Kiwisaver account fees

I complained a while back that the information from my Kiwisaver provider was opaque. The results — whether the annual report or my personal statement — didn’t actually tell me the critical number: what was my return? If I want to compare Kiwisaver with, say, a five-year bond ladder, I need to know what the percentage return on my money was. That information would allow me to make decisions at the margin about whether to put more money in Kiwisaver or in some other investment.

My provider, when asked, did provide a *.pdf of all the transactions in my account. All I needed to do is get the data into a spreadsheet (really?! a pdf?) and then do some analysis. At the time, I had other things to do, and then the data got old, and, and. So I never did it.

The latest annual report (2012) had some interesting figures that give an indication. In a table on page 9, we learn that total income of the scheme was $16m, on assets of somewhere between $150m (starting balance) and $191m (ending balance). That’s an average return of about 9.5%.

The management and administration fees, however, don’t appear on that page. They appear on page 4, not in a table but in the text. Total fees were $1.6m. That is, roughly 10% of account earnings went to paying the fees of the scheme.

On the one hand, this is a problem. Making a good return on investments is hard. I looked at the research 10 to 15 years ago, and I don’t imagine much has changed. Most schemes perform worse than the benchmark indices. Schemes that do well in one or two years revert to the mean. The critical thing is to control the things you can control, and one of the top things is account fees. If 10% of earnings are going to pay the managers (and more in bad years), that’s a big lump of money that isn’t staying in your account, compounding the years away.

On the other hand, I have some sympathy for the Kiwisaver schemes. Revenue of $1.6m actually won’t buy you all that much management. There are thousands of members and thousands of transactions to administer, and then there is all the work trying to manage the investments. Scale and systems are required, and I’m not sure we have achieved that.

In the end, what makes Kiwisaver work for investors is the government contribution. It represents in part a transfer to the investments firms, sure, but at least I get a piece of it. Without it, I would probably be better off paying down our mortgage. Not that I can tell for certain, since they won’t tell me what my return really is.

Manufacturing the market we want

A lot of economic theory is about markets. We then add government in as something that moves the market away from equilibrium. Subsidies, taxes, quotas, regulations, etc. — these are all ways in which government moves the market away from our assumption of what have happened otherwise. We never observe the counterfactual. We end up working backward from what we observe to what we think might have been.

And then we get situations like the affair with Rio Tinto/Meridian/Mighty River. The basic story is:

• the Government is trying to sell part of Mighty River as the first of its State Owned Enterprises sell-offs
• the sagging market for aluminium and high New Zealand dollar has led Rio Tinto to put pressure on Meridian to sweeten the deal around electricity prices
• Meridian doesn’t want to give the shop away, and is resisting Rio Tinto’s negotiating tactics
• the Government is concerned that lack of a deal will drop electricity prices, which would affect the market value of Mighty River shares.

I think I’ve got the story right, although I might not, so please feel free to set me straight in the comments.

The core problem for an economic analysis is that there isn’t really a market operating. The Government intervenes on the supply side of the electricity market through the SOEs. The Rio Tinto smelter as well as all the country’s households and other businesses make up the demand side. Now, the Government wants to step into the demand side to prop up demand from the smelter, rather than letting the two companies negotiate an agreement.

The intervention will be artificially inflating electricity demand above the level expected, given world prices and the exchange rate. This extra demand will boost consumer prices (and will cause more use of coal- and gas-fired plants, leading to more GHG emissions). That is, consumers will be paying a hidden transfer to Rio Tinto via power prices.

On the other hand, inflated demand will allow the Government to receive higher prices for the Mighty River share float, and then also for the planned Meridian float. That’s good for taxpayers and the public finances, but it’s bad for investors (and electricity consumers). Of course, an individual might be a taxpayer, investor and consumer all at once — are they better off?

The other worrying thing is that the Government intervention looks very much like ‘channel stuffing’. This is a business practice of artificially (and temporarily) increasing the sales figures in order to make the business look better than it really is. In this case (follow the bouncing ball), the Government would borrow money to raise Meridian’s sales figures to inflate the value of Mighty River to raise the value of the share float to pay off the borrowing.

This doesn’t require a market analysis; it needs a Rube Goldberg diagram.

