New Zealand’s KiwiSaver
Why Has It Been So Successful?
by
Peter Neilson,
Chief Executive
Financial Services Council
Second National Summit on Pension Reform
Presentation to be delivered at 2.45 pm
9 October 2014
Allstream Centre
Toronto
Canada
New Zealand, Ireland and the UK: The Outliers
Amongst OECD countries only New Zealand Ireland and the UK combine low net replacement
rates compared to average incomes and rely on a Tier 1 basic old age pension with Tier 3 private
savings for a minority of employees.
Net replacement rate for average income earner
Source: OECD 2011
Net replacement rate for average income worker
120
NTH
GRE
HUN
ICE
100
LUX
TUR
AUT SLV
SPN
DEN
ISR
80
CZE
60
CAN
AU
NZ
POR
CHL
EST
KOR
US
BEL DEU
FRA ITY
NOR POL
SVK SWE
SWZ
JAP
40
UK
public schemes
IRE
MEX
private tier 2 scheme
20
Dot size proportional to replacement rates
for people on 1.5 times average income
public& private tier 2
scheme
0
-10
0
10
20
30
40
50
60
70
80
90
100
110
Percentage of retirement incomes from earnings related (tier 2) schemes
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The behavioural economic revolution has changed how we view
retirement savings issues which auto-enrolment is designed to
overcome.
Biases that Distort our Savings and Investing Behaviour
Basic problem
People find it difficult to
implement decisions to save.
Examples
People are tempted to spend when
they want to save.
People procrastinate even when
they know what needs to be done.
Outcome
Insufficient saving.
Regret
Attitudes to losses depend on
whether a person was
responsible for a decision.
People blame themselves for bad
outcomes.
People avoid risk when managing
their own money.
Poor investment choice.
Loss Aversion
Attitudes to risk depend on how
investments are framed.
People avoid risk if framed as a loss
to current consumption standards.
People create special accounts with
different reference points to
manage money.
Poor investment choice
Poor Judgment
People have biased estimates of
investment returns.
People over-rely on past history.
People rely on anecdotes, not
statistics.
People are misled by irrelevant
information
Incorrect calculation of
required saving.
Poor investment choice.
Self Control
Source: Andrew Coleman, MOTU Research
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The Success of KiwiSaver
• KiwiSaver has been described as the most successful savings
innovation over the last 100 years in New Zealand.
• KiwiSaver was the worlds first national auto-enrolment
programme for retirement savings.
• In 2006 the NZ Treasury forecast that 680,000 people would
have enrolled in KiwiSaver by 2013/2014.
• Currently 2.3m are enrolled in KiwiSaver out of 4.4m New
Zealanders and the numbers are still growing.
• Before the start of KiwiSaver on 1 July 2007 we had only about
250,000 people in registered superannuation schemes.
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The Success of KiwiSaver continued…
• At November 2013, 56.7% of all New Zealanders 18+ were enrolled.
Consisting of:
• 57.4% of women 18+ and 56.2% of men 18+
By Household Income
<
$20,000
$20,001
to
$30,000
$30,001
to
$50,000
$50,001
to
$70,000
$70,001
to
$100,000
$100,001
to
$150,000
$150,001
to
$200,000
>
$200,000
Don’t
know/
Prefer
not to
say
34.9%
53.9%
50.7%
63.4%
66.1%
56.8%
69.8%
64.7%
60.4%
• Prior to KiwiSaver only a minority were in Superannuation Schemes and
they were disproportionally male, employed in either the public sector or
the largest corporates and were from higher income households.
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How does KiwiSaver work?
Features
• KiwiSaver was introduced by the Government to provide a
simple way for New Zealanders to save for their retirement
through the workplace.
• Employees were initially auto-enrolled (with opt-out
mechanism) and whenever they changed or started jobs.
• Key incentives for individuals to join KiwiSaver are:
• A $1000 one off kick-start payment
• Annual tax credit (up to $521.43 pa, 50c for each dollar
you contribute up to $1042 pa)
• Employer contributions, 3% minimum or more voluntarily
• Access to funds for first home purchase (after 3 years of
saving)
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How does KiwiSaver work?
Features continued…
• Your KiwiSaver account stays with you – If you change jobs or leave the
workforce, your KiwiSaver account goes with you with the full balance (no
vesting).
• Contributions holiday - After being a KiwiSaver member for 12 months,
you can choose to take a break – called a contributions holiday. This can
last between three months and five years. You can still contribute
$1,042.86 each year in order to receive member tax credits of $521.43 p.a.
from the Government.
• Your contribution - If you are employed, you need to contribute at least
3% of your gross (pre-tax) salary or wages that you earn at that job – this is
deducted from your net (after tax) pay. The employer is obliged to match
the KiwiSaver’s contributions up to 3%.
If you are self employed or a non-worker, you can decide how much you
contribute to KiwiSaver.
• Pick your own provider and investment style – you can pick from a wide
range of providers and investment styles available or default into a
conservative option with a default provider.
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How does KiwiSaver work?
Benefits of KiwiSaver
• You can elect to contribute either 3%, 4%, or 8% of your gross salary, with
3% being the minimum from your pay. If you are not employed you can
contribute directly to your KiwiSaver account.
