Nzx Open Magazine, Issue Two 2006 - "kiwisaver"

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KIWISAVER - A MEANINGFUL POLICY PLATFORM THAT CAN MAKE A DIFFERENCE

18 SAVING IS UNFASHIONABLE



Mark Weldon

20 A FOG OF STATISTICS



CEO, New Zealand Exchange Limited

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Hugh Burrett





Managing Director, ASB Bank

CEO, Goldman Sachs JBWere

22 KIWISAVER ACT - WHAT IT MEANS FOR EMPLOYERS

Kerry Prendergast Mayor of Wellington

& Associates

24 FROM THE OUTSIDE LOOKING IN William Buechler

12 PATERNALISTIC GUIDANCE Roger Kerr









Executive Director, New Zealand Business

14 WHAT’S NEEDED TO MAKE KIWISAVER FLY CEO, Employers & Manufacturers Association



Sam Knowles

America





Listed Products, NZX

27 SMARTSHARES 28 MARKET UPDATE

CEO, Kiwibank

17 NET WORTH IN A SINGLE ASSET



President of Barclay Partners, United States of

Sara Velasquez

Alasdair Thompson

16 A BUILDING BLOCK





26 ADVANCING THE SCIENCE, TECHNOLOGY AND KNOWLEDGE ECONOMY

Rountable





A gin trap is a symbol of a bestial, unfortunately not bygone, age – one where the forest floor was littered with vicious steel jaws to trap the unwary. They were aimed at introduced pests: opossums, stoats, feral cats. But they brutalised our nocturnal, bumbling birds – the very creatures they were meant to protect. They left the lucky ones crippled.

Richuard Upton, Senior Associate of Mackinnon

10 WITHOUT UNDERSTANDING WE CAN’T ASSESS



Executive, HRL Morrison & Co.







Lance Jenkins

GETTING BACK INTO THE HABIT OF SAVING

Tim Brown





We chose this image partly because a gin trap is a short term fix that has long term consequences. And partly because it left us pondering what will save the kiwi? Is KiwiSaver the panacea or the palliative? Or does it represent unnecessary intervention where no real problem exists? Perhaps it’s a little like climate change: we can go on debating the science for a few more generations, but in the meantime precautionary measures may be appropriate. One thing is for sure: we are committed to a course. Is it draconian or does it not go far enough? Those issues are explored in the following pages by a range of contributors whose views spring from a variety of influences, from the purely professional to the absolutely altruistic. All are welcomed in an environment where the effects of decisions made today will be felt long into the future.



Scott St John

CEO, First NZ Capital Securities Limited Rowan Macrae

NZX Communications



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KIWISAVER - A MEANINGFUL PLATFORM

THAT CAN MAKE A DIFFERENCE MARK WELDON, CHIEF EXECUTIVE OFFICER, NZX

Context New Zealand has been distinctive among OECD countries over the past 15 years with its utter absence of policies directly aimed at encouraging household savings. Conversely, successful countries, with the economic performance and standard of living improvements to which we aspire, have widely recognised the importance of personal savings to both individuals and the country, and have consistently implemented, and then expanded, policies to encourage savings. It’s no coincidence that New Zealand, with the most hands-off policy approach to savings amongst countries usually thought of as our OECD peers, has the worst household savings outcomes in the OECD, and amongst the most fragile capital markets. It’s not only in absence of savings, but in the presence of taxation around savings that New Zealand is distinctive. The following quote appeared in the Financial Times 18 months ago: “Australia is unusual in taxing retirement savings three times – at the contributions stage, on the earnings that accumulate each year and on the final benefits. The only other developed country that taxes contributions is New Zealand.” However, there is a critical difference between our two countries: Australia has a mandatory savings programme; New Zealand does not.

Australian comparison The Australian experience is instructive. Their policies have created substantial net new savings, and have resulted in significant improvements in individual wealth, capital market strength, and business investment. As New Zealand is in an intensifying competition with Australia for people and commerce, our relativities to our nearest neighbour cannot be ignored. If this saving differential is not addressed, our destiny is as a full branch economy. Accordingly, the KiwiSaver developed policy setting and any





“As New Zealand is in an intensifying competition with Australia for people and commerce, our relativities to our nearest neighbour cannot be ignored. If this saving differential is not addressed, our destiny is as a full branch economy.”

the KiwiSaver legislation marks a very important shift from a 100% passive approach to household savings. It’s a long overdue step toward changing our nation’s “direction of travel” in the area of savings policy. The recent changes announced, including incentives, are very welcome and good policy. However, although KiwiSaver is a step in the right direction, it is unlikely to generate an increase in the savings rate that is sufficient to address the challenges described above. The general policy statement that prefaces the KiwiSaver Bill states that “The purpose of KiwiSaver is to encourage a longterm savings habit and asset accumulation by individuals who are not currently saving enough, with the aim of increasing individual well-being and financial independence, particularly in retirement”.

Retirement outcomes that follow it, cannot be conducted through a “New Zealand only” lens. Superannuation savings represented by funds under management in Australia are estimated to be between 25 to 30 times larger than in New Zealand, despite the Australian population being only about five times as large. To provide additional context for the rapid divergence of the two economies in this area: the increase in superannuation funds in Australia in 2005 was about four times the size of the total superannuation funds in New Zealand. The size and acceleration of this imbalance in the savings pool, and hence overall capital market development, and rates of business investment, is the single biggest threat to New Zealand’s future as anything but a branch economy. The rate and scale of ownership transfer is increasing. This is not the time to be timid. These issues have been discussed for a long time, and we have not taken advantage of previous opportunities to address them. In this century, wealth, and standards of living, will flow to ownership, not production or service centres. Without a deep savings and investment pool, New Zealanders will not achieve or retain a meaningful ownership stake in the New Zealand economy, and our standard of living and global competitiveness will never rise in any sustainable way. There is a clear need for bipartisan support to turn the current situation around. This is appropriate because savings is a long-term policy area, and needs to be addressed as such. In this context, KiwiSaver is a very welcome addition to the New Zealand policy landscape. The introduction of



Another strange and bad feature of KiwiSaver, however, is the ability to withdraw for a deposit on a first home. While this may increase the attractiveness of the scheme to younger New Zealanders who may not have participated had it been simply a retirement savings vehicle, it is likely to prove a double-edged sword. The risk here is that many people will contribute solely for the purposes of home ownership and then may not contribute thereafter. Given the unhealthy skewedness in New Zealander’s asset allocation in favour of the (non-productive) real estate sector, KiwiSaver could, under current parameters, simply become a means of further incenting home purchase over other asset investments that are more appropriate than housing to provide income streams upon retirement. Taking out a reverse mortgage over a family home, or selling it and moving into a smaller residence, is not the answer. However, repeated surveys have defined this as the single greatest expectation for retirement provision outside government superannuation. This scenario will see a lot of hungry elderly New Zealanders. As the pundits have said, you can’t eat the house.