Dear Mr Staples:

I have been following with interest the recent news regarding an email you received. Yesterday, I received my own email from EQC — delivered to the correct address — to the effect that you were demanding full payment from EQC in return for building services rendered. In return, you have pledged not to pursue your interest in a certain spreadsheet any further.

It occurred to me that you might have access to information that I would find valuable and useful. I have had several assessors come through my house, making comments and jotting down notes. However, no one has given me a complete record of the work to be done and the estimated costs. Now that I have opted out of the Fletcher programme — due to their complete inflexibility — I am being asked to buy a ‘pig in a poke’: an unspecified repair job to an unknown value. It would be very nice to know something about said pig.

It also occurred to me that you are having trouble with the authorities. EQC has now laid a police complaint. The situation described in the email that I received from EQC did sound a bit like blackmail: ‘Do as I say and I won’t show anyone this little spreadsheet.’ (Wasn’t that the plot of a Tom Cruise film?) But then, certain allegations made about you earlier in the week sounded a lot like libel, so I fear my understanding of legal nuances is not equal to the situation.

I would suggest that we may have what economists call a double coincidence of wants. I would like to propose a possible arrangement between us. If you could see fit to send me just one row of a certain spreadsheet — I can advise you the row — I would happily contribute to any legal defence fund that may be required to extract you from the current difficulties. At a pro-rata amount of $100 per household affected, your fund could be over $8 million. From my perspective, it would be money well spent.

Yours sincerely,

Asymmetric information, EQC edition

It turns out that EQC knows exactly what it’s doing. It knows exactly what damage has been done to our properties, what the engineers’ assessments are, and a whole lot more. And all the data is available in a handy spreadsheet. You and I just don’t get to see it.

Information is power. In this case, power over people’s house and lives.

Three thoughts:

• This is the problem with the public agency insurance model. Is it an insurance company? Is it a government department? It’s neither and both. They are screwing down the claims as much as they can, like a private company, but they get to set their own rules, like a government department. And us, the consumers/citizens? High and dry, baby.
• One of the clients of the man who incorrectly received the spreadsheet, Bryan Staples, was paid only $30,000 when EQC knew there was $55,000 to $59,000 of damage. How is a homeowner, a non-expert in building matters, supposed to know how much damage has been done and what it’s worth? EQC is using its expert information, rather than dealing with claimants in an honest and open manner. Last year, another state-owned insurer, ACC, had bonuses for cutting people off. That is, bureaucrats were paid to screw down claims. Is this happening in Christchurch?
• I’m not so concerned about fraud — I think Eric Crampton’s right about that. I’m more angry that EQC has produced a handy guide that only insiders get to see. An enterprising individual could go around the city with inside knowledge of houses and assessments and figure out which houses are underpriced and overpriced. Or, some variation on the ‘nice little house, shame about the earthquake damage’ could push prices down artificially.

The story isn’t about someone accidentally sending the wrong email. The story is the spreadsheet and the secrecy. And the damage being done to the people of Christchurch.

Shocked, shocked! that there is fraud here

So the Right Honourable Winston Peters is alleging widespread fraud in Christchurch, and challenged the Rt Hon Gerry Brownlee to come clean about what he knows. The Serious Fraud Office has already said that they stymied fraudsters last year, saving the country millions of dollars (tens of? hundreds of?).

Fraud was always going to happen. It happens at the best of times — employees walking off with money, false invoices, work not done, etc. Recovery after an earthquake is not the best of times, so the potential was higher than baseline.

And, of course, there’s all that money. As Willie Sutton may or may not have pointed out, you rob banks because ‘that’s where the money is’. Same principle applies to Christchurch.

There are essentially two ways to combat aberrant behaviour: social pressure and good contracts. A high level of trust and goodwill — social capital, if you will, although I know it’s a contested term — and people will tend to behave as they should. Not everyone, not all the time, but it’ll get you most of the way there.

Good contracts can substitute. Well-defined goods and services, clear provisions for variations or re-negotiation, good measurement and monitoring processes, and you’re away.

But here’s the thing: earthquake recovery is exactly the sort of situation in which good contracts are hard to write. As we’ve found out, it isn’t as simple as ‘return the house to its pre-quake condition’. Which cracks do you fix? What’s the tolerance for a sloping floor or a wall out of plumb? What quality of finish and materials is specified? The permutations are endless.

