Section 14 - KiwiSaver


14.       KiwiSaver: in the new environment, what is the role for KiwiSaver?

 KiwiSaver started on 1 July 2007.  At the time, the government presented it:

“…to encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.  The Act aims to increase individuals’ well-being and financial independence, particularly in retirement, and to provide retirement benefits.”[150]

Since then, KiwiSaver has been through a number of major changes[151] and through two reviews by the Retirement Commissioner.

The 2016 Retirement Commissioner’s Review presented 15 KiwiSaver recommendations or comments.  They fall into three main groups: first, there are five recommendations that involve future research and recommendations (participation and reporting data, membership of more than one scheme, default funds, decumulation options and the apparent ‘total remuneration disincentive’).

Then there are two (the ‘Member Tax Credit’ for non-contributing members and increasing KiwiSaver coverage) on which more work is needed now before changes can be recommended.

Of the eight ‘Change Today’ items, two are cosmetic (changing the name of contributions holidays to ‘savings suspension’ and the ‘Member Tax Credit’ to ‘KiwiSaver credit’); while another (dollar-cost fees) may improve disclosure requirements.  A fourth recommendation suggests ‘decoupling’ the KiwiSaver benefit age from the state pension age that would, among other things, allow over-65s to join[152].

That leaves the following four recommendations for immediate change:

  • minimum employer and member contributions increase to 4% each (from 3%) – the government has rejected that suggestion[153];
  • an auto-increase option for member contributions – the government also rejected that suggestion;
  • two new member contribution options (6% and 10%) to add to the current 4% and 8% - the government has said it will consider that recommendation;
  • reduce the contributions holiday from five years to one[154].
[150] Section 3(1) of the KiwiSaver Act 2006.
[151] The history of KiwiSaver’s introduction is summarised in the RPRC’s 2014 report Now we are six – Lessons from New Zealand’s KiwiSaver, Susan St John, Michael Littlewood and Claire Dale (accessible here).  After only 10 years, we are already at KiwiSaver Mark IV and look destined for Mark V.
[152] The changes to the state pension age announced by the government in March 2017 already contemplate that decoupling but not for the reason suggested by the Retirement Commissioner.  It is to facilitate the raising of the state pension age rather than specifically allowing older New Zealanders to join KiwiSaver with the contribution rules that follow membership before age 65.  That could happen but is a separate issue.
[153] In the government’s response to the Retirement Commissioner’s recommendation (letter of 7 June 2017 accessible here), the Minister replied: “The Government is not proposing any immediate change to the minimum employer and employee KiwiSaver contribution rates.  There is limited evidence that this recommendation would raise savings rates.  It could also make it more difficult for low-income workers to contribute to KiwiSaver, while increasing costs to employers.”.  While we agree that higher KiwiSaver contributions probably won’t increase savings, there is actually no evidence that New Zealanders need to save more.  So, the government’s ‘answer’ is to the wrong, or rather, the unnecessary question.  As we have explained in section 11 above (The role of the government), governments seem to have little influence on citizens’ overall decisions whether or how much to save for retirement.
[154] The government’s letter of 7 June 2017 (accessible here) said that “The Government is undertaking work to understand the reasons why members are not contributing…”

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The underlying theme of the Retirement Commissioner’s four recommendations, and also three of the ‘further work needed’ suggestions, is that New Zealanders aren’t saving enough for retirement.  They need to be forced, tripped or encouraged into saving more than at present and KiwiSaver should be a vehicle to promote that needed change in behaviour.  The Retirement Commissioner gave us no evidence to support her recommendations on that account.

We have incomplete information on what New Zealanders are actually doing about their retirement income preparations but here is a summary of what we knew before the Retirement Commissioner started her 2016 review:

  • New Zealanders were probably slightly over-saving for retirement before KiwiSaver started in 2007 (Treasury reports from 2004[155], March 2007[156] and from 2009[157]);
  •  Of KiwiSaver contributions, about one-third was ‘new’ savings, the rest being effectively transferred from other financial assets (Treasury report 2011[158]);
  • KiwiSaver members seemed to have accumulated less net wealth than non-members (Treasury report 2014[159]);
  • Poverty levels amongst the over-65s are the lowest of any of the groups in New Zealand society (MSD reports from 2007 to 2013[160]) and are among the lowest of over-65s in any country (OECD 2008[161]) and also by comparison with 27 EU and other European countries (2009)[162];
  • The overall cost to taxpayers of retirement income policies (public and private) is amongst the lowest in the developed world (OECD 2015[163]).

