The Dim-Post

November 7, 2011

State capitalism

Filed under: Politics — danylmc @ 10:39 am

Via Stuff:

A new state-run KiwiSaver fund could strip away tens of thousands of dollars in account fees, the Green Party says.

Co-leader Russel Norman introduced the KiwiSaver “public option” plan at the Green Party launch in Wellington yesterday.

Dr Norman said the size of the Super Fund – through which the new KiwiSaver offer could be set up – would make it more efficient than others, forcing down fees.

There were questions about exactly how the new fund would work, but Dr Norman said up to $142,000 extra could be cashed in on KiwiSaver accounts.

“It’s not going to cost any money to the taxpayer, but it will save KiwiSavers an awful lot of money. They’ll get a much bigger nest egg.

“We’d basically bolt it on to the existing six providers, just putting a seventh provider on there with a much lower cost structure. And it would add a bit of competition.”

Prime Minister John Key said the problem of high KiwiSaver account fees was “definitely an issue to look at”.

However, a Government provider might imply a guarantee on losses, and this was not in place.

Quite right. Government guarantees are only appropriate for investment funds pouring money into high risk finance companies. #eyeroll.

State run companies are a great solution to market failure – the traditional left-wing response would be to spend money on regulations and oversight bodies to address the problem. Setting up a new company to introduce competition means that the public gets more choice and the taxpayer gets a return on the spending. If only we could do something like this to challenge the supermarket duopoly.

In a political sense this feels like the Greens introducing policies that National can say ‘Yes’ to, in exchange for an agreement to abstain on confidence and supply. I think the chances of a Green-National coalition are zero, but if the Nats win a majority vote there’s no reason for the Greens not to abstain on C & S in exchange for some policy wins.

 

55 Comments »

  1. “…If only we could do something like this to challenge the supermarket duopoly…”

    You read my mind! And stole my idea! Allow monoploies and duopolies, but have a state run agency to keep the buggers honest. Of course, the private sector would splutter it is unfair of the government to compete directly with right of business to extract monopoly rents from a captive market.

    Comment by Sanctuary — November 7, 2011 @ 10:43 am

  2. The only thing I can think of is using schools to set up farmers markets during the weekends.

    Comment by danylmc — November 7, 2011 @ 10:46 am

  3. Not too many farms in Wadestown.

    This is a great idea though.
    I am surprised that Kiwibank hasn’t truly been leveraged in this fashion, with for example, all govt accounts and payroll run through what is effectively the ‘State Bank’.

    Then again, I guess Westpac throws better corporate box functions.

    Comment by Gregor W — November 7, 2011 @ 10:52 am

  4. “The only thing I can think of is using schools to set up farmers markets during the weekends”

    already happening nation-wide. main problem is likely to be the number of ‘farmers’ willing to work for near-minimum wage to man the stalls in god-awful weather.

    Comment by che tibby — November 7, 2011 @ 10:54 am

  5. Awesome- can’t wait for state run supermarkets. I hope they are as exciting as my local supermart was in Warsaw in the mid eighties

    Comment by Monty — November 7, 2011 @ 10:59 am

  6. State run companies are a great solution to market failure –

    What exactly is the “failure” in the case of Kiwisaver fees?

    Setting up a new company to introduce competition

    I no longer live in NZ but last time I checked there were dozens of providers all in competition with each other….

    Comment by StephenR — November 7, 2011 @ 11:19 am

  7. “…I hope they are as exciting as my local supermart was in Warsaw in the mid eighties…”

    Are you making stuff up in that crazy, lovable, usual neo-liberal way again Monty? How many times does the fact-based community have to make you sit on the naughty step?

    Comment by Sanctuary — November 7, 2011 @ 11:21 am

  8. Probably a good idea, would have to see more details, but speaking of making stuff up:

    Dr Norman said up to $142,000 extra could be cashed in on KiwiSaver accounts

    Per account? I know it’s an “up to”, but that’s a number huge enough to be suspicious.

    Comment by bradluen — November 7, 2011 @ 11:25 am

  9. Given how governments have buggered about with retirement savings, I wouldn’t trust such a fund to still exist 10 years after it started.