What to do? Well, you can try to make better contracts. That takes time for negotiation, which is time you aren’t spending on the rebuild. You can have looser contracts but stricter monitoring and enforcement. This could work if you can specify what the results should be — which could be easier than being precise about a process. Or you could try to rely on social capital, but that capital is going to be diluted by all the new people coming in to help the rebuild. Any time and effort you spend on fraud controls, though, take away from the actual rebuild.

All of that means that the control processes won’t be perfect. There will be fraud. Get used to it.

But…the cost of dealing with fraud can be shared out in different ways. There are different costs: money, time, effort, anxiety. The EQC and Cera have, as bureaucracies do, privileged process over people. They have focused on screwing down the process to make fraud difficult, but that makes it harder for honest people, too. To save money, they have increased the cost in time and anxiety for Christchurch people.

Think of it another way: type I and type II errors. The rebuild is focused on type I, false positives. They want to make sure that all rebuild work is exactly as it should be, to reduce the incidence of paying for stuff that didn’t happen. But the two types of errors are inversely related. When you focus on the type I, you increase the incidence of type II, false negatives. You increase the amount of time chasing down fraud that isn’t there.

Oh, and incidentally, you burn through what social capital you have. As a result, you increase your need for strict processes and contracts. It’s a vicious spiral.

Of course there’s fraud in Christchurch. But the solution isn’t to treat everyone like a crook. That’s just imposing more costs on the people of Christchurch to avoid a little embarrassment in Parliament.

Fat taxes — what’s the goal?

Andrew Dickson (othersideofweightloss) was emailing me about fat taxes and I realised I didn’t have a well thought-out opinion on them. Let me start by asking, what are we trying to accomplish?

User pays — This is the point of the tax on fat people that Gareth Morgan Investments suggested in 2005:

Government could publish a range of tolerance for body mass index and those who fall within that over the year (certified say six monthly, bit like a VIC for a car), would qualify for a lower rate of personal tax (higher rate of benefit).

The idea is that fat people make themselves fat, and their fatness costs the public health system money, which is contrary to user-pays, so we need a fat tax to correct this.

If we accept this idea — fat is like cigarettes and alcohol, two products for which we already have a cost recovery scheme — then we need to keep going. First, we need to understand the full lifecycle healthcare costs of fat people compared to other groups, a point that Eric Crampton also makes. The comparison with smoking and alcohol is instructive: dying early is not necessarily a drain on the healthcare system.

Secondly, user-pays cuts both ways. We are told that fat people are fat because they aren’t active enough. Therefore, they aren’t using a whole bunch of services that the skinny, fit people use. So, yes, we could charge more for their use of health services, but they also get a rebate for the things they don’t use: backcountry huts, footpaths, etc.

Cost to society — This is more than just the strict healthcare costs. Jim Mann, Professor in Human Nutrition and Medicine, wrote a 2004 piece for Diabetes New Zealand on How a Fat Tax Can Help Fight Obesity.

debilitating illness and premature death linked to obesity also cause losses to society in the form of lost economic contributions from those who are forced to curtail work or retire early, or die while still in the work force, as well as lost contributions that many retirees make as community leaders and volunteers….

Note that Mann isn’t talking about helping people get the best for themselves, to ‘nudge’ them into behaviours that will bring them higher longer-term welfare. No, Mann is specifically looking at it from the perspective of society, of what the group loses when an individual cannot participate. Because the group loses, it must change the individual’s behaviour. The logical next step is fining people for shirking and jailing them for laziness — where does it stop? And is fat a leading cause of not contributing? I’d have thought that being selfish was far higher on the list, and no one seems to be proposing a fine for that.

Improving individuals’ choices — This options sounds noble — we’re just helping people do what’s best for them. The immediate problem is defining the ‘what’s best’. Economists generally use a neat trick. They assume that what the individual chooses to do is optimal for them. Now, let’s be clear, it is just an assumption, and Joan Robinson showed the circular logic therein. But, what else are you going to assume? There are only two other choices: someone other than the individual (you, perhaps?) have a better sense of what’s best, or that time-inconsistency of preferences means that the individual at some other point in time would have chosen differently for the present.