the way they are in many top quartile OECD countries. While a chorus is starting to gather around our capital markets, KiwiSaver represents the most meaningful policy platform that can make a difference. Healthy capital markets are fundamental to economic performance, the ability for the benefits of ownership to stay resident, and are directly related to GDP and standard of living outcomes. There is a demonstrated link between the strength and vitality of a country’s capital markets and economic performance. Strong capital markets enable growing companies to efficiently access the capital they need to grow. Indeed, Australia’s capital market strength is widely recognised to have been one of the most important drivers of its strong economic performance over the past decade. New Zealand’s long-term cycle of spending facilitated by foreign credit will, unless addressed, soon become very vicious. New Zealand’s policies are in sharp contrast to those in Australia. Again, make no mistake – New Zealand is in an accelerating competition with Australia for ownership of productive assets and companies – and we are losing. A bold move in this area is, along with taxation policy, one of only two possible ways in which our policy settings can meaningfully impact these outcomes. Because of the importance of our settings relative to Australia, the Australian example is discussed in detail below. Where there is a large and growing pool of capital as a consequence of its compulsory superannuation scheme, the greater savings in Australia, together with the associated effects of larger and more liquid capital markets, have resulted in a lower cost of capital. As is obvious, the higher the cost of capital, the lower the level of business investment that occurs. This makes it harder for New Zealand companies to compete in international markets, and in turn, reinforces the tendency for New Zealand companies to relocate to markets like Australia, hollowing out our skill, productivity and tax base.

vs.

Ownership, and hence the flow of wealth, will thus inexorably be from New Zealand to Australia, unless meaningful intervention via savings policy is made.

If New Zealand’s saving policy and record were a Shakespearean tragedy, the reflecting pool would be our attendant, and fragile, capital markets. Our savings pool is small, and with many cracks. So is our capital market. It is a fact that, along with savings, capital markets have never been a policy priority, nor of national or political importance

“Hollowing out”, where New Zealand companies are systematically purchased by Australian companies, and their listing and top people transferred to Australia, is already happening at pace. Hollowing out means that the New Zealand economy will be gutted of the skilled professionals who provide companies with capital market services (e.g.,

Capital markets hollowing out

and

growth

bankers, brokers, and lawyers), as well as top quality management, and less obviously, marketers and other creatives, who will also locate to where the real decisions are made. Conversely, a significant New Zealand savings scheme will result in an increased weight of New Zealand capital, which will in turn allow companies to use New Zealand as the base from which to take on the world, and will help to counteract the pressure to move to markets like Australia. New Zealand deserves to triumph. For that to happen, KiwiSaver needs to be ramped up to a level where our settings are competitive with Australia.

“Our savings pool is small, and with many cracks. So is our capital market. It is a fact that, along with savings, capital markets have never been a policy priority, nor of national or political importance...”



GETTING BACK

“Many New Zealanders have not seen this need to save for their future life after work. However, there is a growing realisation now that while the government may provide a basic level of retirement income it will not be enough to fund the lifestyle most Kiwis now aspire to in retirement.”

INTO THE HABIT

OF SAVING “I am eternally grateful my employer had the foresight to introduce me to a compulsory savings programme that helped to build a nest egg for later life.” HUGH BURRETT, MANAGING DIRECTOR, ASB BANK

New Zealand lags behind its closest neighbours – Australia and Fiji – in this respect. The introduction of KiwiSaver is a logical response to the growing recognition of the need for some form of encouraged saving for New Zealanders.

I have been in the financial services industry for over 40

Over time people seem to have got out of the habit of

Is KiwiSaver the definitive answer? In my view it is a good

years and have witnessed significant changes in Kiwis’

savings. Looking back to when I first joined the workforce, I

first step. At the very least it will be a catalyst to start New

savings behaviour over this time. New Zealanders have grown

would not have chosen to divest part of my newly acquired

Zealanders thinking about changing their existing savings

more comfortable with debt, and particularly the use of high

income into a superannuation scheme either. However,

behaviour. The scheme may not be perfect in its detail,

levels of debt to enhance their lifestyles. I have seen New

my employer had a compulsory superannuation scheme,

but I believe it will evolve over time into a workable, viable

Zealand shift from a generation of “savers” to a generation of

with a set level of contribution for both the employer and

investment proposition as we all learn to save again.

debt to enter the property market and highly geared property investment has become increasingly common.

most young New Zealanders do today. Being a first-time earner, I quickly adjusted my outgoings to accommodate

Kiwis have a love affair with property. The returns have

the small, regular deductions from my pay. I am eternally

been solid and, given the steady appreciation in property

grateful my employer had the foresight to introduce me to

values, generally there is a lower level of risk. So, one

a compulsory savings programme that helped to build a

could argue that property is a rational and attractive form

nest egg for later life.

of investment for most New Zealanders.

Many New Zealanders have not seen this need to save

Is the low level of saving in New Zealand a problem?

for their future life after work. However, there is a growing

Arguably yes, given nearly 80% of New Zealanders’ assets

realisation now that while the government may provide a

are held in property. It is this lack of diversification into other

basic level of retirement income it will not be enough to

financial investments and lack of saving in any other form by ordinary New Zealanders that is stifling our capital markets. This is limiting businesses’ growth and the ability to fund infrastructure. The overall result is that the economic growth potential of New Zealand is hampered.



and without it I would have spent that extra cash like

fund the lifestyle most Kiwis now aspire to in retirement. We need to get Kiwis back into the habit of saving from an early age. I believe compulsory superannuation is the key to reinstigating this savings ethic in New Zealanders.

HUGH BURRETT

“borrowers”. It has become acceptable to use predominantly

employee. This scheme effectively forced me to save,

Hugh is Managing Director for ASB Bank. Prior to this, as Chief Operating Officer, Hugh was responsible for the bank’s sales and service delivery in personal, business and rural banking, and overseeing the delivery in core support areas. With over 45 years’ service, Hugh has held a variety of executive roles within ASB Bank.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.



WITHOUT UNDERSTANDING WE CAN’T ASSESS

Saving for the future or retirement is fundamental to an individual’s ability to secure their own financial wellbeing and reduce the financial burden on future taxpayers. KERRY PRENDERGAST, MAYOR OF WELLINGTON

However, perhaps of more concern is whether we truly understand the reasons for these low savings rates. Do New Zealand incomes lag behind those of other developed countries? What is the effect of the “perceived” New Zealand Super safety net on savings behaviour? Are New Zealanders actually making other investment decisions? And are there sufficient incentives to encourage positive savings behaviour? Without understanding the factors that influence our current savings behaviour, it will always be difficult to assess the effectiveness of initiatives designed to positively influence this behaviour. Saving for the future and/or retirement is fundamental to an individual’s ability to secure their own financial wellbeing and reduce the financial burden on future taxpayers. The ability for an individual to save is also inextricably linked to New Zealand’s economic growth activity as, ultimately, it is this growth that helps provide and sustain income to individuals, from which they will be encouraged to provide for their future. While care should be taken in assuming that savings schemes will make more effective investment decisions than individuals may choose to make overseas, evidence seems to suggest that there is a positive link between savings and economic activity, growth and competitiveness.

individuals, or business owners, then there is an argument to support the fact that the New Zealand economy may be better off in the long term. I believe that KiwiSaver is a positive step in addressing New Zealanders’ low savings rate. The KiwiSaver scheme introduces a number of incentives to encourage Kiwis to start saving early, while maintaining a level of flexibility and choice for individuals – the ability to opt out, the ability to select your own investment risk, contribution holidays and so on. I applaud the government’s attempt to keep administration costs down, to encourage savings through a workplace based scheme and to avoid some of the pitfalls of previous government savings schemes. While KiwiSaver is a good first step I would qualify my overall support for the scheme at this stage. First, I worry whether the range and size of incentives will be sufficient to achieve the change in savings behaviour that the government believes is necessary and, if it isn’t, whether the government will be forced to take New Zealand down the path of a compulsory savings scheme such as that in Australia.