    Comment by Ataahua — November 7, 2011 @ 11:29 am

  10. . . . using schools to set up farmers markets during the weekends.

    Comment by Joe W — November 7, 2011 @ 11:50 am

  11. StephenR,

    You’ve nailed it. We already have enough providers of Kiwisaver (you can see them all here: http://www.consumersaver.org.nz/kiwisaver/pages/providers ) competing with each other – adding yet one more to the list isn’t going to have any benefit.

    More importantly, there’s excellent work being done by the likes of interest.co.nz to work through the myriad or schemes/options and explain exactly what all the fees are – and people are already moving from one provider to another.

    In this case it’s additional information, not additional suppliers, that is going to improve the market outcome.

    Comment by Phil — November 7, 2011 @ 11:50 am

  12. “9.Given how governments have buggered about with retirement savings, I wouldn’t trust such a fund to still exist 10 years after it started.”

    Given how many privately-run investment vehicles crash or lose money or fail to deliver on promised returns, I have trouble trusting my Kiwisaver provider being around when I retire.

    Comment by MeToo — November 7, 2011 @ 11:51 am

  13. Something I’ve found interesting in Australia, which has squillions of super funds competing for people’s money, is that a concept of Industry Super Funds has developed, which are meant to be super funds “run only to benefit members”, whatever that entails. Does anyone know much about how these developed and if they’re actually better than the alternatives?

    Comment by MikeM — November 7, 2011 @ 11:54 am

  14. “adding yet one more to the list isn’t going to have any benefit” – that’s what they said about Kiwibank, and yet look at those fee levels at the Aussie banks ever since.

    Comment by Sacha — November 7, 2011 @ 12:16 pm

  15. Yes I’m not sure how much of a market failure really exists here? There’s competition, choice etc etc and a range of fee schemes. Interestingly he’s not suggesting a no-fees system, just allowing the Guardians of the Super Fund to run a Kiwisaver investment account and assuming it will have a lower cost structure. Not necessarily against that but don’t think there’s massive market failure here.

    Comment by garethw — November 7, 2011 @ 12:17 pm

  16. “adding yet one more to the list isn’t going to have any benefit” – that’s what they said about Kiwibank, and yet look at those fee levels at our Aussie banks ever since.

    Comment by Sacha — November 7, 2011 @ 12:17 pm

  17. @MeToo: Makes you want to bury gold coins in the garden, doesn’t it?

    Comment by Ataahua — November 7, 2011 @ 12:22 pm

  18. MikeM re #13 the super funds that you refer to are similar to credit unions and building societies. SBS bank (which is still a ‘for members’ organisation) offers a kiwisaver product, so does PSIS and NZCU. Kiwibank used to have a tied Kiwisaver service provided by Mercer, so essentially you could look at the Mercer scheme to get an idea of what fees and charges are likely to be occured by Kiwibank to run there own internal scheme. I suspect that what is effectively been offered to Kiwibank is a subsidy to lower fees below actual operational costs.

    Its worth noting that with investment schemes (of which Kiwisaver is one) there is an economies of scale story where the size of the investment fund – on average- provides a lower cost structure and greater opportunities for diversified investments. That however is conditional on the skill of advisors and quality of governance. if you scheme was run by Warren Buffett your probably in good hands, if run by joe from the pub them maybe not.

    Phil and StephenR are correct there already is a competitive Kiwisaver market, if you don’t think there is, then there is clearly an opportunity for you – just make sure you have approved prospectus (see relevant securities legislation) and probably need to have a finanical advisor licence also.

    For National the possible subsidy to Kiwibank is possibly something they could easily trade-off with the Greens (the scheme is likely to be cheaper than having more police (and associated prisons, courts etc) which is one of the usual costs of an agreement with Winston. So in a world of second best decision making, an agreement of Greens on this will be less socially and economically destructive compared to other policy/coalition alternatives.

    Comment by WH — November 7, 2011 @ 12:29 pm

  19. You’ve nailed it. We already have enough providers of Kiwisaver (you can see them all here: http://www.consumersaver.org.nz/kiwisaver/pages/providers ) competing with each other – adding yet one more to the list isn’t going to have any benefit.

