NZ's Model for Sustainable Workplace Savings
Although its retirement savings industry is much less advanced than Australia’s, the KiwiSaver scheme, introduced on 1st July 2007 is putting New Zealand’s retirement planning industry on the radar in the wider world. There are now some 54 KiwiSaver schemes in operation, via 31 providers and around 760,000 individual KiwiSavers after just 1 year in existence - a far cry from the IRDs’ pre-launch estimate of just 171,000 members in the first year. Of the total, 360,000 have actively opted in via a provider, while the rest have not opted out following a change of employment and have been automatically enrolled by their new employer.
Why so popular? Two things in the main:
- For an investment of just NZ$20 per week, Government incentives will effectively give a 300% increase on your investment, without any fund growth, in the first year and 200% every year thereafter
- When an employee changes jobs, they are automatically opted in to KiwiSaver, those wishing to opt out must do so between 2 weeks and 8 weeks of starting work - most haven’t done so (however, the IRD reported that 33% of those automatically enrolled have indeed opted out and most of these, by far, are in the lower earnings brackets).
In simplified terms if every existing member is contributing just $20 per week, these members alone, will have NZ$ 2.34 billion (US$ 1.69 billion) invested after just one year. That same group of people will then have NZ$ 1.59 billion (US$ 1.10 billion) invested each year for at least the next 5 years (the minimum term for a KiwiSaver account). Total current KiwiSaver assets, according to AMP Capitals’ Head of Sales & Marketing, Anthony Edmonds is NZ$ 1.037 billion (US$ 712 million).
In recently published research from AUT Business Schools’ Retirement Policy and Research Centre covering 52 of the top 100 largest employers with 217,721 employees and annual payroll of NZ$9.13 billion (US$6.22 billion) shows that with the benefit of hindsight 88% of these employers would not have started their existing Superannuation Scheme. Indeed, the number of Super Schemes is forecast to drop to just 30.
ASFONZ, being the Association concerned with Company/ Public body sponsored Superannuation Schemes is therefore at a cross-roads with many existing Superannuation Schemes being given up in favour of KiwiSaver and no real prospect of new business. So, the ‘big topic’ of the moment and the future of retirement savings in NZ - KiwiSaver, isn’t really currently part of the ASFONZ remit. It’s a bit like getting the Elephant out of the corner, putting it on the board room table, admiring how big it’s grown, how healthy it looks and how it’s devouring everything in sight and then saying - hang on, that’s a bloody Elephant; and look, it’s eating all our lunches!
Chairman John Melville whom, in his introduction to Retirement Commissioner Diana Crossan put it to conference that ASFONZ “should become the voice of KiwiSaver”. The problem with this is of the 31 KiwiSaver scheme providers on the market, only a handful were represented.
It’s widely accepted in New Zealand that ‘Investment’ broadly means property and cash and sometimes directly into a business. Kiwis don’t have the same view of investment funds as most of the rest of the OECD. Also, the lack of regulation has meant that constraints on advertising, marketing and sales can be said to have had a big role to play in the collapse of around 30 finance companies over the last 18 months. In NZ, of the NZ$ 25 billion invested in non-bank financial institutions, NZ$ is invested in finance companies. So far, collapses in that sector has seen NZ$ 1 billion lost during that period leaving tens of thousands of ‘mum & dad’ investors typically losing everything.
Opportunities then are plentiful and of particular interest should be:
- A new, rapidly growing source of client funds to manage in a highly underdeveloped and un-sophisticated market
- Potential acquisition targets
- The full fund is given to the saver (or estate thereof) without restrictions on income derivation - no annuity or income drawdown products or rules!
With the ‘responsible investment’ rules applicable to KiwiSaver, how much of this flood of new funds will need to be invested outside of New Zealand?
There were two distinct strands to this years conference then; the heads down technical and the Macro view from key note speakers, which well deal with first and included:
Hon. Dr. Michael Cullen, Minister of Finance spoke of the success of KiwiSaver and how he hoped that people coming into KiwiSaver would result in a better financially educated population, but warned of the dire worldwide economic situation and what the ‘credit crunch’ would mean for New Zealand business. He also emphasised the need to contain government borrowing.
Bill English, Finance Spokesman, National Party took a very much contrary view. In fact, in a world of ‘centre ground’ politics, it’s refreshing in the run up to an election to have clear water between the two. Mr. Englishs’ view was one of Kiwi resilience to world events, having got through the ‘Asia Crisis’ once. He didn’t see a link between KiwiSaver uptake and increased investment knowledge of its’ members, this would have to be proactively taken up rather than left to happen because people now had savings for the first time. He also outlined plans to develop new investment opportunities, possibly linked to debt attached to future public/ private partnerships in such areas as infrastructure.
English also made mention of the huge financial commitment KiwiSaver and State Superannuation will leave his party with, should they be elected in the next few months. This, he said, they would honour but would have to borrow to meet. Intriguingly, he went to say that they are not looking to replace State Super with KiwiSaver but without an income tested State Super the role of KiwiSaver would have to be reviewed.
Diana Crossan, Retirement Commissioner, spoke of the ‘lifestyle years’ - those years between 50 & 70 when people, rather than as expected previously, opt to change their life choices rather than ‘retire’. More part time jobs, consultancy and travel than tending the rose garden and going to coffee mornings. Ms. Crossan also outlined the three stands to her departments work - stable, effective Government Policy, a trusted Financial Services sector and a financially sorted population. She was rightfully proud of the independent website www.sorted.org.nz which has been described as the best of its’ kind in the world.
Cathy Magiannis, IRD gave a fascinating view of the KiwiSaver footprint; the trends so far with KiwiSaver uptake, opt-out, age related and income related trends. Perhaps predictably, the same experience that Stakeholder had in the UK was mirrored in this report, that being, the target market, the young lower paid are the most likely to opt out and the current largest group opting in are more wealthy middle age people.
Cathy Quinn, Commissioner, Securities Commission and David Benison, Government Actuary gave an overview of the rather complicated state of play in which New Zealand currently finds itself. One of the best bit’s of news from this session was the encouraging work being done on the mutual recognition of securities between Australia and New Zealand. The best estimate on the delivery of a blueprint for action being late 2009.
The more technical aspects of the conference were run in concurrent sessions on each of the two days. These sessions asked as many questions as they answered, which only re-iterated the state of flux in which New Zealand regulation, legislation, governance, implementation and operation finds itself. This was probably most apply demonstrated in the session run by Mike Woodbury, partner, Chapman Tripp and Mark Todd, partner, Bell Gully - both leading experts in the KiwiSaver space. Their session ran through the some of the many ‘grey areas’ surrounding KiwiSaver including; the “Total remuneration” option, membership contracts - mistakes etc., complying superannuation funds, consent-free transfers, double-dipping protections, mortgage diversion, fee increases, payments on death, employer obligations and disclosure obligations.