KERRY PRENDERGAST

It is generally acknowledged that New Zealanders have among the lowest savings rates when compared to many other developed countries. Given New Zealand’s aging population and questions over the affordability of New Zealand Superannuation, this low savings rate should be of concern.

Second, I worry about the effect increasing pressure on employers to contribute to employees’ savings schemes will have on the future investment decisions those employers may choose to make, and whether such contributions would be affordable, particularly for small to medium-size entities. It will be interesting to see how the government deals with these issues, if and when they arise.

If the investment decisions made by those managing savings funds are superior to those that you or I can make as

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The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

Kerry has been Mayor of Wellington since 2001, having started a career in local government in 1986 as a Tawa Borough Councillor. She was elected as a Wellington City Councillor in 1989 and was Deputy Mayor from 1995 to 2001. Kerry is a member of all Council Committees, Subcommittees and Working Parties. She is Vice President of Local Government New Zealand.

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PATERNALISTIC GUIDANCE ROGER KERR, EXECUTIVE DIRECTOR, NEW ZEALAND BUSINESS ROUNDTABLE

The income tax double taxes savings. The adoption of GST was a pro-savings policy. New Zealand should also move to a lower and flatter income tax structure. Excessive government savings (budget surpluses) crowd out private savings and should be reduced via tax reductions. Excessive state welfare is also relevant to incentives for private savings. The parameters of NZS, in particular the eligibility age, should be modified over time. The Cullen Fund may discourage private savings. It should

Is the New Zealand savings rate a problem or not? People save so that they can consume or

being redirected away from over-regulated public markets

be abandoned in favour of a much cheaper policy of debt

to private equity markets.

repayment.

meet contingencies in the future. How they decide to split

developed countries there is no close link between savings

Reduced government spending, the elimination of unjustified

current income isn’t the business of governments. People’s

and economic growth.

regulation, better infrastructure, and privatisation of SOEs

preferences and circumstances differ. There is no ‘right’

Investors will judge how long and at what level they are

would improve New Zealand’s international competitiveness

Total

savings

comprises

government, business

prepared to fund capital account surpluses and market and

household savings. It is well established in economics that changes in one component affect the others and that

General growth-oriented policies are the key to ensuring

indebtedness is threatening financial sector stability.

adequate retirement living standards.

Is KiwiSaver the right answer?

than the aggregate.

is based on faulty analysis, namely that New Zealanders

The OECD estimates that gross national savings as a percentage of GDP was 18.4% in New Zealand in 2005, only a fraction below Australia at 19.6% and well above the United Kingdom at 14.8% and the United States at 13.1%. Moreover, household net wealth has risen from 282% of personal disposable income in 1979 to 588% in 2005.

What is the impact, now and in the future, on households, capital markets and our overall competitiveness? Households save in many ways – by investing in houses, businesses, farms and in human capital, as well as through capital

No. KiwiSaver

are making irrational savings decisions and under-saving for retirement. None of the reports of recent official task forces on retirement income provision recommended such an approach. The bill reflects a paternalistic view that individuals need to be “guided” into savings commitments (of a particular form). It is implausible to suggest that politicians make better judgments about long-term savings than individual savers, who are the same people who vote them into office. Insufficient attention has been paid to the costs of the scheme (to individuals, employers, superannuation funds, Inland Revenue and taxpayers) relative to any benefits of “correcting” irrational behaviour.

markets.

The Treasury and others have expressed doubt that KiwiSaver

Treasury research has found that New Zealanders on

will lift aggregate savings. Workplace superannuation should

average appear to be saving at rates that allow them to maintain living standards in retirement, given New Zealand Superannuation (NZS).

Roger is the executive director of the New Zealand Business Roundtable. He was formerly a senior official in the Treasury and a director of the Electricity Corporation of New Zealand and the Group Board of Colonial Limited in Melbourne.

be a voluntary choice. For many people a strategy of paying off mortgage debt would yield higher returns.

What alternatives should be pursued? The

Funding for investment is not limited to domestic savings.

role of the government should be to adopt policies that

Firms, banks and other borrowers have access to world

are as neutral as possible between present and future

capital markets. There is no evidence of a lack of capital

consumption and minimise savings distortions.

to fund profitable investment projects. Some capital is

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adjustments will occur. There is no evidence that external

government actions mainly affect the form of savings rather

There is no evidence that New Zealanders are poor savers.

and boost New Zealand’s capital markets.

ROGER KERR

savings rate for everyone, nor for the country.

Research indicates that for

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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KIWISAVER FLY

We hope government can see the marketing factor available through taking such an approach, though it hasn’t previously paid much attention to the way its policies can be used to capture the public’s imagination and create a sense of national vision and direction.

ALASDAIR THOMPSON, CEO, EMPLOYERS & MANUFACTURERS ASSOCIATION (NORTHERN) INC.

Employers in general expressed a solid measure of support for the principles of KiwiSaver, though smaller businesses in particular are unhappy that they will be expected to pick up the scheme’s compliance costs. But that was a year or so ago and since then the stream of added compliance costs has been unrelenting.

“While prudential borrowing is a sound way of financing business or infrastructure development, it’s no way to maintain a lifestyle.” Is the New Zealand savings rate a problem or not? The savings rate amongst individual Kiwis is a problem. While the level of savings being made at present by the country overall compares reasonably well with other countries, the savings rate achieved by Kiwi individuals makes disturbing reading. Business people believe the reason for the shortfall is broadly twofold: many New Zealanders are not saving enough because the government is taking too much of their income in taxes and using some of government surpluses to build up state controlled superannuation funds. A second reason is the shortfall is partly historical; internally generated savings have never been adequate to fund the developments we aspired to. As a nation we have always looked to investors offshore to fund part of the growth of our business and residential development. Of course overseas investors expect a risk-related premium for the uses of their funds.

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What alternatives should be pursued?