Improving choices comes down to two things: improving information and/or overcoming time-inconsistent preferences. Given all the information shoved down our throats for decades (gratuitous foie gras reference), I find it difficult to believe that lack of it is causing 1 in 4 adults to be obese. It’s pretty simple — veggies and fruits >> fried stuff. The time-inconsistent preferences angle is more plausible and interesting. But again, given all the existing ways that people can motivate themselves to be less fat, how much more can people in the present be disciplined by their future selves?

So, why fat taxes? The explanations offered don’t really stack up. We have to look someplace other than economics to understand the motivations. Take your pick of explanations — Foucault and Lacan immediately come to mind — but that’s a topic for another day.

A new leader

We had news this week that a group of senior people selected a new leader, someone who could help New Zealand address some of its thorny issues.

No, silly, not Francis (although, since you raised him, why have we gone from God’s Rottweiler to one of God’s Marines? What happened to the Good Shepherd?).

Callaghan Innovation, formed from the old Crown Research Institute IRL, announced the appointment of their first CEO, Mary Quin. They are touting her experience at technology companies in the US and experience at a management firm in Alaska.

She has a difficult job ahead of her, so here’s some free advice. The presser focused on her international connections and their potential for improving New Zealand’s links overseas. Sure, that’s a concern, but the job’s much bigger than that. Here’s how it breaks down to me:

• The company – the conversion to Callaghan has been a change, and that requires management. Although IRL is one of the more industry-focused CRIs, in general CRI scientists sit somewhere between university researchers and corporate scientists. They aren’t there for the big bucks, and they aren’t necessarily focused on solving somebody else’s problems (which are notoriously difficult to see). This is a well-known issue with CRIs (see this note from 1997), but at the same time the signals from their shareholder (the Ministry) change with fads and governments while some of their staff have been around since the DSIR days. Quin will need to figure out how to get the culture she needs, but starting with the culture they’ve got.
• The science system – they were always going to choose someone from off shore (the search company was Australian, which set the tone). The difficulty is that the New Zealand science system is run as much by personalities as by policy. Things happen because someone wants them to happen. I’m not making a value judgement here, by the way — it’s a fact of living and working in a small country that there are two degrees of separation and sometimes one degree of freedom. In addition, there are lots of moving parts to the system. Sorting out the who-what-where-why will take time and a deft touch. Quin will need to play those relationships right.
• Industry – this is clearly the area where Callaghan hopes Quin will shine. Some CRIs have excellent relationships with their industries, and they work cooperatively to direct the science in ways that support the industry. IRL was more fragmented than some of the others, and doesn’t have the same strong industry bodies that agriculture has. But, the plan is that the fragmented high-tech and manufacturing sector can learn to work well with Callaghan. That’s going to take a lot of jaw-jawing and some obvious successes to show the way. Quin will need to get out there and talk with the companies where the Ministry sees promise, and then produce something of value within a year or two.
• Overseas – meh. I’m not convinced that the mythical land of milk and honey called ‘Overseas’ is all that important to this job. Yes, we do sell our knowledge and science overseas. For example, IRL’s Richard Furneaux has well-publicised international collaboration with a US group. But all that does — if and when it works — is provide a few jobs for our scientists. What we really need is science that supports our other sectors — ICT, manufacturing, medtech, etc. — so that those companies can take care of the overseas part of the equation. Put another way, Callaghan Innovation shouldn’t be doing NZTE’s job. Quin will need to figure out where ‘overseas’ fits in the business plan to deliver the economic growth that the Ministry envisions.

I wish her luck. It will be interesting, if nothing else. Let’s hope it’s successful, too.

The big dry

We’re in a drought. Pastures are drying out, stock are stressed, and Wellington now has water restrictions (very mild water restrictions, it must be said).

The costs are being toted up. The figures being tossed around are in the $1 to $2 billion range (0.5% to 1.0% of GDP, roughly), which compares to agriculture being ~10% of GDP. If it hits lambing or breeding stock, the impacts could go on past this season. Given the weak economic recovery, there are concerns about moving back into recession.

