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It's Back to School Time, Uniforms and All

By Mary Holm

Monday 23rd October 2000

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The government plan to put taxpayers' money into a superannuation scheme is a bit like putting us all in school uniform.

Everyone will be treated the same. But the outfit won't suit anyone particularly well. And on some people it will look dreadful.

Under the scheme, the money will be invested in a pool of shares, bonds, probably property and other assets. It will be broadly diversified.

One concern is that the "guardians" who choose what to invest in will, no doubt, make sure the portfolio is not very risky. Otherwise, there would be loud complaints from more conservative people.

Let's suppose that, instead of having this huge super scheme, a portion of the money was distributed to each person to invest as they wish for their own retirement.

Many people would choose riskier portfolios - perhaps invested solely or largely in shares. In exchange for accepting more volatility in their returns, they would expect to make more, on average, over the years.

With one big government fund, we won't be able to choose our level of risk.

What's more, there's been talk of limits on the fund's investments.

It might, for instance, be directed to avoid investing in "unethical" companies - perhaps including those that produce armaments, tobacco or alcohol, or harm the environment or treat employees badly.

That might not be too bad. Research suggests that "ethical" investments often bring in good returns. Still, not everyone would choose to be restricted that way if they were running their own individual fund.

Another restriction under discussion is a limit on how much the fund can spend on overseas shares, versus New Zealand ones.

This is more worrying. People whose jobs and homes are in New Zealand are strongly advised to put a large portion of their investment dollars offshore. It spreads their risk.

If our money is pooled in one big fund with a strong New Zealand bias, we are heavily dependent on how one small economy performs.

The school uniform, then, will be too risky for some, not risky enough for others. It may also be too ethical for some, and too New Zealand-weighted for many.

Worse, many people shouldn't be in a uniform at all.

If we were all given our own retirement money, it would be good if we each used it in whatever way will maximise our net worth - assets minus mortgages and other debts - at retirement.

For many thousands of New Zealanders, the first step with that money should be to pay off credit card and other high-interest debt.

Beyond that, they would probably be better to pay off lower interest debt, such as mortgages, before investing in a fund.

For others, the money would best be used to get training or education. This is likely to lead to a higher income and, hopefully, higher savings.

Others again should put the money into their businesses. Many new businesses fail because of a lack of capital.

If they had more money they might grow into enterprises that would employ many and boost the economy. Far more than just the business owners would benefit.

I realise this is all rather pie in the sky. If the government simply gave each person money every year - via a tax cut or whatever - many wouldn't voluntarily use it to boost their net worth at retirement.

They would need encouragement. And programs designed to encourage, such as tax incentives, come with their own problems.

But there's got to be something better than shoving us all into a scheme that will suit so few of us.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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