Checking your provider

WHAT SHOULD YOU LOOK FOR?

Does your intended KiwiSaver scheme:

 

Have unit pricing?

Does it convert your savings into units of one of their funds and then tell you periodically what the price of each unit is? Unfortunately this is a common but insidious practice that life insurance companies in particular employ. It prevents you being able to validate the value of your holdings and most importantly deduce the effective fees and expenses you’re being charged. There have been cases brought by the Australian Securities Commission against life insurers for mis-pricing their units with the error consistently in favour of the company rather than investors. Unfortunately the New Zealand regulator is so under-resourced it hasn‘t run similar checks here.

Have a reserve account?

A common practice - again originating from the life insurance firms where the discretion their employed actuaries have to move funds about is often unchecked - is for "the fund" to reserve monies for events that may or may not occur in future. The reasons given for reserving some of the funds are to cover possible tax liabilities, possible expense increases, to vest at some future date to the member, or to smooth future returns. The problem is that as soon as some of your money is moved to "reserves" the ownership of it becomes moot. Is it still yours, does it belong to "the fund" or will it, some time in the future, become "free" reserves thanks to the "discretion" exercised by the actuary employed by the manager, and actually then become the property of the company and definitely no longer yours? The recourse of individual savers to recover monies that the fund manager has moved to "reserves" is very weak indeed.

Allow dealings with related parties?

Some schemes will invest your savings in products or funds that are managed by the same or a related business. Effectively the company then captures a second level of fees. Other schemes will have a sister company that charges expenses to the fund and the trust deed will allow those expenses to be effectively uncapped by employing weasel words such as "reasonable" and "in good faith" to imply an effective cap.

Clearly state fees or are they expressed as a combination of flat dollar fees and a percentage of funds under management; plus exit and entry fees for unitised investments?

One of the most scurrilous practices is to have very high exit fees so members find themselves effectively trapped with their current provider. A mix of flat dollar and percentage fees is a common way of disguising very high fees from members.

Offer you a range of investment options that allow you to diversify your investments?

We‘ve already seen some schemes being promoted that invest in just one sector. That simply misses the point of what long term savings is about. For example, there‘s one company pushing the idea that their fund (that invests in a narrow range of New Zealand companies) is a suitable repository for long term savings. It is not.