Slim KiwiSaver returns spark protest
KiwiSavers are being short-changed, receiving lower returns on cash than if they put their money on deposit at the bank, and that has prompted one former fund manager to urge the Reserve Bank to change its rules.
Former BT Funds manager Andrew Blackler said it was time for the Reserve Bank to change its rules to fix the problem, which he said undermine KiwiSaver's returns.
Blackler is calling on the Reserve Bank to change its capital adequacy rules for banks that have the effect of penalising KiwiSaver cash investors.
Under the rules, the cash holdings of KiwiSaver funds - and each of the big bank schemes puts a significant chunk of that money into their parent banks - are considered to be "wholesale" money and not "retail".
Retail money is considered stickier, less likely to be withdrawn, and so is deemed by the Reserve Bank to be more stable under its capital adequacy rules. However, banks pay higher interest on retail term deposits than to their large wholesale depositors, leaving KiwiSavers out of pocket.
Before the global financial crisis, wholesale investors got paid a premium for term deposits over retail investors. That has reversed and currently a nine-month term deposit yielding 4 per cent for a retail investor would yield just 3.2 per cent for a wholesale investor, one fund manager told the Sunday Star-Times. "Under the Reserve Bank's current interpretation wholesale investors, including those who are investing on behalf of retail KiwiSaver investors, are unable to receive the same rates on deposits as retail investors directly with New Zealand registered banks," Blackler said.
That could serve to undermine the aims of KiwiSaver, and, ironically, make life harder for banks.
Banks are awash with retail term deposit money following an extended period where people have opted to put their money into safe cash investments. But, said Blackler, as banks continued to grow their balance sheets and the world economy improved, they may struggle to continue to attract the necessary growth in retail funding to match.
Blackler has called for a debate on the issue with a view to a better deal for KiwiSaver cash investors.
"Clearly the most obvious interpretation would be for the Reserve Bank to treat all KiwiSaver funds as retail deposits in terms of calculating each bank's core funding ratio as these funds are only acting as conduits for retail investors," he said.
"To appease the Reserve Bank's concern about concentration of decision-making and bank stability, I would suggest that the KiwiSaver fund should have a concentration limit of having, say, no more than 25 per cent with any registered bank in order to receive "retail" treatment."
But will the Reserve Bank listen?
A statement issued to the Star-Times suggests not.
"The Reserve Bank's core funding ratio requirements require banks to ensure 75 per cent of their funding is made up of more ‘sticky' core funding, eg, long-term wholesale debt with maturities of more than one year, or retail deposits. This is because a heavy reliance on international short-term funding markets can result in limited access to funding should funding markets freeze up, as occurred during the global financial crisis.
"Cash on deposit from financial institutions, including from managed fund providers such as KiwiSaver providers, is not included in the Reserve Bank definition of more stable funding under the core funding ratio
requirements. This is because the money could be moved and invested elsewhere overnight, potentially significantly reducing a bank's funding levels and working against the financial stability aims of the core funding ratio."
One fund manager, who asked not to be named, said it was hard to see the Reserve Bank changing its policy.
"This is there for good reason. This is to ensure financial market stability. They don't want big institutions to be able to haul out large chunks of money.
"There is no doubt we feel KiwiSaver money is sticky money. The issue the Reserve Bank has is we, as an institution, have the ability to take out a whole lot of investors' money in one go and take it to another bank."
KiwiSaver scheme cash funds, even those set up by banks which invest most or all of their cash into their parent bank, had that ability to remove money from that institution, the fund manager said.
And, he argued, the worst of the cash underperformance is past for KiwiSaver cash investors.
The premium that retail investors have had over wholesale investors had touched 200 basis points on a nine-month term deposit. That had now dropped to around 80 basis points, and he expected the premium to continue to fall.
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