[155] Saving for Retirement: New Evidence for New Zealand, Grant Scobie, John Gibson and Trinh Le, New Zealand Treasury, 2004, accessible here.
[156] Are Kiwis saving enough for retirement?  Preliminary evidence from SoFIE, Grant Scobie and John Gibson, New Zealand Treasury, March 2007, accessible here.
[157] Saving Rates of New Zealanders: A Net Wealth Approach, Grant Scobie and Katherine Henderson, New Zealand Treasury, 2009, (accessible here).
[158] KiwiSaver: An Initial Evaluation of the Impact on Retirement Saving, David Law, Lisa Meehan and Grant Scobie, New Zealand Treasury (2011) accessible here.  Care though has to be taken with SoFIE data as participants’ recall of basic information seems at variance with IRD data – see KiwiSaver: Comparing Survey and Administrative Data, Anton Samoilenka and David Law, New Zealand Treasury (2014) accessible here.
[159] KiwiSaver and the Accumulation of Net Wealth, David Law and Grant Scobie, New Zealand Treasury (2014) accessible here.
[160] See Household Incomes in New Zealand - Trends in Indicators of Inequality and Hardship 1982 to 2004 (2007), Bryan Perry, Ministry of Social Development (accessible here).  By 2008, however, the income-based measure had worsened from 7% in 2004 to 14% (see Household Incomes in New Zealand - trends in indicators of inequality and hardship 1982 to 2008 (2009), Bryan Perry, Ministry of Social Development (accessible here).  By 2012, the position had improved again: to 6% of all over age 65 in “low income households” – see Household Incomes in New Zealand - trends in indicators of inequality and hardship 1982 to 2012 (2013) Bryan Perry, Ministry of Social Development (accessible here).  That volatility illustrates the close relationship between the 60% of income ‘poverty’ measure and the annual amount of New Zealand Superannuation; also that many old people have little private income.  We should expect less volatility in deprivation-based measures of poverty.
[161] Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD (2008).  New Zealand was one of the three countries that show an overall incidence of poverty in the “mid 2000s” amongst all people “of retirement age” of about 2% (rounded up from 1.53% in New Zealand’s case).  The other two countries were the Czech Republic and the Netherlands.  The report itself is not accessible online but was looked at in the RPRC’s PensionBriefing, 2009-1, International comparison of poverty amongst the elderly – accessible here.
[162] See The material wellbeing of New Zealand households: trends and relativities using non-income measures, with international comparisons, Bryan Perry (Ministry of Social Development) 2016, accessible here, at page 19.
[163] Pensions at a Glance 2015, OECD (accessible here) at page 181.  Of 34 OECD countries, the net cost of NZS is 7th lowest.  However, that ignores compulsory ‘private’ schemes and also the cost of tax breaks for private provision.  Australia, for example, spends about two-thirds as much on tax breaks for retirement saving as it does on the Age Pension itself (2016 Tax Expenditures Statement, Australian Government, accessible here).

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All this probably helps explain why, of all New Zealanders over age 65 in 2014, a Statistics New Zealand survey found that 71% reported having “enough or more than enough money” and 86% reported having “high life satisfaction (7-10 on 11-point scale)”.[164]

From this, we could have deduced before the Retirement Commissioner’s 2016 review that New Zealand’s overall retirement income framework was ‘working’: people seemed to be saving ‘enough’; limited ‘poverty’ in old age; favourable international comparisons, all at probably the lowest overall cost to taxpayers of all developed countries.

The Retirement Commissioner’s review did not discuss or question any of what we already knew but we must assume the Retirement Commissioner thinks New Zealanders aren’t saving enough for retirement, given her recommendations.  But do we know that?  Where is the evidence?

Can we even say that KiwiSaver members are saving more for retirement than their non-KiwiSaver peers?  We just don’t know but logic suggests they won’t be saving that much more, if any more.  Given the predictable reduction of occupational superannuation schemes at KiwiSaver’s hands, some may even be saving less in total than previously, but we don’t know[165].