    Would certainly like to know what they mean by “lower cost structure”. It’s probably not beyond the bounds of possibility that subsidies/taxpayer funding will be involved in artificially lowering fees, but I don’t think (?) they’d be that crude.

    Comment by StephenR — November 7, 2011 @ 12:33 pm

  20. “Makes you want to bury gold coins in the garden, doesn’t it?”

    so Ataahua… where do you live again?

    /getmyshovel

    Comment by che tibby — November 7, 2011 @ 12:43 pm

  21. @ Monty the pinkos are coming! Run run run #coldwarlives

    Comment by nw — November 7, 2011 @ 1:00 pm

  22. Re 13, 18:

    Industry, profession, family specific kiwisaver funds are catered for in the Kiwisaver Act. They are mostly used so that industries which already have superannuation schemes can add a scheme that has the benefits of kiwisaver. For example, universities have superannuation schemes for their employees and now have kiwisaver schemes, likewise with Fisher & Paykel.

    I suspect (but don’t know) that these are used more in Australia because the strength of Australian unions meant super schemes continued in most industries. There were a lot more schemes in New Zealand before the 1990s.

    Comment by Tobias — November 7, 2011 @ 1:04 pm

  23. “adding yet one more to the list isn’t going to have any benefit” – that’s what they said about Kiwibank, and yet look at those fee levels at our Aussie banks ever since.

    Number of major banks in NZ: Four
    Number of kiwisaver providers: Thirty one

    Comment by Phil — November 7, 2011 @ 1:07 pm

  24. The last study I saw put the average KiwiSaver fees and expenses at 0.83% of assets plus $2.55 per month. Even ignoring the monthly charge, that’s a lot. A scheme tacked on to the Super Fund should be able to beat that without subsidies. Whether rates of return are better, worse, or about the same as the private sector we’re 20 years away from knowing.

    Comment by bradluen — November 7, 2011 @ 1:10 pm

  25. “Number of major banks in NZ: Four
    Number of kiwisaver providers: Thirty one”

    You may be confusing the quantity with the quality of a market.

    Comment by Sacha — November 7, 2011 @ 1:21 pm

  26. A national kiwisaver scheme would need to guarantee a return surely or otherwise there would be no point. As has already been pointed out there is already competition within kiwisaver. Low fees and I suspect some kiwisaver schemes also deliver poor profitability. Therefore, a set return on money put in would be necessary.

    Comment by gingercrush — November 7, 2011 @ 1:36 pm

  27. A scheme tacked on to the Super Fund should be able to beat that without subsidies.

    How so? And just to bang on about competition some more – why aren’t any of the other providers beating this rate, considering it’s in their interests to do so?

    Comment by StephenR — November 7, 2011 @ 1:43 pm

  28. Just what has happened to fees Sacha? How about some data. What about margins? I’d be much more concerned about margin increase because fees can be avoided in a range of ways, margins less so.

    As for state run supermarkets, gawd it’s like being in a Monty Python sketch going on about the coming revolution. Have none of those cheering them on ever considered buying from greengrocers, assorted convenience stores, mini markets, dairies, the Warehouse, butchers, Moore Wilsons, etc etc? Oh whoops, sorry that’s right they don’t exist because the supermarkets have a compulsory ‘monopoly/oligopoly’.

    Comment by insider — November 7, 2011 @ 1:49 pm

  29. “If only we could do something like this to challenge the supermarket duopoly.”

    Once again The Democratic People’s Republic of Korea leads the way. Lets take a look at some pictures to see how New Zealand can take its rightful place in the world:
    Kim Jong-Il looking at things

    Comment by OECD rank 22 kiwi — November 7, 2011 @ 1:55 pm

  30. Because challenging a duopoly makes us just like North Korea? Wow, you are even dumber in the sunlight here than the dim-lit halls of the Kiwiblog comments makes you out to be OECD rank stinker.

