KiwiSaver turns two
New Zealand’s KiwiSaver scheme turns two on 1 July. According to its supporters it has been wildly successful; the numbers enrolling have certainly exceeded original estimates. I’ll look at how real that success has been shortly and also how the scheme might evolve over the longer-term, but firstly let’s look at some of the features of the scheme that make it mildly revolutionary.
While the automatic enrolment (opt-out rather than opt-in) feature has attracted international attention, the most revolutionary aspect of the scheme is probably the use of the IRD as the clearing house for most contributions. Some saw the IRD’s involvement as potentially disastrous given the complexity of the funds flows from employers, employees, the government, and between schemes as transfers occurred. And at times some providers might have agreed with that assessment.
When Australia brought in its compulsory Superannuation Guarantee scheme in 1992 it left it to providers to work out their own payment clearing system and some thought New Zealand was mad to rely on the IRD. But, they probably look with envy at how well the payments system now works for KiwiSaver.
The ability of KiwiSaver members to choose their own scheme and to transfer between schemes is also a bit novel. Traditionally, work-based savings schemes gave employees little scope to choose. Choice is a powerful and essential part of driving improvements in markets. And heaven knows the New Zealand savings industry is overdue an upgrade or two given we came dead last out of 16 countries in a recent Morningstar survey of funds management industries around the developed world.
Although the art of making fees complex and confusing so that people can’t easily compare them is alive and well in the KiwiSaver market, fees charged by providers are generally lower than for traditional retail funds management and unit trust products. So a tick here, but still plenty of scope for making fees simpler and more easily comparable.
Now let’s examine the so-called success of KiwiSaver. Yes the numbers are well ahead of what most anticipated when the KiwiSaver Act was first passed. But just before the scheme was launched Labour decided that it needed pepping up. Dr Cullen put KiwiSaver on steroids, and surprise, surprise it took off like a rocket. It’s a no brainer for those looking to save for their retirement. The government has contributed around 45% of the more than $3bn that has been poured into KiwiSaver accounts since July 2007.
But even with that sort of largesse there’s no clear evidence yet that it has led to an increase in savings. While there’s a host of new pressures on households to save as the recession plays out, what little we can tell from the net funds flow into the retail managed funds market since June 2007 points to a decline in funds under management. The funds flow data shows that Kiwis are changing where they save – no great surprise there, it was always going to be KiwiSaver’s major impact.
KiwiSaver will grow in importance. As Joe and Jill saver see their accounts climb above $10,000 they will want to be kept informed about what’s happening to their savings – where they are invested, what returns the manager is achieving, and so on. As account balances grow Kiwis will be driven to take more care of their savings – raise their investment knowledge and possibly their acumen.
So where to from here for KiwiSaver? National made the scheme less generous, mainly by removing the employer tax credit, capping the compulsory employer contribution and the tax deductibility of that contribution at 2%, and removing the annual $40 fee subsidy. The government will still match member contributions up to $1,042 every year. In other words, tax payers will still be paying more than $1bn a year subsidising Kiwis to save.
National’s decision to suspend contributions to the CullenFund reignited the debate over raising the age of entitlement to New Zealand Super. That has implications for KiwiSaver – the exit date is tied to the age of eligibility for NZ Super.
My bet is that a future government will allow people to access their KiwiSaver accounts early – withdraw up to say 30% of their account balance at age 60, and maybe another 40% at age 65 and the remainder at the age of eligibility for NZ Super. After all KiwiSaver is a retirement savings plan not a safety net like NZ Super.
Another area a future government might look at is restricting the $1,000 kick-start to those over 18, or who are in full time employment. It would delay some KiwiSaver costs for the government. More importantly it might reduce the number of KiwiSaver accounts paying relatively high fees – fixed monthly fees on small account balances really chew into returns.
The government could take over the processing of financial hardship, serious illness and death claims by KiwiSaver members. There should be some productivity gains to be had for either the government or members, and there would also be greater consistency of treatment.
How about making it compulsory? Not a great idea in my view given: there are no guarantees; KiwiSaver is not the best place or way to save for everyone; it would mean increased fiscal costs (unless subsidies are withdrawn); compulsion would probably reduce the incentive for individuals to take responsibility for their own savings.
KiwiSaver is here to stay but that doesn’t mean the scheme is set in concrete. It’s unlikely to solve the country’s savings problem but if it encourages people to take more interest in what’s happening to their savings it might lift our abysmal investment record.