The drought is, of course, a lack of water. But really, it’s a lack of insurance. By insurance, I mean information and infrastructure that protect us from downside risk. There isn’t enough of that around water in New Zealand, and no wonder. We haven’t needed it. But this year we do, and climate change is expected to increase the variability of weather and make ‘insurance’ more important.

Just for example…

You may remember that December was wet, so the hydro dams were spilling water over the Christmas break. If not, the great memory machine can help out. Lake Ohau, Lake Pukaki, Aviemore, Waitaki, Benmore, Tekapo, Roxburgh – all were spilling water. My wife — South Island born and bred — said that was a bad sign, that they’d be telling us to conserve power in the autumn as a result. Well, it’s not quite at that level, but it’s getting there.

One thing clearly missing was better information. The current drought is unusual:

The February rainfall into Lake Te Anau in the South Island was the lowest since records began 80 years ago, Meridian Energy said yesterday….

Going from full at the start of January to the 1992 level in March had never happened before, [Leyland] said.

The past wasn’t going to be a good guide to the future. If we can figure out better models of weather, precipitation, power generation, power usage, etc., then we can have better control over the lake levels. That’s going to cost money to figure out, but it’s like buying an insurance policy.

Another kind of insurance is increased storage. The country as a whole is not short of water. It is just in inconvenient places at inconvenient times. Storage and distribution can overcome those problems — it’s like money in the bank or an insurance policy against drought. As or if the variability of rainfall increase(s), the value of that insurance policy also increases.

There’s also the consumption side. Because we aren’t used to extended dry periods, we aren’t that efficient with water.We could be, though, and that’s something else we should figure out. Unfortunately, the consumption needs to be supply-sensitive. That is, we should reduce our consumption in dry years but correspondingly increase it in wet years when we can. That kind of flexibility will have a cost to it, just like buying insurance.

And, it really, really suggests we need some kind of rationing mechanism for water, so that people are using more or less of it depending on how much is around. Prices are economists’ first choice for rationing, because they allow people to make individual decisions about how much that water is worth to them.

We aren’t the only people to face uncertainty around water. We’re lucky — we tend to have lots of it. We just need to work out how to manage the variability. Other places — Australia, California, Israel — have to make do with less. That means we don’t even need to be particularly clever; we just need to learn from them. Think of it as importing insurance.

Priorities — the post-mortem edition

Having studied Latin America, I know that its politics and economics are complicated. Having grown up in the US and paid attention to its history and politics, I also know that its relationship to Latin America is complex and far from altruistic.

Hugo Chavez has died, so the post-mortem analyses of his administration are rolling in. I don’t know enough to have a firm opinion on Chavez, but I do know enough to be very wary of anything the Anglo media says. Put simply, they are unlikely to have the interests of Venezuelans at heart. (If you don’t believe me, look up ‘Salvador Allende’.)

And so, a post from the left-wing US media watchdog group FAIR (h/t Yann) was a welcome reminder of the different sets of priorities and how they colour our views of the world:

That’s right: Chavez squandered his nation’s oil money on healthcare, education and nutrition when he could have been building the world’s tallest building or his own branch of the Louvre. What kind of monster has priorities like that?

Once again, it’s all about the objective function.

Onions — a data point on exports

I’ve been looking at horticultural crops and their export opportunities. It can be a fickle business. You work hard to develop a specific market, and overnight the rules can change or a new competitor comes in. Tastes and preferences are different around the world and change over time, so fruit varieties that sell well this year in Europe might not be suitable in five years or in Asian countries.

Horticulture in New Zealand is an export industry. Wine, onions, potatoes, apples, cherries, etc. — they sell some on the domestic market but lots overseas. Mainly, we aren’t big players on international markets — not like dairy — so there is lots of room to grab niche markets but also the danger of being squashed.

Being an export industry, horticulture is affected by the exchange rate. I was looking at onion exports and thought they looked a bit like the inverse of the exchange rate. Here’s the graph:

The correlation coefficient between the two series is -0.54, which is reasonably strong. Yes correlation is not causation and no I haven’t run any statistical tests and yes it’s a short data series. But, at first blush it does suggest that the high exchange rate is hindering this export industry.

As the title suggests, I’m just offering this as a data point. When we talk about the impacts of exchange rates and the OCR and Auckland housing and manufacturing, this is the sort of thing going on out there in the economy.