    Comment by Sanctuary — November 7, 2011 @ 2:09 pm

  31. Sanctuary going to need an extra dose of Thorazine on November 26. It’s going to be so much fun watching him flip out as the results come in. It can’t be easy for Sanctuary to be one of lifes little losers. The entertainment value for me on November 26 is going to be priceless.

    Time go buy some popcorn from one of the supermarket duopolies. Oh wait, I live in an industrialised first world country, not in hickville at the ass end of the world.

    Comment by OECD rank 22 kiwi — November 7, 2011 @ 2:19 pm

  32. Whoa, wait. I last encountered something like this testing some samples I collected from a river of pink slime running through a disused subway station under First Avenue. Quick! Kiss a right winger and save Manhatten!

    Comment by Sanctuary — November 7, 2011 @ 2:37 pm

  33. > Per account? I know it’s an “up to”, but that’s a number huge enough to be suspicious.

    Sorted has a calculator here: http://www.sorted.org.nz/calculators/kiwisaver-fees/

    I imagined an 18 year old earning $200k, and there were plenty of schemes charging over $200k in fees by age 65 (a few charging over $300k, and one, from Craigs Investment Partners, at over $500k). Obviously that’s a ridiculous example, but it’s not inconceivable that the right person, with the right (or wrong) scheme, could pay over $200k fees by retirement.

    (I reckon we should just bring back tontines…)

    Comment by repton — November 7, 2011 @ 2:43 pm

  34. StephenR: As WH said, economies of scale. Plus if I had several billion in a fund and somebody offered to run it for me for 0.83% a year, I’d laugh them out the door unless they were Warren Buffett (and maybe even then, I’m risk-averse). As for why others aren’t beating this — some of them are! (I’d beat it too if I had that several billion.) But there’s no reason to think a market with a short history, undereducated investors, and murky transparency is going to be close to efficient, and of course there’s no guarantee you’ll do any better or worse investing in a low-fee fund rather than a high-fee fund. If a government-run fund, however, would have a structural advantage — and I’m not saying I’m sure it does, I haven’t thought out the logistics — it should improve the market, at least in expectation.

    (The one possible unintended consequence I can think of is if the govt fund does so well at first that it knocks out a lot of the competition, becomes the dominant player, and then tanks simultaneously with the Super Fund. Low probability but extremely nasty.)

    Comment by bradluen — November 7, 2011 @ 2:52 pm

  35. “Market failure”….sigh. People who use that redundant phrase reveal their illiteracy of economics. Do you also subscribe to “nature failure” too….?

    Comment by James — November 7, 2011 @ 3:03 pm

  36. “30.Because challenging a duopoly makes us just like North Korea?”
    No: trusting the production and distribution of foodstuffs to the government would make us like North Korea.

    Comment by Clunking Fist — November 7, 2011 @ 3:08 pm

  37. Fees shouldn’t be the the main focus. I wouldn’t choose a no fee option if Russell Norman was fund manager.

    In the Kiwisaver scheme I’m in I’m quite happy with the fees I pay (of course less would be better) – the fund performance easily justifies it.

    Comment by Pete George — November 7, 2011 @ 3:13 pm

  38. “nature failure” – what, becoming a Green as well are we, neolib lad?

    Comment by Sacha — November 7, 2011 @ 3:56 pm

  39. If the Greens’ policy means more people sign up for Kiwisaver, then it’s worth trying. If the private sector is failing, then let government step up to the plate (again).

    @ James (#35): “Market failure” is a central plank of economic theory, just like “nature failure” (as you simplistically put the breakdown of the environment) is central to environmental science — both are real, and both need to be nipped in the bud.

    Comment by Dan B — November 8, 2011 @ 12:42 am

  40. I think that smaller businesses should get tax incentives from the Government, especially in the retail sector because they need a boost badly

    Manufacturing jobs are not going to bring our tourism industry back to its glory

    Donatella Versace should build another Palazzo Versace hotel in Queenstown. They already have one in Queensland, Australia. It’s time for New Zealand to embrace that level of opulence, too.

    Comment by Betty — November 8, 2011 @ 1:10 pm

  41. Donatella Versace should build another Palazzo Versace hotel in Queenstown. They already have one in Queensland, Australia. It’s time for New Zealand to embrace that level of opulence, too.