Since 2007, taxpayers have spent about $8.5 billion on tax incentives for KiwiSaver[166].  Of total KiwiSaver balances in 2016 ($34 billion), as much as 25% came from taxpayers.  About $740 million will be spent in the current financial year and another $2.4 billion over the three years to 2020[167].  Where is the evidence that these large sums have actually changed New Zealanders’ overall financial behaviour?[168]  Citing the number of members or the amount now invested in KiwiSaver doesn’t answer that question.  Encouraging those numbers to grow won’t answer it either.  Asking New Zealanders whether they think KiwiSaver is a good idea or whether they think they should be saving more is even less helpful.

Finding out what New Zealanders are actually doing about their financial preparation for retirement is the only way to understand whether KiwiSaver actually helps; even, whether New Zealand needs KiwiSaver.  That requires a longitudinal survey of household financial behaviour of the kind New Zealand trialled in 2002-2010 with the Survey of Family Income and Employment (SoFIE).  There is more on this suggestion in section 15 (Households’ financial position) below.

International evidence suggests that governments are relatively powerless to change savers' decisions to save more or save more in a particular way or for a particular purpose, no matter what kind of intervention has been used (tax incentives, compulsion or soft compulsion).  KiwiSaver might be an exception to that general observation but we need evidence of that[169].

[164] New Zealand General Social Survey, Statistics New Zealand (2014) accessible here.
[165] A 2015 Treasury review suggests that, even with growing KiwiSaver balances, total ‘managed fund’ assets owned by New Zealand households (life insurance, other superannuation, managed funds and KiwiSaver), measured as a percentage of GDP, had by May 2014 only just returned to levels seen in November 2006, before KiwiSaver started.  Growing KiwiSaver balances had, over the eight years measured, displaced falling levels of ‘managed funds’, other superannuation and life insurance – see Review of the KiwiSaver Fund Manager Market Dynamics and Allocation of Assets, Andreas Heuser and others (2015) here at page 11.  As the report notes (page 15), “The evidence also suggests that the effect of KiwiSaver on increasing net wealth is poor.”
[166] Sources: Inland Revenue Department, KiwiSaver Annual Report 6. 1 July 2012 - 30 June 2013 plus costs for 2014-17 from the Treasury’s Long Term Fiscal Model 2016. This number ignores the favourable tax treatment given to funds in KiwiSaver schemes, given their status as ‘portfolio investment entities’ (PIEs).  We have more to say on this in section 17 below (Income tax and saving vehicles).
[167] Source: Budget 2016 forecast from 2015/16 onwards; Long Term Fiscal Model 2016, The Treasury.
[168] A Treasury report (KiwiSaver and the Accumulation of Net Wealth David Law and Grant Scobie, 2014 accessible here) looked at changes in net wealth and “various panel regression techniques” and concluded “Neither approach suggests KiwiSaver membership has been associated with any positive effect on net wealth accumulation.”
[169] As already noted above, the government seems to think that increasing member and employer contributions to KiwiSaver isn’t a good idea, given the apparently “limited evidence” that this would raise saving rates.  We suggest there is no such evidence.

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What little we do know about New Zealanders’ financial behaviour cannot justify the Retirement Commissioner’s four key recommendations to ‘strengthen’ KiwiSaver.

A word on ‘total remuneration’: As explained in the last section (Occupational superannuation - the role of employers), under ‘total remuneration’, the employer sets a total budget for a job.  That budget is unaffected by an employee’s decision to join KiwiSaver as the employer’s required 3% contribution is deducted from ‘total remuneration’ with the balance paid as direct, taxable income.  On the face, this looks negative but the employer ensures that two employees who do the same job are paid the same ‘total remuneration’.  Otherwise, the employee who joins KiwiSaver will receive more in total by the amount of the employer’s contributions.  The Retirement Commissioner’s 2016 Review said that ‘total remuneration’ was a “disincentive towards KiwiSaver membership…The intent of KiwiSaver legislation is that compulsory employer contributions are paid on top of gross salary or wages.”[170]  This is one of the five areas identified as requiring further work to, in this case, “…better understand the effects of allowing a total remuneration approach in regard to the intent of KiwiSaver legislation.”

