One group that had a jubilant reaction to Thursday’s Budget was the life insurers whose products dominate the long term savings sector. And they has every right to be ecstatic- Michael Cullen has just naively delivered to them 4 million heads on a plate, Gareth Morgan addresses the issue.The saving public may well be seduced by the tax breaks and employer levies that this latest incarnation of KiwiSaver entails, but once the hype of politicians bearing gifts is swept aside, there remain far more important issues for the individual New Zealander to consider with this arrangement.
Firstly let there be no misunderstanding. The government is providing no guarantee whatsoever as to the safety of your money, no undertakings whatsoever as to the returns you can expect, and is delivering you holus bolus into the arms of the long term savings sector. If your provider happens to under-perform, lose your money or even just take it, well that’s tough – buyer beware.
Let’s look at the long term investment performance of this sector. The average fund manager makes only 70% of the market average return in any one year, and over the long term investors are lucky to receive 40% of the returns on their own money – the rest goes to ‘helpers’. These are international results about how well people do in these funds.
The local apologists for the life insurance sanctimoniously assure us they know what’s best for our savings but this is an industry that is big on marketing and seduction expenditure, and very short on delivery. I welcome anyone to show me how over the long term (20 years plus) they have personally made a half decent return from the total contributions to any superannuation or endowment policy that these players have offered. For each one of you that have I will show you 10 people that have had their life’s savings demolished.
Now what is the problem? It is simply that this sector is subject to totally ineffective accountability by those charged with protecting the public interest – the politicians and their regulatory foot soldiers. I can demonstrate this with just two examples.
- The assurance from the industry that they are eminently suited as long term guardians of our property. This is an acknowledgement of a fiduciary duty. A fiduciary (from the Latin word, fÄ«dÅ«ciÄ?rius – something held in trust) is someone who is placed in a position of trust by another person and as such cannot in law put their own interests in front of those of the trusting party. A fiduciary situation arises when one party gives their property over to another for care, protection or performance and is reliant on the behaviour of the other party. It is especially relevant where the other party is dominant as in the case of an investment manager who writes the contract, designs the product, controls the funds over time and has the power over the retirement benefits and interests of the reliant (or vulnerable) party. The life insurance companies that peddle these long term savings products declare themselves to be exactly in this business of long term care of your property, taking on a position of trust that each member is entitled to believe they are acting in that member’s interest, Their fiduciary responsibility is not a contractual matter, it arises because of the circumstance where they are the dominant party and are making undertakings to us that pertain for long periods of time. In law, you cannot contract in or out of a fiduciary circumstance.
Now have a look at Clause 24.1 of the Tower KiwiSaver trust deed – you will have to pay $28 to get this document, as unlike the investment statement it isn’t compulsory to send it to savers so they don’t. Tower doesn’t even chose to make it freely available on its web site. Yet the Trust Deed is the real oil – the bit that lays out exactly the relationship between the promoter, the manager, the trustee, the scheme concocted to take in your savings, and finally you, the ‘member’ of the scheme. The Trust Deed reveals all the tricks of the trade, the Investment Statement under New Zealand’s loose regulatory umbrella, isn’t worth the paper it’s written on.
Anyway Clause 24.1 of Tower’s Trust Deed states,
“When exercising its powers and functions under this Deed, the sponsor will not have, or be deemed to have, a fiduciary relationship in respect of any Employer, Member or Trustee”
So here we have Tower attempting to contract out of its position of trust. This is a very common element of the ‘trust deeds’ that life insurers write and tells us heaps about how seriously they take the duty of trust that the public has no choice but to place in them. I demand that the industry’s spokesmen justify to the New Zealand public this disgusting practice. Why exactly is it that their marketing is all about us trusting them until our retirement days but in the fine print they state they are not to be trusted?
- Next, let’s go to their practice of reserving, that insidious behaviour whereby the operators of these schemes separate you from your own property. I’d like here to see the life insurance spokesmen declare to the public that their long term savings schemes have not, do not and will not in future, create reserves from a savers’ money that that saver will never see again should the saver leave the scheme or change providers – that in no circumstances whatsoever within the savings schemes they peddle are reserves ‘freed’ by dictate of actuaries working for the company to then become the property of the company and no longer of the saver.
I notice again in the Tower KiwiSaver trust deed (the only one available so far) provides for creation of reserves and that there are no guarantees whatsoever that members who leave Tower’s scheme will be entitled to their share of reserves when those reserves are no longer required.
The reality is that life insurance companies are expert in creating reserves that are never returned to the specific savers from whom they took the money. This is the primary reason that the savers in these schemes have done so incredibly badly. While high fees and expenses hurt, they are piffle compared to the damage done from this disgusting manipulation of reserves. Why would the leopard change its spots?
I can go on but two assignments should be enough homework for the life insurers to justify that their jubilation isn’t at our expense.
Now if the politicians and the regulators aren’t going to fix these problems then the only way to force change is for someone to offer the public an alternative – a KiwiSaver scheme which has no reserving permitted and as well specifically declares the role of provider as a fiduciary one. This is the rationale for my own company’s entry into this market with Gareth Morgan KiwiSaver. We provide an ethical benchmark for the life insurers to match. But I would far rather see the whole industry be compelled to improve its game by efficient regulatory protection for the New Zealand saver. That way cheats are locked out of the business.
New Zealanders are faced with making very serious decisions about the safety of the savings they entrust to these big institutions, and others. From the regulatory perspective, it is clear this largely self-regulated sector is a shambles and Michael Cullen may be proud of his KiwiSaver initiative (that’s another debate) but I do wish he had cleaned up this industry before letting it loose on the innocent public, ignorant of the intricacies of how they get separated from their money.
Dr Cullen would do the New Zealand public a major service if he;
- prohibited KiwiSaver providers from trying to dodge their fiduciary duty.
- prohibited the deployment of ‘schemes’ that remove savers’ legal title to their own property and reduce them to the status of unsecured creditors on their savings. Rather than create this monster in the middle – the ‘scheme’, there is no reason why there cannot be a direct contract between the carer and the saver, where the savers’ property cannot pass out of their beneficial ownership, and the carer is no more than somebody who tends the garden and has absolutely no ability to walk off with the pot plants. KiwiSaver schemes must not have discretion to create reserves. If that means getting rid of vesting of employer contributions, too bad, it is well worth that sacrifice to protect the property of New Zealanders from plunder by these foreign firms.
The looming KiwiSaver July 1st deadline has given urgency to the need to clean up the industry that offers long term savings products before is gobbles up even more of the hard-earned property of ordinary New Zealanders.