What is the impact, now and in the future, on households, capital markets and our overall competitiveness? The perception is the

Small businesses in New Zealand pay about $3500 per employee a year in compliance and they don’t want any more unpaid work foisted on them by government.

lack of savings by households encourages Kiwis’ penchant for living off debt, which is usually funded through leveraging the collateral in their house. While prudential borrowing is a sound way of financing business or infrastructure development, it’s no way to maintain a lifestyle. But Kiwis tend to expand their mortgages for things like holidays and a new car as the value of their property rises, and the banks have been quick to promote the idea that people can do this without clouding their future living standards.

Nearly 70% of respondents to a survey EMA conducted 18 months ago said employees should be able to opt out of any savings scheme offered, and we were pleased our advice on the matter has been heeded. In the survey 47% said savings should be locked in until retirement, a preference expressed more strongly amongst medium sized organisations.

Kiwis don’t tend to invest the savings represented in their homes very much in capital markets or on enhancing the competitiveness of their businesses. It’s a problem because building a diversified investment portfolio is sound practice for both individuals and large super funds alike, to ensure any risk is spread and the rate of return from the investment is smoothed over business cycles.

Is KiwiSaver the right answer?

KiwiSaver is a start. On its own it doesn’t represent anything like a complete answer to our savings crisis. But in time it’s likely to improve our national savings rate modestly. Its significance would be immeasurably boosted if KiwiSaver was introduced hand-in-hand with a cut in the personal tax rate with the cut solely for lodging into the scheme. That would galvanise public attention on the importance of saving. It might even spark the emergence of saving as an economic good uppermost in people’s minds.

Just over 20% of respondents said savings should be mandatory, with nearly 80% expressing a preference for incentives to encourage saving. Now if government was prepared to cut personal tax rates and reserve those cuts for KiwiSaver, then individuals, business, our capital markets and the government might all come out winners. Another great boost to capital markets would result if government significantly reduces the company tax rate, which would boost both foreign and domestic investment as companies sought to invest savings in New Zealand and recorded more of their profits here.

ALASDAIR THOMPSON

WHAT’S NEEDED TO MAKE

Alasdair is currently CEO for Employers & Manufacturers Association (Northern), a member of the Business New Zealand Management Board, Managing Director of Linrick Investments (NZ) Limited, part owner of BodyTech Fitness & Spa Limited, and a member of the Auckland Business Forum and the Auckland Racing Club. In 1990 Alasdair received the Queen’s New Zealand Commemorative Medal for Service to New Zealand.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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NET WORTH IN A SINGLE ASSET SCOTT ST JOHN, CEO, FIRST NZ CAPITAL SECURITIES LIMITED

Is the New Zealand savings rate a problem? Whether or not New Zealand has a savings problem depends on your perspective. Clearly, many consumers don’t perceive any problem. They’re happy to spend throughout most of their lives and then fall back on the state during their retirement, accepting a frugal lifestyle in their latter years.

A BUILDING BLOCK SAM KNOWLES, CEO, KIWIBANK Sam is CEO of Kiwibank. He has considerable experience in the banking industry. He has been a senior manager for trading banks in New Zealand and Australia, specialising in areas including strategic planning, retail services, marketing and business development. Sam is a Member of the New Zealand Institute of Directors and has degrees from Waikato and Canterbury Universities.

I support KiwiSaver and agree that the “opt out or you’re in” procedure is the way to go. I also agree with the enhanced tax incentive package. It will certainly be critical to the success of the scheme. In my view there is no question that New Zealanders have a savings problem: both understanding the need to save and with the way they save. Many people see KiwiSaver as being bold. In fact it is not. It is however an encouraging start, a building block for the future. The problem actually goes deeper than just the need to save for retirement. Many New Zealanders have no grasp of the ethos of saving to buy and the consequences of their spending decisions. As a result their spending and finances are well out of control. In today’s world of unlimited consumer temptations, we need to ensure our children are equipped to understand the choices they face. Many of my generation learned the value of saving from our parents. This passing on of information can no longer be relied on. Unfortunately, teaching of basic money management skills does not figure highly on the school curriculum. We need to be much bolder in educating

our young about money and saving. This should not be a “subject option” for older students, but a basic component of our learning throughout the years at school. My hope is that the KiwiSaver debate will lead us to mobilise to address the deeper issues. If we can bring an understanding of the concepts of living within your income, saving and earning interest through the primary and secondary education system, it is a natural follow on to workplace saving schemes. I’ve long admired what Australia has achieved in this area, albeit through a compulsory scheme, but the savings lesson is quickly self evident. The KiwiSaver scheme is a positive step in the right direction. There can be some quibbles about the complexity of the scheme, but these can be addressed over time as we develop a better understanding of employee behaviour. And, more importantly, as New Zealanders develop an understanding of the concept of saving.

proposed change to the way managed funds are taxed for Australasian equities, the proposed changes to the way overseas investment income is taxed is a step in the wrong direction. Putting up a tax barrier for investing overseas sends the wrong signals to investors about saving in financial assets and will encourage further investment in assets such as housing as a result.

What is optimal?

Government policy will dictate

the path that New Zealand savers take. At present, New Zealanders are dissaving, and housing is clearly over-

As a country we are surrendering our financial independence,

represented in New Zealanders’ investment portfolios.

and as individuals we are not asset allocating appropriately. A

The current initiatives around KiwiSaver and taxation will

distorted tax system encourages investment in housing at the

not solve the problem. New Zealanders need to save more

expense of financial assets. Forthcoming changes will only

and save smarter by asset-allocating more appropriately

make this worse. Ultimately, as a nation, we are all poorer.

away from housing. We would encourage the government

Scott was appointed CEO of First NZ Capital in 2002. His experience in the finance industry is extensive and includes roles as a Senior Equity Analyst, Equity Salesman, Head of Equity Sales and Head of Equities. Scott joined First NZ Capital’s predecessor company CS First Boston in 1993 following seven years at Hendry Hay McIntosh.

to consider a taxation regime that is less distortionary

What is the impact of this?

At best we have developed into a nation where for the majority, net worth by the age of retirement is concentrated in a single asset – a house. We are a country devolving into persistent, and growing current account deficits, without a deep and responsive savings pool. New Zealand is becoming increasingly susceptible to country shocks; we are not even competing to retain ownership of local assets, and we are not effectively seeding growth companies. We are also increasing our reliance on the state for health, education and retirement.

Is KiwiSaver the answer?

SCOTT ST JOHN

between asset classes. Housing does not need attention, however saving via financial assets does need a boost. Whether this is via incentives or compulsion, the emphasis should not be on where New Zealanders invest but how much they invest personally. Encouraging the development of a deep savings pool must be the emphasis – capital will flow to New Zealand investments on merit as a consequence. This would resolve some of the issues that we refer to above over time, such as seeding exciting local growth companies. All New Zealanders would be wealthier – something we should aspire to.

Whilst I welcome

the current government’s initial moves to look at savings, KiwiSaver is only a small component of what is required to remedy this issue. David Skilling and his team at The New Zealand Institute have done some excellent work in this area, suggesting that a maximum of circa 1% of employee income will be saved as a consequence of KiwiSaver. Whilst better than nothing, this will not resolve the savings issues, the current account deficit, the depth of the New Zealand capital markets, or New Zealand’s reliance on foreign capital.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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As a nation, this sort of mindset is a problem. The spend now, pay later lifestyle is reflected in New Zealand’s massive current account deficit approaching 10% of GDP, meaning a greater than ever reliance on the goodwill of overseas investors, and a greater burden on taxpayers to support people’s lifestyles.