    Who’s stopping her? If she wants tax breaks and special rights to abuse workers she can fuck right off. If she wants to run a business like everyone else, she as every right to do so.

    Comment by Paul Rowe — November 8, 2011 @ 1:53 pm

  42. I think that smaller businesses should get tax incentives from the Government, especially in the retail sector because they need a boost badly

    Where to start.
    What is a small business? Less than 50 employees? Less than 10? All Retail? Pie shops? Gas stations? Chain clothing stores?

    Manufacturing jobs are not going to bring our tourism industry back to its glory

    That would be because manufacturing has basically nothing to do with tourism, right?

    Donatella Versace should build another Palazzo Versace hotel in Queenstown. They already have one in Queensland, Australia. It’s time for New Zealand to embrace that level of opulence, too.

    Are you suggesting that the NZ taxpayer subsidies a luxury goods store or is this a completely separate non sequitur statement?

    I sincerely hope you are running for Parliament, Betty.

    Comment by Gregor W — November 8, 2011 @ 2:21 pm

  43. As for why others aren’t beating this — some of them are!

    yep.

    If a government-run fund, however, would have a structural advantage — and I’m not saying I’m sure it does, I haven’t thought out the logistics — it should improve the market, at least in expectation.

    Sounds awfully hypothetical. Hmm. More details thanks Greens!

    Comment by StephenR — November 8, 2011 @ 5:51 pm

  44. I wouldn’t choose a no fee option if Russell Norman was fund manager.

    Tongue in cheek I hope. It’d probably be like the Cullen Fund – professional investment managers appointed by the government and left to do their thing.

    Comment by StephenR — November 8, 2011 @ 5:53 pm

  45. StephenR wrote: “It’d probably be like the Cullen Fund – professional investment managers appointed by the government and left to do their thing.”

    I think it would actually BE the Cullen fund – currently the Cullen Fund is invested in entirely by the government, but under this scheme individuals could have their Kiwisaver invested in the same fund. That’s where the economies of scale come in to make the fees lower.

    Comment by Kahikatea — November 8, 2011 @ 10:48 pm

  46. yes

    Comment by jim — November 9, 2011 @ 3:29 am

  47. very good post

    Comment by andy — November 9, 2011 @ 3:31 am

  48. I think it would actually BE the Cullen fund

    This would be a terrible idea. Cullen is a soverign wealth fund – it’s making high-value low-volume investment decisions.

    A Kiwisaver fund, on the other hand, has to be able to deal with high-volume low-value flows (ie; contributions) each week/fortnight/month from your pay and mine. To be successful it also has to offer different ‘tranches’ of investments to satisfy the risk profile of investors. This requires a very different institutional setup than what Cullen currently is.

    Sure, you could leverage off the name and reputation of the Cullen fund to attract Kiwisavers in, but there are no economies of scale gains here.

    Comment by Phil — November 9, 2011 @ 1:20 pm

  49. @ kahikatea “That’s where the economies of scale come in to make the fees lower.”

    You’d think so but the Superfund are wholesalers if you like and don’t have the capability to manage retail funds so there is no economies of scale and if anything they could end up charghing more fees than an established retail manager.

    Comment by garfield@xtra.co.nz — November 9, 2011 @ 1:26 pm

  50. Private providers need to make a profit.[fair enough]
    A Government board could and does [Cullen fund] manage funds very effectively.
    If this arrangement was made available to the puplic then these profits wouldn’t have to be extracted from the investor. They do add up to a substantial sum over time.
    The managers would be paid of course but it would be a safe assumption to make that it would be cheaper than a body doing the investment on a profit extracting basis. Fund managers are extremely well versed at taking their cut even if the fund performs poorly.
    As long as no state guarantee or investment direction is given I consider this to be of benefit to the average saver.

    Comment by Rob S — November 9, 2011 @ 7:12 pm

  51. @ Rob S – Yes you are correct there is the other layer to the cake, that of the retail fund management ie tracking and managing Mrs Jones investment including compliance, customer service, statements etc. If the Superfund was to add this layer to their business they would incur significant capex and ongoing opex. The trick will be how to deliver the retail component at low cost as the wholesale part is already there.

