapping in and out of asset classes to counteract this. It’s incredibly difficult picking a winning fund in the long term as there are so few. You’re more likely to get better returns randomly picking 20 shares and investing 5K in each.

    And to the bubble – that’s down to chasing results again i.e. greed – it was always clear that a bubble was about to happen what is never clear is precisely when to get out. Happy to say I put my money where my mouth is – cashed up a lot of equities, bought in to gold and bonds and waited. I don’t think I have a magic crystal ball. I do think I trust history though.

    I don’t ignore transactions and up to date valuations are a piece of piss – they are available via the net for free and are very up to date. Not sure what you are referring to. An accountant is a lot cheaper than the amounts the managers clip off the ticket once one has a reasonable level of investments. I am pretty sure I have already pointed this out. It is very easy and cheap to do the administrative stuff around investments. I know this for a fact. I do it.

    I think you’re talking a bit of bollocks around the old scorpion proverb. If funds managers were attempting to be clear and transparent then they should declare all costs and not be forced to do so especially as these costs are really important in terms of long term returns. They have a history of obfuscation and some legacies of that linger on. They don’t realise that this increases the distrust they already have. They rely on the ignorance of the average investor. Bad policy.

    You use the mowing the lawn analogy – Paulus, as an example, obviously invested with little understanding of the market. This happens all the time and the caveat emptor of investing means that the funds manager does not have to point out that there is a reasonable probability returns could be crap as we’re near the end of a bubble even though that’s what he probably believes. Handing over lawn mowing doesn’t potentially cost 6 figures to someone. I was in discussion with one manager about 2007 and he only mentioned the likely crash once I mentioned it to him and asked him how he was going to cope with it. His answer was he wasn’t even though he admitted it was pretty likely. I am reasonably confident based on other similar discussions in the past that this is a pretty common thread.

    If I had a lot of money that would be even more reason not to pay someone else to look after it. I’ve had conversations with some of the managers who won’t touch you unless you have a substantial amount of funds. They still operate on a clip the ticket approach and every time I have asked for evidence how much money they make their customers it’s never been forthcoming except for some noticeable exceptions. Gareth Morgan being one of them.

    I think we agree that the real problem with investing is the ignorance and behaviour of the vast majority of people and I argue that it’s not in the various funds managers’ best short to middle term interests (or their responsibility) for this to get addressed. They make too much money out of this lack of knowledge. However, it’s probably not in their long term interests as precisely this type of behaviour and -ve outcomes that many have had with investments is a major reason so few people will invest with them and many focus on property or fixed interest investments.

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  50. Kimble (4,374 comments) says:

    That is an incredibly damning statement – these professionals cannot beat an index.

    Thats just not true. Look, if you want to say that the average or median manager doesnt beat the market, then that is one thing. If you want to say that it is difficult to identify the managers who will out-perform, then thats fine too. But to claim that, other than a few massive outliers, no managers beat the index? No way.

    Looking over the last 10 years around 40% of US equity managers outperformed the S&P500. Around 60% lagged the index by less than a best guess at the cost of fees (around 0.5%). Its about the same over 20 years. Over 30 years the figure drops to around 15% beating the index and 40% beating fees (and thats underestimating what fees were 30 years ago, yikes!).

    Now survivorship bias will make these numbers look better than they otherwise would, but even if it leads to the over-estimation being doubled thats still almost a third of managers adding value.

    I mean these are intelligent people, they arent idiots, at worst they would be evenly distributed around 0 value add. But taking off 1% fees will still leave a sizeable population out-performing.

    If funds managers were attempting to be clear and transparent…

    Why would you expect them to do that? Why would you expect that of anyone?

    The underlying asset mix that the fund is investing in is doing well or badly and funds are pretty bad at swapping in and out of asset classes to counteract this.

    You keep saying this but few funds have the mandate to make significant changes to their asset mix. Most will look over the long-term and set their allocation for that. Its a humble approach; recognising the difficulty of market timing, realising that you are just as likely to make a bad call as a good one, and deciding not to bother.

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  51. slijmbal (1,210 comments) says:

    I cannot let you get away with those factual inaccuracies

    The accepted figures are that approximately 1/3 of active managers beat the index in any one year and less than 1 in 6 over the long term. By definition an index fund beats most active managers and beats active managers as a group. All figures allow for fees which is the only measure that matters. 1 in 6 is an exceedingly low figure for a bunch of experts beaten by a simple low cost index approach.