Whilst KiwiSaver is a step in the right direction, as is the

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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SAVING IS UNFASHIONABLE TIM BROWN, EXECUTIVE, HRL MORRISON & CO. Saving is unfashionable and, more than gratification deferred, it is a dis-pleasure in its own right. Money in the bank is foolish. Money invested in Telecom shares obnoxious. Borrow to invest in property or to buy a flat screen TV: easy and satisfying. Percentage of household consumption debt funded

2006

13%

Household debt/disposable income

2001

100%

(household figures are national averages)

2006

160%

2014

200%

2000 to 2006

+50%

Change in New Zealand export commodity prices Current account deficit

2000

$6 billion

2006

$14 billion

Net international investments/GDP

2006

(90%)

Short term interest rates

2006

7.5% pa

New Zealanders are not saving. The evidence is ineluctable, at both anecdotal and macro levels. What is contentious and debatable is whether, for the nation and especially the household sector, not-saving is a problem and, if so, whether government has a role in a solution. If we don’t save we (individuals and as a society) will end up owning only the output of our labour, on which we will owe a student loan. In a world where the next generation will comprise 9 billion people it will be a great deal better if Kiwis also own land and other productive assets. Net offshore ownership of New Zealand is higher than for any other country in the OECD (net ownership is overseas ownership of New Zealand assets minus New Zealand ownership of offshore assets). In effect, when a child is born in this county $40,000 of their future earnings are already owned by an offshore lender or investor (unless the child emigrates). In addition, low savings mean high interest rates and all which that entails.

The 600 words on this page are not the place to elaborate the problem of under-savings (please read the reports of the New Zealand Institute), but a key point in the debate is worth noting. People can and do act irrationally, i.e. they do things not in their own best interests, often because they feel that they are “going with the flow” and “surely the market is right”.

INVESTING IN THE Both positions are absurd, but presumably accord to the wishes of the respective electorates. The inference is that political will to encourage/require higher personal savings will only emerge when politicians discover some way to make saving fashionable and satisfying in its own right. Politicians (and their electorates) have not been helped by polarising debates over the issues. Polar views tend to lead to confusion and inertia. It is likely that progress will have to be incremental. The “glass half full” view of KiwiSaver is that while it will not materially change the balance of ease/pleasure between saving and consumption, it does establish a savings structure that can be enhanced by future application of carrots and sticks. But at some point some politicians are going to have to invest political capital or the figures set out in the table will continue to deteriorate and the child born owing well over $40,000 will decide that emigration is an easier option.

Left-leaning politicians say the state will provide a safety net if taxation is kept up. Right leaning politicians say people are saving as much as they can and lower tax would release funds for more saving.

TIM BROWN Tim has been with Infratil’s management since 1994. He has been an active participant in several public issues debates, notably whether regulation of New Zealand banks should be retained by RBNZ and whether Auckland would benefit from Whenuapai Airport being opened for civil use.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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How this occurs is well explored by many books on the behaviour of markets and crowds, for instance Robert Shiller’s “Irrational Exuberance” which predicted the demise of the US “dotcom bubble” (and that US markets would not recover for a decade). What Shiller and others have shown is that societies and markets can make profound mistakes about the allocation of resources. Realisation tends to arise only once disaster has struck. In this instance irrational means believing that you can spend your way to a portfolio of investments. Borrowing from offshore lenders (or selling local companies to offshore investors) and investing in residential property or new TVs will not result in New Zealanders becoming wealthy. With regard to under-saving we can either wait for proof of the dictum “if something is unsustainable it will not be sustained” or do something. In this context, “we” can only mean government because it is the only agency with sufficient clout to turn the rudder. However, at present no New Zealand politician of standing has shown a willingness to invest real political capital to encourage/require higher personal savings.

SHAREMARKET

The easy way into the sharemarket www.smartshares.co.nz

Investment Statements can be downloaded from the Smartshares websites. Units in the funds have been accepted for quotation by NZX and will be quoted upon completion of allotment procedures. However the Special Division that regulates Smartshares Limited takes no responsibility for the offer.

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A FOG OF STATISTICS LANCE JENKINS, CEO, GOLDMAN SACHS JBWERE

Is the New Zealand savings rate a problem? Over the past few months we have witnessed the full force of statistics used by those who argue both for and against the issue of whether we have a savings problem. To quote Benjamin Disraeli, there are three kinds of lies: “lies, damn lies and statistics”. Regardless of the “fog of statistics”, I believe that we do have a savings problem and I would make the following simple points.

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a)

Our capital markets are small and lack real depth.



Australia, which has a population five times bigger than ours, has managed to grow their capital market 20 times larger. If we had a solid savings record across a number of asset classes this simply would not be the case.

b)

Funds under management are small.



We have in New Zealand total funds under management of between $40 and $50 billion whereas our Australian counterparts have over $1 trillion.

c)

New Zealand companies have a tendency to outgrow our market.



New Zealand companies have a history of either moving out of our market (Lion Nathan, Nufarm etc) for a listing overseas or they are taken over by well capitalised private equity funds or foreign companies. Australia has kept its world class companies (BHP, Brambles, etc) because Australians have invested in financial assets and created a healthy capital market. History suggests we lose New Zealand companies when they need to grow their business because our capital markets and funds are too small.

d)

What if NAB were a seller of their New Zealand banking business?



If the press speculation were true and NAB in Australia were looking to sell their New Zealand banking business, the New Zealand funds management market (a reflection of our savings pool) simply would not have the $10 billion or so that would be required to buy the bank back. Why are there five strong and well capitalised banks in Australia, but none in New Zealand? The answer is that compulsory savings in Australia have strengthened ownership and savings across all asset classes. New Zealand simply has not kept up.

My bottom line is that in order to avoid being a branch economy, we need an ownership stake in our New Zealand companies. Until we can keep our New Zealand companies and fund their expansion plans then I will continue to believe that we have a savings problem.

What is the impact now, and in the future, on households, capital markets and our overall competitiveness? An inadequate savings culture has created the lack of depth we are currently experiencing in our financial markets. Let’s not make the excuse and say we’re too small; because if you look at other examples – Singapore and Australia – those examples highlight that we can have substantially deeper capital markets. If our savings culture does not change, we risk becoming another branch economy. As New Zealanders, we want to have a say in what our companies do. Without an ownership stake, we have little influence. We need to understand the link between savings

and ownership and come to terms with the premise – that without a savings and investing culture we will lose the ability to have a real say in growth and strategic decisions of our New Zealand companies. I do not want to see the likes of Fletcher Building leave the NZX simply because our capital markets cannot support their growth ambitions. As New Zealanders we should not accept that it is okay for companies to outgrow our markets. Australia doesn’t – why should we? Without ownership, our competitiveness as a nation will erode. If our New Zealand companies become foreign owned, what say will we have on whether skills and jobs are kept in this country rather than being farmed out elsewhere? We run an enormous risk as a nation of losing important skills offshore without an active voice in the plans and initiatives of our New Zealand companies.

