New Zealand KiwiSaver Knowing What We Now Know What Should We Have Done Differently? by Peter Neilson, Chief Executive Financial Services Council For Stakeholders, Policy Advisers and Media October 2014 Toronto, Canada

Knowing what we know now what should we have done differently? The incentives could have been better targetted. 8% of KiwiSavers only put in enough savings to maximise the incentives and they are typically those who can afford to save anyway. Incentives at the levels provided did not totally overcome affordability issues for the poorest households in employment. The “anchoring” problem means that those less engaged stay where they were initially placed whether or not it is appropriate given their long term interest. About one third of KiwiSavers default into a 3% + 3% option which on current policy settings will not fund a comfortable retirement (a retirement income at 70-80% of the average wage). It probably would have been better to have had an option to start at a 1% contribution rate and annually step up contributions over time to reach 10%, 5% from you and your employer). The default investment style should have been growth or balanced rather than conservative including a capital guarantee fee funded by the default KiwiSaver member. 2

Knowing what we know now what should we have done differently? Continued… Inertia works well both positively and negatively. You can take a 5 year contribution holiday if you wish and recently one of our members looked at the typical contribution holiday and found out it was around 4.3 years which can be very costly in terms of the final nest egg. A 5 year contribution holiday is probably too long. As the prime purpose of KiwiSaver is for retirement savings the rules on pre-retirement withdrawals other than in the case of death, permanent migration or extreme hardship are not able to accommodate a situation of extended illness preventing employment. Bundling a base level of life and income protection insurance would have prevented this problem. Unlike most developed countries, superannuation funds in New Zealand are tax disadvantaged relative to other forms of retirement savings in particular compared with investment in rental property. 3

Knowing what we know now what should we have done differently? Continued… Affordability has prevented some lower income New Zealanders from enrolling in KiwiSaver or getting the full value of the incentives. An option to start at 1% contributions matched by the employer and growing each year till they reached a combined 10% contribution rate may have enabled many more lower income employees to join and stay in KiwiSaver and achieve a comfortable retirement. Gender equality. If men have higher incomes than women, women live longer on average than men and spend more time out of the work force on family duties, then they are likely to have lower nest eggs at retirement and lower pensions. It would be possible to have a top up guarantee that was mildly redistributive for those who had contributed for 30 years or more but had not quite saved enough to reach a certain level of income in retirement. Annuities and decumulation. We have not resolved the issues about whether there should be any obligation to take some of the KiwiSaver nest egg and turn it into an additional pension. While it is early days for most KiwiSavers this is an issue that we are still to resolve. 4

Changes since KiwiSaver started When KiwiSaver started in 2007 there was also a $40pa Government subsidy to cover fees. This was rescinded in Other changes since inception were: halving of the annual member tax credit to a maximum of $521pa since 2011 reduction in the minimum contribution rate from 4% employee and 4% employer to 2% each, subsequently increased to 3% each from 2013 Deduction of tax from the employer contribution since 2012, which reduces the amount going into the member’s account. 5

The Libertarian Critique of KiwiSaver and Compulsion KiwiSaver is not required because retirement is a known event so people can save for it and there are private sector businesses that can provide such a service Yes they can but many people won’t save which is why we have had an old age pension since 1898 Many people have difficulty saving. Some 41% of New Zealanders say they would want to be forced to save for their retirement. 6

The Libertarian Critique of KiwiSaver and Compulsion continued… To know how much to save you need to know what you can expect from the Government, how long you can expect to live, what income you would need up to 40 years hence, how much you will need to save to achieve an amount to fund that income What you will get from the Government pension in future is always uncertain. Most New Zealanders consistently underestimate their likely longevity post 65. Only 49% of New Zealanders understand the concept of compound interest and only 13% can do a rough calculation of expected compound interest returns (the rule of 72). Most people find it difficult to estimate the lump sum required to fund a particular level of income. These issues are more likely to adversely affect the retirement incomes of the most risk averse, the very poor, women and the elderly. 7

The Libertarian Critique of KiwiSaver and Compulsion continued… People are already saving enough This might be true of the very highest earners, particularly if they have investments in land, and the poorest may get a boost of income in retirement as NZ Super is more generous than other income tested benefits but most middle income earners retire on only 40 to 50% of earlier earning. If they save in KiwiSaver they will offset it by saving less elsewhere or by incurring more debt prior to retirement Even research undertaken by a group of researchers hostile to KiwiSaver found about one third of KiwiSavers’ savings were additional. We have a private retirement income savings issue whether or not it adds to natural savings but for behavioural reasons it is likely to boost overall private savings by making saving easier for those who find it most difficult. 8

The Libertarian Critique of KiwiSaver and Compulsion continued… People get forced to save at the wrong times by having fixed contribution amounts KiwiSaver substantially addresses this issue by making part of the savings available for first home purchase and the option of taking contribution holidays. Compulsory saving reduces liberty and is therefore unacceptable As pensions are funded by compulsory taxation it is hard for most people to accept this argument. 9

The Welfare Left Critique of KiwiSaver and Compulsion If KiwiSaver becomes very successful or compulsory politicians will apply an income or assets test to the taxpayer funded pension NZ Super and eventually phase it out That proposition was firmly rejected in the 1997 referendum and remains unpopular with voters (37.4% opposed, 27.4% in favour - Horizon Research October 2013). NZ Super paying a flat rate to all is fairer for women who have lower incomes, lower savings and live longer and adding in KiwiSaver will increase inequality It is possible to top up pensions to achieve greater gender equality. Most women would prefer higher retirement incomes with KiwiSaver added to the pension even if inequality was greater. With KiwiSaver, women who live longer than their partner will inherit the balance of their partners KiwiSaver nest egg so may in fact be financially better off compared with losing their partners NZ Super alone, on their demise. 10

The Welfare Left Critique of KiwiSaver and Compulsion continued… Many lower income earners cannot afford to save 3% or 4.5% of their incomes Australians were able to do so with their compulsory superannuation guarantee scheme on incomes that are close to New Zealand’s current earnings. A slow starting contribution rate and a slow phase in makes it feasible to save and achieve a much better income in retirement. 11