    Comment by garfield@xtra.co.nz — November 10, 2011 @ 8:03 am

  52. A staff of less than 10, clothing stores and convenience stores.

    If it is a business directly (not a business owned by a company) and it is that small and a clothing or convenience store, then they should be able to have their tax structure arranged as such that they are not penalised for their unwillingness/lack of funds to structure it as a separate entity (company/family trust/etc).

    Perhaps this needs to extend to all small businesses. I don’t know. But the retail sector would benefit from this immensely and encourage the bigger retail conglomerates (Versace) would be more likely to open up over here if our retail sector took off.

    To have business tax as it currently is, especially in retail, where you have to estimate your earnings and pay tax every quarter, is ridiculous.

    If they paid annually on their actual profits (like a company), they would be more likely to succeed and to expand. Also, if this was tied to products manufactured here and the retail outlet had to have a majority of its goods manufactured in New Zealand (textiles, milk, chesse, meat, sanitary products, shampoo, stationery, confectionery) in order to qualify for this tax restructuring opportunity, then this surely would add more jobs to our country too.

    The Government wouldn’t be subsidising anything. Tax would just be restructured for small businesses in order to create more jobs. The fact that neither Labour nor National have come up with anything even slightly resembling this, probably means that we are not going to get the 170,000 jobs that National ramble on about. Unless they do adopt something like this.

    Comment by Betty — November 10, 2011 @ 9:36 am

  53. To have business tax as it currently is, especially in retail, where you have to estimate your earnings and pay tax every quarter, is ridiculous.

    If you are talking Provisional Tax, it doesn’t have to be every quarter.
    It’s dependent on your GST cycle and whether you elect to use standard, ration or estimation options.

    Also, I’m not sure your assertion that tax restructuring to favour small business by any arbitrary measure (staff, turnover, sector) would encourage conglomerates to enter the NZ market.
    I would hazard to guess in fact that completely the opposite is true.
    Conglomerates would undoubtedly lobby Govt. for the same tax advantages as small business if there was a perceived benefit.

    Note – any incentive/assistance that is applied to one sector rather than generally is a subsidy (even if it doesn’t involve a transfer and is therefore indirect).
    That’s not saying it’s a bad thing. It’s just calling a spade a ‘spade’.

    Comment by Gregor W — November 10, 2011 @ 11:31 am

  54. Garfield is right. The Cullen Fund is a low-volume high-value ‘wholesale’ fund. It’s fundamentally different to a high-volume low-value retail fund management operation, which has daily inflows to deal with.

    You could leverage off the brand name and reputation, no problem. But there’s no operational efficiencies to be had by mashing together Cullen and Kiwisaver directly.

    Comment by Phil — November 10, 2011 @ 12:33 pm

  55. To have provisional tax for businesses and not companies gives the companies a business advantage over individually owned businesses and this needs to change.

    To restructure businesses as companies for tax purposes in this way and to link it to goods manufactured in New Zealand is also a good idea I believe.

    This will create more jobs in this country and encourage hotel chains and casino chains and other chains to set up stores in prime locations in New Zealand (Queenstown, Auckland, Wellington, Christchurch, Nelson, Dunedin, Rotorua, Invercargill) because more New Zealanders will be employed and therefore will be going on holiday at least once a year and this country’s population as a whole will have more discretionary income to spend on luxury items in these prime locations.

    It’s not a subsidy. It’s encouraging businesses to sell goods that are manufactured in this country. Most manufacturing firms are already companies and are therefore treated differently from individually-owned businesses for tax purposes. A lot of retail businesses in New Zealand are small owner-operated, trading on tiny margins, and being penalised for not registering as a company. They work long hours, are understaffed because the tax structure they are under means they cannot afford to employ the necessary amount of staff, and this causes health and safety issues. Moreover, ACC is notoriously tough on accidents that occur in small businesses and this adds a further strain.

    That’s calling a spade a spade.

    Comment by Betty — November 10, 2011 @ 1:20 pm


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