The best example of this is Lion Nathan. If Lion were still a New Zealand company, the tax take would be substantially larger from this one company than it currently is as a branch office. Multiply this one example many times and it becomes a large piece of tax revenue. In the longer term a growing savings pool will grow our capital markets, and in turn will lead to more New Zealand companies contributing to the wealth of New Zealand and New Zealanders. These initiatives will require leadership from our government and I am hopeful that long term planning by our leaders will help us develop as a nation and ensure that we retain an ownership stake, and a voice, in New Zealand companies.

Is KiwiSaver the right answer?

KiwiSaver is a positive step in the right direction, but it does not go far enough.

What is the right answer?

We should look at overseas experience to help us understand what works and what doesn’t. If we look to Australia, its citizens are entirely better off due to their compulsory savings regime. However, we should do more that simply make it compulsory. As with the US system (their 401K program) pre tax dollars should be invested in the savings scheme and there should be a form of matching by employers. The returns (while accumulating) should be tax free until that individual turns 65. There should be some emergency opt-out provisions with no penalty, otherwise individuals should have the right to pull out their money for any reason, but with a significant tax penalty. An exemption from Specified Superannuation Contribution Witholding Tax (SSCWT) for employer contributions to Kiwi Saver schemes is a great starting point. My suggestion would also be that this program should be accompanied by a business tax cut, so that companies receive some offset to the increased cost of the contribution. While the government may lose tax revenue in the short term, this country and therefore, the government, will benefit over the medium and longer term from both New Zealanders saving for their own retirement, and from New Zealand companies not migrating overseas with the accompanying tax loss.

LANCE JENKINS Lance is the Managing Director and CEO of Goldman Sachs JBWere (New Zealand). He has been a partner of Goldman Sachs JBWere since 1999. Lance received an MBA from New York University (Stern School of Business) and has LLB and BCA degrees from Victoria University of Wellington.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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KIWISAVER ACT

So what are the obligations for employers?

WHAT IT MEANS FOR EMPLOYERS

Employers will be responsible for: l distributing information packs about KiwiSaver to all new employees. These packs will be provided by Inland Revenue;

RICHARD UPTON, SENIOR ASSOCIATE OF MACKINNON & ASSOCIATES

l passing on new employee’s details to Inland Revenue;

153 pages of it!) is like trying to fit an elephant into a Mini – you have to concentrate on getting the important bits in! With this in mind, this article is written as a summary of the main aspects of KiwiSaver, with a particular focus on issues affecting employers. The KiwiSaver Act will become law on 1 July 2007. The purpose of KiwiSaver includes an intention “to encourage a long term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement ”. However, before that can happen, employers and employees will need to quickly come to terms with many new obligations.

Key features KiwiSaver seeks to achieve its purpose by automatically enrolling all new employees into a KiwiSaver scheme. Enrolment will mean that deductions are made automatically and immediately from an employee’s wages and will be invested with a particular savings fund provider. All employees aged between 18 and 65 will be eligible to participate. They will automatically be enrolled when they become “new” employees, which includes when they change employment. In a sense, the scheme is voluntary. Although new employees will automatically be enrolled, then they have the ability to decide to “opt out”. Opting out must occur between the 13th and the 55th day of new employment. Similarly, existing employees can “opt in” by advising their employer they wish to join KiwiSaver, or by approaching a provider directly. To this extent, the scheme obviously requires a degree of proactivity on the part of anyone wanting to pursue either option. It seems likely that some will simply neglect to “opt out”, and will therefore join the scheme by default, rather than because of a genuine desire to do so.

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What happens?

Joining a scheme will mean that deductions are made from the employee’s salary to the relevant provider. Contributions are made at a rate of 4% of the employee’s gross salary or wages (unless the employee chooses to contribute at the higher rate of 8%).

l receiving opt-out notices from employees and advising Inland Revenue about these.

What about existing schemes? Employers who have existing superannuation schemes are able to apply for an exemption from KiwiSaver. To do so, various requirements must be met, including full portability and a minimum contribution rate of at least 4%. Many existing schemes will struggle to meet these thresholds. Employers may also be able to convert existing schemes to KiwiSaver schemes or to establish a KiwiSaver scheme within an existing scheme.

Employees are only able to contribute to one scheme at a time. If they do not nominate a scheme, then they will be either be allocated to the employer’s preferred scheme (if one has been selected) or to a default scheme selected by Inland Revenue. This means that an employee can continue contributing to the scheme even if they change employer. In a sense, portability is a key aspect of the scheme. Employees are not locked in to using one provider indefinitely – rather, they can transfer from provider to provider.

General observations While most will applaud the objectives of KiwiSaver, there appears to be a real lack of awareness amongst both employers and employees about its true impact. In the months up to next July, significant education is required to ensure the Act is complied with. Unquestionably, the effect of deferring 4% of one’s wages until retirement will play an ever increasing role in future wage bargaining.

As a “carrot” to all, the Government will incentivise employees to join KiwiSaver by making an upfront contribution of $1,000 per person who joins the scheme.

When can savings be withdrawn? Withdrawals can not be made from the scheme until either the age of eligibility for New Zealand superannuation is reached (which is currently 65) or until after the employee has been in a scheme for five years, whichever is the later. There are two exceptions to this; in the case of significant financial hardship and/ or serious illness, or for permanent emigration. There are eligibility criteria set out within the Bill. The Bill also allows for KiwiSavers to make one-off withdrawals to assist with financing the deposit of their first home provided they have been a member of KiwiSaver for at least three years. After contributing for 12 months, KiwiSavers are able to apply for a “contribution holiday” of up to five years. Earlier applications can also be made in the case of financial hardship.

RICHARD UPTON

Trying to provide a brief overview of the KiwiSaver Act (all

l deducting employee contributions and forwarding them to Inland Revenue with the employee’s PAYE;

Richard has worked as an employment lawyer since 1998, in both private practice and in house, where he managed the Employee Relations team for one of New Zealand’s largest companies. He is now a Senior Associate with Mackinnon & Associates, a boutique employment law and human resources firm.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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RANDOM THOUGHTS FROM AN INVESTOR REGARDING INVESTING IN NEW ZEALAND WILLIAM BUECHLER, PRESIDENT OF BARCLAY PARTNERSTM, UNITED STATES OF AMERICA

It’s true. Sometimes we humans can’t see the proverbial forest for the trees. Recently, I had the marvelous opportunity to make a due diligence trip to New Zealand in order to confirm my vision of the investment opportunities I perceived to exist there. To my surprise, I continually experienced a strange yet pervasive lack of optimism for the future of New Zealand and a lack of confidence in business and the economy that might be called for lack of a better term – “The New Zealand Blues”. These feelings might best be summed up by a statement made by a New Zealand government minister during a business meeting I attended in Wellington. Imagine my surprise when, in the midst of a talk, he declared, “We must always remember, we are a small and isolated country”. To my dismay, a quick review of the meeting room revealed a number of heads nodding up and down in agreement. Perhaps, if I lived in New Zealand, I might agree. But I don’t live in New Zealand and I don’t agree. As an Outsider Looking In, I realise that New Zealand might be considered a small country on a relative basis compared with the US or Australia – but not compared with Ireland and Israel who, by the way, are fine examples of strong economies built out of the technology revolution. (I wonder if they perceive themselves as being a small country?) But I am sure about this: New Zealand is no longer truly an isolated country. After all, New Zealand, with today’s global reach of the internet, is really only a mouse click away from anywhere on this planet. And what about the future and the improvements to come in both technology and transportation?

