KiwiSaver turns two

New Zealand’s KiwiSaver scheme turns two on 1 July.According to its supporters it has been wildly successful; the numbersenrolling have certainly exceeded original estimates. I’ll look at how realthat success has been shortly and also how the scheme might evolve over thelonger-term, but firstly let’s look at some of the features of the scheme thatmake it mildly revolutionary.

While the automatic enrolment (opt-out rather than opt-in) featurehas attracted international attention, the most revolutionary aspect of thescheme is probably the use of the IRD as the clearing house for mostcontributions. Some saw the IRD’s involvement as potentially disastrous giventhe complexity of the funds flows from employers, employees, the government,and between schemes as transfers occurred. And at times some providers mighthave agreed with that assessment.

When Australia brought in its compulsory SuperannuationGuarantee scheme in 1992 it left it to providers to work out their own paymentclearing 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 forKiwiSaver.

The ability of KiwiSaver members to choose their own schemeand to transfer between schemes is also a bit novel. Traditionally, work-basedsavings schemes gave employees little scope to choose. Choice is a powerful andessential part of driving improvements in markets. And heaven knows the NewZealand savings industry is overdue an upgrade or two given we came dead lastout of 16 countries in a recent Morningstar survey of funds managementindustries around the developed world.

Although the art of making fees complex and confusing sothat people can’t easily compare them is alive and well in the KiwiSavermarket, fees charged by providers are generally lower than for traditionalretail funds management and unit trust products. So a tick here, but still plentyof scope for making fees simpler and more easily comparable.

Now let’s examine the so-called success of KiwiSaver. Yesthe numbers are well ahead of what most anticipated when the KiwiSaver Act wasfirst passed. But just before the scheme was launched Labour decided that itneeded pepping up. Dr Cullen put KiwiSaver on steroids, and surprise, surpriseit took off like a rocket. It’s a no brainer for those looking to save fortheir 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 evidenceyet that it has led to an increase in savings. While there’s a host of newpressures on households to save as the recession plays out, what little we cantell from the net funds flow into the retail managed funds market since June2007 points to a decline in funds under management. The funds flow data showsthat Kiwis are changing where they save – no great surprise there, it wasalways going to be KiwiSaver’s major impact.

KiwiSaver will grow in importance. As Joe and Jill saver seetheir accounts climb above $10,000 they will want to be kept informed aboutwhat’s happening to their savings – where they are invested, what returns themanager is achieving, and so on. As account balances grow Kiwis will be driven totake more care of their savings – raise their investment knowledge and possiblytheir acumen.

So where to from here for KiwiSaver? National made thescheme less generous, mainly by removing the employer tax credit, capping thecompulsory employer contribution and the tax deductibility of that contributionat 2%, and removing the annual $40 fee subsidy. The government will still matchmember contributions up to $1,042 every year. In other words, tax payers will stillbe 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 ofeligibility for NZ Super.

My bet is that a future government will allow people to accesstheir KiwiSaver accounts early – withdraw up to say 30% of their account balanceat age 60, and maybe another 40% at age 65 and the remainder at the age ofeligibility for NZ Super. After all KiwiSaver is a retirement savings plan nota safety net like NZ Super.

Another area a future government might look at is restrictingthe $1,000 kick-start to those over 18, or who are in full time employment. Itwould delay some KiwiSaver costs for the government. More importantly it mightreduce the number of KiwiSaver accounts paying relatively high fees – fixedmonthly fees on small account balances really chew into returns.

The government could take over the processing of financialhardship, serious illness and death claims by KiwiSaver members. There shouldbe some productivity gains to be had for either the government or members, andthere 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 foreveryone; it would mean increased fiscal costs (unless subsidies arewithdrawn); compulsion would probably reduce the incentive for individuals totake responsibility for their own savings.

KiwiSaver is here to stay but that doesn’t mean the schemeis set in concrete. It’s unlikely to solve the country’s savings problem but ifit encourages people to take more interest in what’s happening to their savingsit might lift our abysmal investment record.

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