A week ago mayhem started to break out in the Australian savings industry funds with fund after fund freezing redemptions. Parts of the industry, particularly mortgage and property funds were running scared that investors would withdraw their money and place it with institutions and funds which are covered by the guarantee scheme.

Watching the situation unfold lead me to think that the same thing would happen here and there could be disastrous consequences for New Zealand’s managed funds industry.
So far only one player has followed suit – AXA. So it seems with things going quiet that maybe the flow of capital won’t be as significant as in Australia.

But it’s worth noting New Zealand’s mortgage fund sector is quite small and many of the funds have already stopped redemptions. The two groups which look most vulnerable are the funds run by the regional groups linked into law firms and possibly the banks.

Maybe one of the reasons the flow hasn’t happened is that Treasury has only just started approving New Zealand institutions for its scheme. We are keeping a list of approved institutions here and will update it daily.

What worries me is that there could still be a massive flow of capital from quality, non-guaranteed income securities to lower quality, guaranteed products.

Already some advisers, well one in particular, is encouraging people to go for the highest returns they can find in finance companies.

My issue with this is sure the return is guaranteed, but what happens if the company does get into trouble and needs to be bailed out under the scheme? I bet it won’t be like Lotto where you go into the shop on the day after the draw and get your cheque. No doubt the government wait for a failed company to go through the process of winding up before any government cheque is written and history shows us these things take some time.

The other point, and one being argued strongly by some in the managed funds sector, is that there should be some look-through provision in the guarantee scheme so funds are covered on a pro-rata basis based on how much of their funds are in government securities.

For instance if a retail PIE is invested 30% in government guaranteed securities and 70% in other securities, then there should be a “look through” that allows the retail PIE investors to benefit from the 30% coverage.

Apparently Finance Minister Michael Cullen will make some comment on this over the weekend. Let’s hope it is a sensible decision.

I’ve held off commenting immediately on National’s plans to invest 40% of the NZ Super Fund into New Zealand assets so the idea can have more thought.

At first I thought it was daft, but I wanted to see if there was any merit in it at all. After discussing the idea with others, reading comments and cogitating on it for a while I come to my original observation. It is a daft, or let’s say sub-optimal idea.

I know I am not alone in that. There have been a number of other comment pieces such as this one on a Fairfax site called Super Fund Idiocy and even the Herald, which seems like a National Party mouthpiece sometimes, wrote an editorial which was critical of the move.

What I don’t get is how a guy who worked for Merrill Lynch, a company which no doubt supports and promotes diversification, can come up with an idea like this?

Two of the key issues in this proposal are if National wants to over-ride the Guardians and give them an asset allocation, it’s just a small step to go further and tell them what projects to invest in. No doubt at this stage pork-barrel politics would start with political parties funding pet projects search for more votes rather than returns.

Secondly, and more importantly, the fund is being run to generate the best possible long-term returns so money made can be used pay part of the country’s future pension costs. With a sub-optimal asset allocation the decision potentially threatens future super payments.

I’m sure National don’t want the electorate to understand this.

Stepping back from this one announcement and looking at what National proposes, a couple of things become clear.

Superannuation is again a political football and secondly, it seems getting New Zealand and New Zealanders to save wouldn’t be a priority for a National-led government.

I had been under the belief that one good thing the Labour administration has done over nine years is sort out the superannuation area; they’ve put certainty into the area and encouraged Kiwis to save.

We may not agree with all the things they have implemented, but Finance Minister Michael Cullen has attacked the issue in a staged and logical way and ended up with a pretty reasonable result.

There are many things we can be proud of. NZ Superannuation (the state pension) is considered, internationally, a good, simple and fair system. The NZ Super Fund (aka the Cullen Fund) has won plaudits for being a well-constructed sovereign fund, and better than many others around the world, while KiwiSaver is clearly innovative. It may not have won the same level of accolades as the other two bits of the equation, but it looks like it works and the population are embracing it strongly.

Along comes National and it proposes some significant changes, which I would suggest are the last thing Kiwis want.

Both National and Labour have lost elections on their superannuation policies in the past. Both have acknowledged the lesson, but maybe one hasn’t listened?

The launch of the deposit guarantee scheme may be smart politics from the Labour-led government but you have to question the practicalities of it.

It seems to have some pretty big flaws. What’s more, people like RBNZ governor Alan Bollard acknowledge that, but are happy to live with them.

The two issues I have are that governments shouldn’t be underwriting the risks in the market.

Perhaps the biggest irony in this is that Commerce Minister Lianne Dalziel has made innumerable comments over the past year or so about this issue. She has told people who have lost money in the finance company sector that it is not the government’s job to take risk out of the market.

There was no way she was going to do this. What happens next? The government announces a deposit guarantee scheme which captures all the organisations the Reserve Bank regulates.

Another irony is that until recently the non-bank sector was outside the central bank’s regulator ambit. Now it’s in and all these institutions are covered (if they opt in).

Perhaps the biggest issue though is that the scheme captures banks, finance companies, building societies, credit unions and PIE funds. However, fund management firms and corporate debt are generally left out of the scheme.

This seems a little unfair and makes one think the scheme should either be wider, or narrowed up. My preference would be to see it narrowed up.

Such a scheme is likely to encourage a shift away from the investments outside the guarantee to ones inside.

This could quite easily see the people shift from less risky investments like corporate debt to higher risk finance companies as the government is guaranteeing the returns.

One good thing is that it will give people with money tied up in still functioning finance companies some confidence about their investments – even if the actual return comes from their taxes!

I guess it will be a bit of a boon to advisers too – as they can safely recommend any investment which is guaranteed.

At the risk of getting another earful from some readers I am going to venture into politics again! Before I start though a few reasons why.

This site is about personal finance and financial advice. This is an area of intense interest this election, particularly in the wake of the National Party’s economic package released this week.

It is quite reasonable, and I would suggest responsible, to discuss what each of the political parties are offering investors and advisers in the run up to November’s election. (For the record I don’t belong to, nor am I affiliated with any political party).

John Key firmly put KiwiSaver on the agenda this week. This is an issue worth discussing.

I don’t have a hard and fast view on National’s tax cut plans at the moment, but it seems to me raiding KiwiSaver to provide personal tax cuts isn’t the smartest idea in the world.

Clearly KiwiSaver has been popular with New Zealanders. Can you tell me another product in this country which has amassed more that 800,000 customers in less than a year? To take away some of the appeal of the scheme so everyone can get a little bit extra cash in their pocket doesn’t, on the face of it, seem to add up. (Happy to hear contrary views on this).

Also I wonder whether encouraging more consumption, and no doubt more debt, is a great idea when financial markets are falling down around the world due to credit issues.

Likewise encouraging savings over consumption is at the heart of what a lot of this industry is about.
Therefore it has been fascinating to watch the string of press releases on National’s plans and KiwiSaver and observing some strongly divided views. Even among industry bodies there seems to be contrary opinions.

The ISI is disappointed with what is being proposed while ASFONZ is supportive. Unions, understandably are lining up with Labour on this, although National is proposing to lower the contribution rate to 2% (something the unions argued strongly for), and business groups tend to say the ideas are on the right track.

Also this industry is based around long-term thinking. While much of the media comment is about the short-term immediate impact of the proposals, there was a piece of news I caught last night which took a long term view.

I’m seeking the numbers now, but from memory the difference in how much a KiwiSaver would have in their account at age 65 under National and Labour was around $200,000.