Where are those supersonic jets at Mach 7 when you need them? (As an aside, I am absolutely sure that 80 years ago, someone stood on the shores at Waikiki Beach at Honolulu, Hawaii and declared, “We must all remember, people may not want to invest here, we are too small and isolated.”) Perhaps the observations of an Outsider Looking In might merit consideration for those contemplating investing in New Zealand. Here is the situation as I see it. In my eyes, New Zealand is: “A stunningly beautiful and natural resourced blessed country with a democratic, largely energy self reliant, law abiding society, an investor- and business-favourable legal environment, and an undervalued, under-owned, and underappreciated stock market, which rewards shareholders with high dividend yields .” To those of us who like to examine the downside, don’t worry, outside investors can also see the “warts” and the “blemishes”. For investors from other countries, there is always the currency risk (or reward, depending on one’s viewpoint on the future direction of the New Zealand dollar). And certainly investors should be concerned that the political leaders in New Zealand may misunderstand the needs of maintaining efficient capital markets and the strong economies that go hand in hand with strong capital markets. (Why does it always seem to be so difficult for politicians to understand that less means more when it comes to lowering taxes and thereby increasing revenue?) And of course, as we all know, something completely random can always go wrong with any investment.

But enough of these ole “New Zealand Blues”. It’s time to step back for a second, count the blessings and move forward. A country that is essentially energy self reliant in a world that is desperate for energy? How wonderful is that? Major Immigration problem? Nope, New Zealand has plenty of room for the best and the brightest. For international investors looking at countries in which to invest, how attractive is a country where you don’t have to worry about waking up some morning to find your assets have just been confiscated by the local government? Leadership and Vision? Yes, it’s there, but perhaps a common goal and vision of the future has not yet emerged. Why couldn’t New Zealand become the technology centre of the South Pacific? The vision will come. I’m sure of it. The business men and women I met with during my visit were unfailingly bright and motivated. Investing Infrastructure? The New Zealand Stock Exchange is small but growing and eager to provide ways and means for investors from New Zealand and abroad to invest in the future of New Zealand. As far as visitors are concerned, the beauty of New Zealand is surpassed only by the graciousness of its people. If you add in the fact that the All Blacks recently performed some serious haka action over in Brisbane, what more could an investor ask for? Just kidding, of course. Then again, maybe not. Perhaps I’m just a foolish optimist, but to me, the future of New Zealand is equal to or greater than the future of Hawaii was those 80 years ago when our fictional someone stood on the shores on the beach at Waikiki. As other investors from around the world realise the opportunities and advantages of investing in New Zealand, new money from these outside investors, both retail and institutional, will flow to New Zealand in amounts well beyond anything experienced in the past. And that will be the catalyst that will jump-start an economic boom in New Zealand that will simply defy current expectations. …At least that’s the way I see it, as an Outside Investor Looking In.

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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WILLIAM BUECHLER

FROM THE OUTSIDE LOOKING IN...

William, founder and president of Barclay PartnersTM is a consultant and asset manager who specialises in modern global asset allocation and diversification. He was Senior Vice President, Investments, at a major brokerage firm in the United States, where he was a founding member of the firm’s 401(k) Retirement Plan Advisory Board, eventually managing assets worth approximately $760 million. He went on to found Barclay PartnersTM Asset Management, LLC, and is now the firm’s President and majority 25shareholder.

ADVANCING THE SCIENCE, TECHNOLOGY AND KNOWLEDGE ECONOMY ADVANCING NEW ZEALAND –

SARA VELASQUEZ, LISTED PRODUCTS, NZX In today’s changing global business climate, information and people can be immediately accessed around the world. New Zealand’s location on the edge, although once considered an impediment is no longer the case. New Zealand companies can go global right from our very own backyard. The interest in New Zealand companies is reflected in the outstanding, cutting-edge, market leading businesses that other countries are keen to attain. NZX knows that New Zealand is full of fantastic and innovative companies. We aim to provide a marketplace that supports these companies and allows them to flourish, as well as improving the capital market environment for all New Zealanders. In May, NZX launched the NZX SciTech Index to recognise, monitor and promote the breadth of our nation’s NZX Listed science, information and technology companies. The SciTech Index is a special interest index that currently includes 25 information, biotechnology and industrial technology NZX Listed Issuers. To complement the launch, NZX in association with Radio Live, sponsored seminars in August in Auckland and Christchurch for companies tracked by the NZX SciTech Index to present their stories to the New Zealand public. These seminars offered a unique opportunity for investors to interact one on one with New Zealand’s listed technology companies and the brains behind them. The seminars were designed to encourage companies represented by this index to more broadly tell their story. Companies in this sector need access to capital to fuel their growth. NZX markets provide the opportunity for these companies to access that capital, and for investors to access a stake in this vital sector.

the days’ events with the resounding feedback that this type of opportunity was appreciated, very much valued and considered an overall success by presenters and attendees alike.

The profile of those wanting to invest in the sharemarket is changing. Increased numbers of women and those of a younger demographic are seeing the value of investment. A 2005 survey conducted by NZX showed that 11% of non shareholding Kiwis plan to begin investing in the next year. If just a quarter of these people stuck to this claim this would mean 100,000 or more new investors in New Zealand.

NZX is committed to growing New Zealand’s economy and recognises that science, biotech, information and industrial technology are important to the prosperity of New Zealand. The 25 companies that make up the NZX’s SciTech Index are:

Biotechnology

Understanding that we must invest to grow is one thing, but a barrier remains for many potential investors, and that is getting started, that first step.

A2 Corporation Limited, BLIS Technologies Limited, Botry-Zen Limited, Comvita Limited, Fisher & Paykel Healthcare Limited, Genesis R&D Corporation Limited, ICP Biotechnology Limited, Livestock Improvement Limited, Pacific Edge Biotechnology Limited, Wool Equities Limited.

Smartshares is the ideal introduction to the New Zealand and Australian share markets for new investors. They offer the opportunity to become comfortable with investing in the sharemarket in a low risk, diversified way, and building the asset gradually via the regular savings plan.

