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Simply super

Sonia Speedy starts off a series on pensions around the world with a look at her native New Zealand

The one word on everyone’s lips when it comes to the New Zealand state pension system is simplicity.

Unlike the UK’s complex maze, often coming under attack for its inequalities, the NZ system is a breath of fresh air, encompassing many of the features being demanded by groups lobbying for UK pension reform.

As a citizen’s pension, the NZ system, known as superannuation or “super”, provides a set benefit on three levels – single, sharing accommodation; single, living alone; and married, with all indexed to national average earnings.

Super is paid to every eligible New Zealander aged over 65, regardless of their income or assets. Married couples get 65 per cent of the national average wage with each of the couple being entitled to half. Singles get around 45 per cent of the national average wage.

Eligibility hinges on how long the individual has been resident in NZ, with the requirement being that you must have lived inthe country for at least 10 years since age 20, with five years’ residence since the age of 50.

Current super rates after tax are around $NZ13,302, (5,282) a year for a single person living alone, $NZ 12,279 (4,876) for single sharing and for a couple, around $NZ 20,465, (8,127).

There are only two supplements available from the Government on top of this – an accommodation supplement and one for those with disabilities.

The other significant feature of the system is that while the Government provides a “livable” wage, the rest is up to the individual. There are currently no Government incentives for workplace or private pension schemes.

But the Government is making a foray back into the territory of workplace pensions with the creation of a new KiwiSaver scheme, which offers some similar features to the UK’s stakeholder pensions. It is due to come into effect in April 2007.

New Zealand company Aventine Consulting consultant Michael Littlewood is a councillor on the Association of Superannuation Funds of New Zealand says NZ has had a citizen’s pension in one form or another since 1938.

Looking at more recent history, the Labour Government introduced an income test, know as a surcharge (as it was implemented through the income tax system), to the super scheme in 1985. The National Government then tried to strengthen this further in 1991, says Littlewood.

However, the backlash against it was so strong that the attempt was abandoned.

Instead, a 1992 taskforce provided the foundation for a political accord in 1993, described as providing several years of stability in retirement income policy for NZ before it fell away.

Littlewood says getting rid of the superannuation surcharge was part of the 1996 coalition Government agreement and it finally disappeared in 1998.

He says: “Now nearly all political parties subscribe to the 65 at 65 mantra – 65 per cent of the national average wage from age 65.”

New Zealand’s Investment Savings and Insurance Association chief executive Vance Arkinstall describes the NZ government’s superannuation provisions as simple and easily understood.

“It does not carry the huge administration difficulties and servicing costs that exist in other countries – to that extent the NZ model is an excellent example,” he says.

However, he suggests the system runs into difficulties due to the heavy dependence on super that has been created as the only or major source of income in retirement. With super providing only a subsistence level of income and an aging population, the system could come under other pressures in the future, he says.

Retirement commissioner Diana Crossan celebrates the simplicity of the system. “There is no doubt that everyone understand it,” she says.

NZ has a slightly younger population than many countries, with only 12 or 13 per cent of the population over 65 but this is set to rise to 25 per cent by 2050.

Crossan says that at its peak the current system will cost NZ just under 8 per cent of GDP and it currently costs just under 4 per cent.

The government is paying 3 per cent into the New Zealand Superannuation Fund to help fund future cost increases, she says.

“We are putting money away from the tax take now to spend at the peak of the baby boomers’ retirement.”

The fund has brought debate nationally, with some believing the money should be used to go into the hospital system for those who need it now while others say it should go back into the pockets of people to use as they see fit for their own retirement provisions.

Crossan says taxes may also need to rise or the amount of super could be reduced or the retirement age raised to to 66 or 67 to meet the needs of the baby boomers when retirement time comes.

But simplicity is not the only word commonly associated with the NZ system. Try equality as well.

Where the UK battles with poverty levels of around 20 per cent among senior citizens, NZ’s level is closer to 5 per cent.

“We have solved the problems of poor old women, which most struggle with,” says Crossan.

UK Pensions Policy Institute director Alison O’Connell says NZ has been central to the debate on how UK state pension reform should be carried out.

“The NZ system, because of its lack of means’ testing and equality has been a really relevant example. In some ways, it is like a kind of gold standard to which other reform proposals are measured,” she says.

Would such a system work here? Scottish Equitable pensions development director Stewart Ritchie says the simplicity is attractive but in the UK, you would not be starting out with “a clean sheet of paper”.

“I think the big lesson is you cannot just translate an idea from where it works at the moment and expect it to work in the UK. You have to be very careful to test it for the law of unintended consequences.”

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