The Retirement Commissioner misrepresents the position.  Section 101B of the KiwiSaver Act 2006 (accessible here) states the presumption that the employer’s contributions are “…paid in addition to an employee’s gross salary or wages” (section 101B(1)) but then allows the employer and employee to agree otherwise (section 101B(4)).  The Retirement Commissioner seems to be thinking of recommending the abolition of the right of an employer and employee to agree remuneration arrangements.  If that’s the intention, we disagree with the purpose of the Retirement Commissioner’s reason for ‘further work’ in this area.  The assumptions underpinning that ‘further work’ must be that an employee is incapable of agreeing appropriate arrangements with the employer and that the employer has no legitimate reason for seeking that agreement.  That is why section 101B(1) is in the legislation[171].

Taxpayers will spend $738 million on KiwiSaver in 2017.  The Treasury expects that to be $840 million in 2020.  The Retirement Commissioner’s four key recommendations would increase that subsidy.  There are some questions that need answers to support even the current subsidies before we can discuss whether further subsidies can be justified.

[170] 2016 Review of Retirement Income Policies accessible here at page 17.
[171] The government also disagrees with the Retirement Commissioner.  In its letter of 7 June 2017 (accessible here), the Minister of Commerce and Consumer Affairs said “the Government is not considering changing the total remuneration approach as it applies to KiwiSaver at this time.  The Government considers that the current approach is satisfactory as it provides flexibility to employers and employees.”  We assume this means the Retirement Commissioner will not now see the need to undertake further work on this topic.

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Questions New Zealand needs to discuss on KiwiSaver:

Some of the following questions overlap with questions in the last section 13 (Occupational superannuation – the role of employers):

  1. Is KiwiSaver working?  Subsidiary related questions include: are KiwiSaver members saving more for retirement than their non-KiwiSaver peers?  Are the total net financial assets of KiwiSaver members greater than the totals of non-KiwiSaver peers?  In other words, is so-called ‘behavioural economics’ working in the KiwiSaver environment?
  2. Are New Zealanders saving enough for retirement whether or not they belong to KiwiSaver?  If they are, that would undermine the case for ‘strengthening’ KiwiSaver.
  3. What effect has KiwiSaver had on housing ownership patterns and housing debt as between members and non-member peers?
  4. What effect has KiwiSaver had on remuneration patterns as between employers with/without ‘total remuneration’ policies and as between employers with preferred KiwiSaver schemes and those without.  What proportion of employers have a ‘total remuneration’ policy?  Has KiwiSaver affected that pattern?
  5. What effect has KiwiSaver had on occupational superannuation schemes?  What is the overall impact of KiwiSaver on workplace-related retirement saving schemes (including KiwiSaver)?
  6. Who specifically benefits from the current tax subsidies to KiwiSaver (occupation types; remuneration bands; distribution by age, sex, work status etc.)?
  7. What effect has KiwiSaver had on the financial services industry in the last ten years and who benefits?  Should New Zealand be concerned about the aggregation of KiwiSaver savings in the hands of a small number of providers, mainly the major trading banks?[172]
  8.  If, as suggested in section 11 of this report (The role of the government), the government has no role in forcing or incentivising particular types of financial provision for retirement, what might be KiwiSaver’s role in a more rational policy environment?  Here are some suggestions that require analysis and debate:
    (a)    Remove auto-enrolment;
    (b)   Remove ‘Member Tax Credits’;
    (c)    Re-install the ‘kick start’ government grant for new members;
    (d)   Remove default providers (if no auto-enrolment) or open up default status to all ‘qualifying’ schemes’ (if auto-enrolment retained);
    (e)    Remove all rules about member contributions;
    (f)    Remove compulsory employer contributions;
    (g)    Allow access to benefits at any age and for any reason.

Questions 1 and 2 cannot be answered without a proper longitudinal study of household assets, liabilities and incomes.  We look at this in the next section.

[172] According to the annual report of the Financial Markets Authority (graph accessible here; report accessible here), the trading banks had 1.8 million of 2.6 million total members at 31 March 2016 (69%) and $21 billion of $29.6 billion in total assets (71%).  Eight KiwiSaver schemes have 87% of all members and that concentration will probably increase.