Information Technology Cadmus Technology Limited, Finzsoft Solutions Limited, Plus SMS Holdings Limited, Provenco Group Limited, Rakon Limited, Renaissance Corporation Limited, Software of Excellence International Limited, VTL Limited.

smartFONZ turns two smartFONZ was launched in December 2004. Each smartFONZ unit represents securities in the top 50 companies listed on the NZSX Market, including Auckland International Airport, Contact Energy, Fisher & Paykel Healthcare, Nuplex Industries and Pumpkin Patch. Annualised smartFONZ performance over the past two years is 12.83%*. Other funds in the Smartshares family are: smartTENZ – tracks the top 10 companies on the NZSX Market smartMIDZ – tracks the 40 companies in the NZX MidCap Index smartMOZY – tracks companies in the Australian S&P/ASX MidCap 50 Index smartOZZY – tracks the Australian S&P/ASX 20 Index.

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Smartshares offer diversification, performance, flexibility, transparency and low fees.

Industrial Technology Connexionz Limited, Mooring Systems Limited, Scott Technology Limited, Sealegs Corporation Limited, Wellington Drive Technologies Limited, Windflow Technology Limited, Glass Earth Limited.

The appetite for face to face access to these companies was strong, with over 250 investors registered to attend the Auckland event, and more than 180 in Christchurch. The majority of presenters and attendees enjoyed the format of

26

KIWIS SAVING: INVEST TO GROW

BEM;IJH?IA

More experienced investors can also use Smartshares as a passive core to their portfolio, adding individual stocks to broaden and further diversify that portfolio.

For more information, or to receive an Investment Statement, email: [email protected] call: 0800 80 87 80 or download at: www.smartshares.co.nz.

Presentations are available at http://www.nzx.com/nzxmarket/aug_seminars

*-Returns calculated on unit price movement assuming distributions reinvested on payment date, after tax, pre-management fee to end of Sep 2006.

For more information, please contact: Sara Velásquez Listed Products +64 4 496 2855.

DISCLAIMER: Units in Smartshares funds have been accepted for quotation by NZX and will be quoted upon completion of allotment procedures. However, the Special Division that regulates Smartshares Limited takes no responsibility for this offer. Neither NZX nor Smartshares Limited guarantee investments in Smartshares funds.

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MARKET UPDATE NEW ZEALAND EXCHANGE LIMITED

A new Electronic Communications Network partnership in Australia

On 11 September NZX signed a shareholders agreement with Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Bank and Merrill Lynch, incorporating a company to launch a new Australian Electronic Communications Network (ECN). NZX has a 50% stake in the new entity with Citigroup, CommSec, Goldman Sachs JBWere, Macquarie Bank and Merrill Lynch each holding 10%. Well-established in markets globally, ECNs are high-speed, low-cost platforms that separate listing from trading functions. The ECN, set to launch in mid 2007, will deliver a choice of platforms for market participants to report offmarket crossings. NZX has appointed Trayport, a leading supplier of electronic trading systems, to provide the technology for the ECN as well as its core equity and debt markets, following an extensive global tender process.

FundSource and NZX: Committed to strengthening New Zealand savings framework On 29 September NZX announced the acquisition of FundSource, an investment research company based in Auckland. FundSource provides fund managers and financial intermediaries with independent qualitative and quantitative research, runs an annual investment conference for financial advisors and fund managers, and recognises excellence in investment management with its annual industry awards. A number of structural changes proposed in relation to tax, financial intermediation and regulation will impact on how New Zealanders save and invest in future. In this context FundSource is well positioned to contribute to the expected growth in demand for independent, credible research. The acquisition of FundSource is consistent with NZX’s

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commitment to strengthening New Zealand’s savings framework – to make it easier for investors to become informed and confident and in control of their financial future. This year ING (NZ) was named FundSource Fund Manager of the Year. This is the 15th year the awards have acknowledged excellence in funds management capability amongst New Zealand-based funds managers.

New Zealand dairy sector unlocked, instalment warrants solid growth continues, Comvita moves to the main board Dairy Equity Limited Dairy Equity Limited listed on the NZSX market on 14 September. The establishment and listing of Dairy Equity Limited enables investors to acquire the beneficial ownership of fair value shares in Fonterra Co-operative Group Limited so they can gain exposure to the returns generated by our largest export sector and one of the world’s largest leading dairy exporters.

Barramundi Limited Barramundi Limited joined the NZSX Market on 26 October. Barramundi is an investment company managed by Fisher Funds Management, investing in Australian companies outside the Top 100 by market capitalisation. Fisher Funds Management also listed KingFish Limited in 2004, which invests in smaller companies listed on the NZSX and NZAX, amongst others.

announced as a finalist in the upcoming 2006 NZTE Exporter of the Year Awards – AgriTech, Life Sciences and Biotechnology category. Comvita was also awarded both the Westpac People’s Choice and the IAG TrailBlazer Award at the recent Westpac Sustainable Business Awards.

Instalment Warrants Warrants are primarily used by investors as a means of leveraging their portfolio. They enable investors to “lay-by” their shares by putting down an initial, partial payment, receiving entitlements (e.g., dividends) throughout the life cycle of the warrant, paying a final instalment on the maturity date. Warrants were unavailable to New Zealand investors as a portfolio leveraging tool until April 2005 when ABN Amro listed 15 warrants covering a wide range of some of New Zealand‘s most prominent listed companies. UBS Securities Limited listed a further two series of Telecom warrants, and ABN Amro listed a further seven series of warrants on 9 October, bringing the number of warrants on the New Zealand market to 37.

securities on 17 October.

New Swap Indices NZX, in association with Westpac Institutional Bank, launched a new set of debt indices, the NZX Swap Indices, on 26 July. They complement NZX’s other Debt Indices, including the NZX Government Bond Indices, NZX Corporate Bond Indices and NZX Bank Bill Indices. NZX Debt Indices are widely used by professional investors such as managed funds to benchmark the performance of fixed interest investments.

Glass Earth joins the NZX SciTech Index Glass Earth Limited listed on 13 October 2006, the first Overseas Listed Issuer on the NZAX Market. Shortly afterward NZX announced that Glass Earth would join the NZX SciTech Index, based on their use of cutting edge geo-science technologies to assist in the discovery of new mineral deposits. The NZX SciTech Index is up 16.7% year to date (since 31 December 2005).

Capital raised on the NZDX hits 2 billion for 2006 The NZDX Market has performed strongly this year with a record of over $2 billion of capital raised so far. Amongst the companies that have used the NZDX Market to fund their growth so far in 2006 are:

Comvita Limited

Generator Bonds Limited issued $121 million of Commodity Bonds on 14 September.

On 31 October, Comvita Limited moved from the NZAX to the NZSX Market.

ANZ National Bank Limited issued $350 of debt securities on 15 September.

Comvita, a Bay of Plenty-based company, was one of the first companies to list on the NZAX Market when it was established in 2003.

GPG Finance Plc issued $350 capital notes on 3 October. Sky Network Television Limited issued $200 million of debt

A member of the NZX SciTech Index, Comvita has been

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