KiwiSavers in dark as banks spread risk
Bank KiwiSaver schemes are making a poor fist of telling savers where their cash is invested.
KiwiSaver schemes hold a lot of cash, with many default and conservative savers opting for cash funds, or conservative funds with heavy cash holdings.
At the start of the year, the KiwiSaver cash funds of the two ANZ schemes (the ANZ and National Bank schemes), ASB, and Westpac held a combined $532 million, and that does not include the cash holdings of the popular conservative and balanced funds each of the schemes offers.
But while many of the bank scheme investment mandates have similar wordings that give the schemes the flexibility to invest in "one or more" New Zealand banks, nowhere in the investment statements or websites is it possible to see how they are using that flexibility.
The Sunday Star-Times asked the banks to provide breakdowns of their cash holdings, and it appears the majority are now opting to spread their holdings across their parent banks as well as putting some into rival banks, a contrast to a year ago when it was more common for bank schemes to invest the bulk of their cash with their parent bank.
Once bank KiwiSaver schemes lend the money to their parent banks, they are able to lend it out at a profit for mortgages, personal loans and business lines of credit.
Spreading the risk by investing cash among other institutions is one of the oldest and trustiest principles of investing, and it needs to be remembered that one does not have to go far back in New Zealand history to find a bank going bust.
The philosophy of diversifying to reduce risk is encapsulated in a statement to this paper from Westpac-owned fund manager BT, which handles the investment of the bank's KiwiSaver scheme funds.
"BT believes it's important from both a risk and a return perspective to ensure that the portfolios are well diversified," it reads.
BT diversifies not just across banks, but invests in short-term deposits across non-bank borrowers such as local councils, state-owned enterprises and corporates, as long as they have a strong, long-term, credit rating from Standard & Poor's (or equivalent) rating of A- or above.
ANZ-owned fund manager OnePath, and ASB have similar approaches to spreading risk, though ASB was later to adopt the philosophy.
ASB's scheme invested its cash only in the ASB bank until the middle of last year. The shift was part of a revamping of the fund which came after a review of why it was among the poorer-performing bank funds. It now has just a quarter of KiwiSavers' cash holdings invested in ASB bank.
"In the best interests of KiwiSaver members, ASB outsourced the investment management of the cash mandate to Colonial First State Asset Management in mid-2012," said Roger Clayton, ASB's head of wealth products and services.
It appears Kiwibank has also made a similar move.
At March last year, the Kiwibank scheme's cash fund was mostly invested with Kiwibank. But in a statement, Kiwibank told the Sunday Star-Times: "The management of the cash portion of the Kiwibank KiwiSaver Scheme has been outsourced by Kiwibank Investment Management Ltd (KIML) to Kiwibank Treasury (KBT) on an ‘arm's length' basis. Both the scheme provider (KIML) and the Investment Manager (KBT) agree that diversification of the portfolio away from a concentration of exposure solely into Kiwibank deposits is in the best interests of members. As such, KBT have followed a policy of seeking to diversify exposure away from Kiwibank through the use of other approved banks.
"This process lowers the risk profile for members and allows KBT to potentially access higher term deposit rates in the marketplace if available. Whilst the amount with third parties will vary over time, it is not unusual for the majority of funds within the cash component to be on deposit with institutions other than Kiwibank."
The exception to the risk-spreading model of cash investment appears to be the Bank of New Zealand, which has only just launched its scheme, and the cash fund of which is set up to only invest with the BNZ. While it is riskier, there is nothing wrong with KiwiSavers making an informed choice to put their money in a fund which only invests in one bank.
It is not only between bank schemes that cash investment policies vary.
There can also be differences in the way cash within KiwiSaver schemes is invested.
The cash funds in the ANZ and National Bank schemes have cash holdings in their cash funds, but also have cash holdings in their diversified funds such as their conservative, balanced and growth funds. But while the cash funds in the schemes have 42 per cent of their cash invested with the ANZ, the cash slugs of the diversified funds are differently invested and have just 18.2 per cent invested with the ANZ.
- Sunday Star Times