    Allowing for the spread it is arguable that it’s mostly random distribution. And as you point out the figures are skewed by failed funds so are even worse than that. If you then add the increased risk of active vs passive management then the active funds should actually return significantly more than than the index to be worth taking that risk.

    A quick google will confirm that.

    Active managers tend to outperform index funds when the market is suffering so I would hope they did better last few years but I haven’t checked.

    My point about changing asset mix is precisely that – you’re not getting the point – they don’t as they only see themselves as a mechanism for investing in a particular manner and clipping the ticket. From a value perspective they don’t really contribute as a group. Exactly my point.

    Active managers charge more like 1.3-1.5 % in fees and thus have to beat the market by that much every single year. They simply don’t except for some randomness and a very small group of the ‘alphas’ estimated at 1% of funds.

    It is exceptionally damning and widely accepted in the investment industry. This is an industry that charges literally billions of dollars in fees that can be beaten with a really simple investment approach. Exactly why people should take control of their own investments.

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  52. Kimble (4,374 comments) says:

    I am not arguing that most managers beat the index, you said that none do. I proved that wasnt true. Most DID beat the market before fees over 10 and 20 years (ignoring survivorship bias). If most of THEM beat the market, then it stands to reason that most OTHERS dont.

    Cheap index funds are great, but you are taking their marketing (that most active managers underperform the market after fees) to an extreme by saying that none of them beat the market. The idea that only 1% of funds beat the market long term is simply not supported by observation.

    Did you know that a greater proportion of passive managers underperform the market than active managers?

    Think about it. Its true. Should I take that to mean that all index funds are worthless?

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  53. slijmbal (1,210 comments) says:

    “I am not arguing that most managers beat the index, you said that none do”

    Firstly I said – “I will correct you “funds managers do not beat the market in the long term” is 100% accurate – the average lucky manager or freak like Mr Buffet is mostly a measure of statistical spread or extra special ability and not a reason to use funds managers. Funds managers as a group do not beat the market – full stop.”

    I said as a group they did not beat the index and it is widely accepted they don’t. More importantly so few do in the longer term that’s it’s a waste of time trying to pick winners

    Secondly no idea where you got your figures from. Your figures are simply wrong. do some simple googling.

    Very few do beat the index is what I have repeatedly stated and I challenge to pick now which funds managers will beat the index.

    I did not say “The idea that only 1% of funds beat the market long term is simply not supported by observation.”

    I said 1 in 6 do and it’s estimated only 1% of those do so because of ability. The rest can be attributed to poor dumb luck.

    If you’re not going to bother reading properly what I say (you’re doing it often enough I think you may be deliberately misrepresenting) then you’re obviously going to invest in funds and lose money :)

    good luck

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  54. Kimble (4,374 comments) says:

    You said “…these professionals cannot beat an index.”, I quoted that statement in my response, you cant have missed that it was this specific point I was addressing. These professionals DO beat the index, there is simply no justification for grouping them as one and claiming otherwise.

    People dont invest in fund managers as a group. People investing in fund managers looking to outperform the market are rational to do so because SOME fund managers DO outperform the market over the long term.

    To show how silly your line of argument is I will turn it right around.

    You say that fees make all the difference, fine. Take as a given that I showed that the majority of professional managers probably beat the market BEFORE fees over some fairly decent time frames.

    Given that alpha is a zero-sum game (the relative gains by one come from the relative losses for another), the fact that the pro’s made money means the other group, non-professional investors, MUST have lost money relative to the market. So non-professional investors cannot beat the market, even without the drag of fees.

    Did I just prove that managing your own money is a stupid thing to do?

    Secondly no idea where you got your figures from.

    I got quick access to a database and looked at the excess 10- and 20-year returns of a single representative fund for each US equity fund manager. They arent wrong. They are direct observations.

    I said 1 in 6 do and it’s estimated only 1% of those do so because of ability. The rest can be attributed to poor dumb luck.

    Wrong. I dont know the study you are looking at, but if it was properly scientific it would have said that only 1% could be proven to have out-performed due to skill but you cannot attribute all of the rest to dumb luck. It could be skill, it could be luck, you dont know what proportion of which. The guys you says were just lucky didnt outperform by enough to be reasonably certain that it wasnt just natural variation.

    Very few do beat the index is what I have repeatedly stated and I challenge to pick now which funds managers will beat the index.

    Those are two different things.

    1. The majority of funds do not beat the index after fees.
    2. Picking the funds that will is difficult to do before the fact.

    I agree with both, but 2 does not support a strong version of 1.

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