• Employer contributions at dollar for dollar up to 3% of your gross salary.
This is paid by employers to the KiwiSaver’s account without coming off
your salary. The employer obligation is to match the employee
contributions at the minimum level only. No employer contributions are
payable during a contributions holiday.
• Investment returns on all the accumulated contributions (government,
employer and your own) belong to you individually and are accessed at
age 65.
• KiwiSaver schemes must have a Trustee licensed under the Securities
Trustees and Statutory Supervisors Act 2011 to look after the benefits and
safeguard the interests of members.
• There is no Government guarantee on KiwiSaver accounts.
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How does KiwiSaver work?
Default arrangement
• New employees not already in a KiwiSaver scheme are automatically
enrolled but may opt-out within 55 days of starting that employment
• Those who don’t take an active step to pick a provider or an investment
style are allocated to one of 9 default providers and put into a
conservative fund (only 15-25% in growth assets).
Changing Providers
• Members wanting to change providers can arrange this with a telephone
call or online and then the completion of a form.
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Why was KiwiSaver so successful?
Convenience
•
Auto-enrolment made it easy and convenient for middle and lower income employees
to join and save because they didn’t need to make choices and their money was saved
before it could be spent.
Inertia
•
Inertia makes it very easy to stay in and keep saving even if you are not very engaged.
Ease of Compliance for existing Superannuation Schemes
•
It was very easy for existing Superannuation Schemes to become complying KiwiSaver
schemes and enjoy the same benefits.
Individual accounts
•
Having individual accounts managed by banks and insurance companies gave people
confidence that it was their money and not controlled by the Government and that
contributions were not just another form of income tax.
Easy for the employer
•
Using an individual’s tax number and the Inland Revenue’s tax collection system made
it convenient for employers and in particular smaller employers saved costs and
avoided the creation of multiple accounts.
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Why was KiwiSaver so successful? continued…
Access for first home deposits
• Being able to use KiwiSaver savings for a first home deposit made it attractive for
many younger people who saw saving for a home deposit as their first saving
priority.
Flexibility
• The option of switching providers or investment styles, taking a contribution
holiday and the initial opt out provision meant most people did not think they
were being taken where they did not want to be.
“Free Money”
• The $1000 kick start payment, the matching $1042pa tax credit (now reduced to
$521pa) and the matching 3% contribution from employers were seen as
attractive, even for people who were ideologically opposed to KiwiSaver.
Confidence
• The simplicity of the Scheme, the Government sponsorship and education
campaigns by the Retirement Commissioner gave confidence to those people who
knew they needed to save but were paralysed by indecision.
The KiwiSaver programme managed to provide a compelling value proposition for
young and old, rich and poor, men and women as well as employers, so it became easy
and acceptable to do the right thing. For most people it was a “no brainer”.
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Knowing what we know now what should we have done
differently?
•
The incentives could have been better targetted. 8% of KiwiSavers only put in
enough savings to maximise the incentives and they are typically those who can
afford to save anyway. Incentives at the levels provided did not totally overcome
affordability issues for the poorest households in employment.
•
The “anchoring” problem means that those less engaged stay where they were
initially placed whether or not it is appropriate given their long term interest.
•
About one third of KiwiSavers default into a 3% + 3% option which on current
policy settings will not fund a comfortable retirement (a retirement income at
70-80% of the average wage).
•
It probably would have been better to have had an option to start at a 1%
contribution rate and annually step up contributions over time to reach 10%,
5% from you and your employer).
•
The default investment style should have been growth or balanced rather
than conservative including a capital guarantee fee funded by the default
KiwiSaver member.
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Knowing what we know now what should we have done
differently? Continued…
• Inertia works well both positively and negatively. You can take a 5 year
contribution holiday if you wish and recently one of our members looked
at the typical contribution holiday and found out it was around 4.3 years
which can be very costly in terms of the final nest egg. A 5 year
contribution holiday is probably too long.
• As the prime purpose of KiwiSaver is for retirement savings the rules on
pre-retirement withdrawals other than in the case of death, permanent
migration or extreme hardship are not able to accommodate a situation of
extended illness preventing employment. Bundling a base level of life and
income protection insurance would have prevented this problem.
• Unlike most developed countries, superannuation funds in New Zealand
are tax disadvantaged relative to other forms of retirement savings in
particular compared with investment in rental property.
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Knowing what we know now what should we have done
differently? Continued…
•
Affordability has prevented some lower income New Zealanders from
enrolling in KiwiSaver or getting the full value of the incentives. An option to
start at 1% contributions matched by the employer and growing each year till
they reached a combined 10% contribution rate may have enabled many more
lower income employees to join and stay in KiwiSaver and achieve a
comfortable retirement.
•
Gender equality. If men have higher incomes than women, women live longer
on average than men and spend more time out of the work force on family
duties, then they are likely to have lower nest eggs at retirement and lower
pensions. It would be possible to have a top up guarantee that was mildly
redistributive for those who had contributed for 30 years or more but had not
quite saved enough to reach a certain level of income in retirement.
•
Annuities and decumulation. We have not resolved the issues about whether
there should be any obligation to take some of the KiwiSaver nest egg and turn
it into an additional pension. While it is early days for most KiwiSavers this is
an issue that we are still to resolve.
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