KiwiSaver is now operating and, a little more than four months into the new scheme, there are over 225,000 accounts. This is clearly a vindication of the automatic enrolment in the scheme for new employees. The government is claiming a great success.
But if pension policy were merely a matter of number of accounts then life would be simple so what manner of success is KiwiSaver?
First, you must have some idea of what success means, and to whom.
Several pension commentators believe that KiwiSaver is an answer looking for a problem. The state pension scheme, New Zealand Superannuation, pays 65 per cent of the average wage to any citizen aged 65 plus. It has no means test or asset test and is the bedrock of retirement provision. It has been widely praised. Its great attraction is twofold. First, NZ Super ensures we have few genuinely impoverished old people. Second, because there is no means test, incentives remain – every dollar you save will make you better off in retirement.
But there was no tax incentive to save. This was the famous “level playing field”. Between 1985 and 2007, New Zealand had a long period of simplicity and stability in retirement savings legislation which has now gone.
Academics and economists consider KiwiSaver to be complicated and inefficient and far from a success, more an unfolding disaster.
A recent report by the NZ Institute for Economic Research assembled these arguments. Household savings are negative, down by almost 10 per cent. There may have been a shift to company savings – which spiked up since 1999 – but these have now fallen back to past levels.
They also believe savings may be made from the informal economy (which was estimated at between 7 and 11 per cent of GDP). Alongside this, government surpluses have risen sharply, so overall national savings levels are not poor.
These figures do not impress many individuals, who worry that they cannot trust future governments to spend surpluses on caring for them in retirement.
Ordinary people largely interpreted KiwiSaver as a limited form of tax relief from a government which has otherwise been a very effective revenue-gatherer and these people now have a shiny new KiwiSaver account, with a $1,000 (roughly £380) “kickstart” balance, and a regular contribution of 4 per cent of salary. Many accountholders would say, although we are only a few months in, that KiwiSaver is a modest success.
But only a modest one . Fuel prices and housing costs have risen recently and the account balance is barely equal to two weeks’ rent in most parts of Auckland.
From a product perspective, there is some hope that savers will benefit in the medium to long term, provided they stay the course. Typical managed fund products available before KiwiSaver were generally much more expensive. One bank provides a good example – its own medium-risk unit trust has total fees of nearly double the 0.73 per cent it charges typical KiwiSavers.
New Zealand’s Labour government hopes that KiwiSaver will be a vote-winner in 2008 – an election year. It has dedicated resources and publicity to it. It can also take heart that the scheme has not been the focus of attacks by the main opposition party. Their messages have been mixed, with cautious acceptance of the scheme, followed by vague promises to improve it rather than an outright commitment to scrap it.
But there is a feeling among some that by trying to tempt savings out from their various hiding places, the government has another agenda to get everyone saving in nice, safe, tax-advantaged accounts which are clearly visible to the Inland Revenue and then slap on a means test.
The current state system, NZ Super, has many supporters with a grand coalition from nationalist oldies to left-wing unionists. Their aggressive, pre-emptive, defence of NZ Super may be unfair on the government, which has stated it has no plans to apply any means test. Indeed, both major parties are signed up to main-taining the 65 at 65 formula.
Employers have been saddled with some administration. From April 1, 2008, they will be required to make a financial contribution where an employee has been enrolled and enrolment is automatic in most cases. The required contribution will rise over the next four years. Alongside this, they will have a tax credit for most employ-ees on lower salaries, this will exceed the required contributions for some time. There are few loud voices of complaint right now but the pain will increase.
Initially, it was thought that KiwiSaver would be a bonanza for fund managers and that financial advisers would be cut out entirely but so far neither that hope nor that fear has been entirely realised.
As tax credits were intro-duced, KiwiSaver became more complicated and a need for advisers has been created. But government pressure on keeping fees down means advice cannot be funded by commission taken from the product.
KiwiSaver’s automatic enrolment, with an optional opt-out, has led to the high number of new accounts and this is a good sign for fund managers but the costs of setting up new systems have been high in spite of the use of the Inland Revenue as collector of contributions.
Account balances will be modest for some time and if there are many requests for contribution holidays from savers, managers may have lots of very low-balance accounts to administer.
But KiwiSaver is here and only one thing looks certain – it will change. Our concern is that rather than the UK moving towards the simplicity of the New Zealand system, New Zealand is moving towards the complexity of the UK system.
Russell Hutchinson will be speaking at the ABI’s Saver Summit on December 6 2007. For more details and to book your place, visit www.abi.org.uk/saversummit2007.