Growth Opportunities for the Finance Sector Peter Neilson, Chief Executive Financial Services Council Presentation to FINSIA/ANZ Luncheon “What Does 2013 Hold for Us” Midday, Friday 15 th March 2013 Hotel Intercontinental Grey Street Wellington

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. Who is the FSC and what do we do The FSC replaced the ISI in May 2011 with the aim of: Applying evidence based advocacy to help grow and protect the wealth of New Zealanders. Why does that matter? The wealthiest 1% of New Zealanders hold 16.4% of the wealth, whereas the bottom 50% own just 5.2% of the wealth. We represent the investment management and personal insurance industries. Property and general insurance is covered by the ICNZ and Health Insurance is covered by the HFANZ. If you have a KiwiSaver account, a superannuation fund, life or income protection policy, there is a better than 80% chance it is provided by one of our members. Today I am going to talk about the growth opportunities that exist for the financial services industry and what the industry, other New Zealanders and the Government will need to do to bring them to fruition. 2

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. Some numbers to put the current vulnerability of New Zealanders into focus Only 9% of New Zealanders think NZ Super ($349 per week maximum after tax for an individual and $537 for a couple) is sufficient to retire on. (Horizon Dec 2012) Only 15% of New Zealanders have income protection insurance. (Horizon Oct 2012) For New Zealanders: Only 15% say they have sufficient savings to last six months if they were made redundant. 26% would not be able to pay their bills after just one week. 54% have insufficient savings to last 4 weeks after being made redundant. The majority of New Zealanders are financially living close to the edge and unemployment, sickness or retirement could put them quickly over that edge. 3

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. KiwiSaver Contribution Rates – Horizon Survey December 2012 So about 1 in 10 KiwiSaver members with their employer could be saving at a rate sufficient to fund a comfortable retirement, about 10% of salary. 4 % Not making contributions currently20.4 Employees making 2% contributions (employer 2, 4 or 8%. Soon to lift to 3% + 3% at least) 36.8 Employees making 4% contributions (employers 2, 4 or 8%)18.7 Employees making 8% contributions (employers 2, 4 or 8%)3.4 Not sure15.7 Another contribution rate7.9

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. The Income Protection Insurance Gap If you have an accident in New Zealand and are off work for more than one week, ACC will pay you 80% of your previous earnings until you return to work. 100% of New Zealanders are covered by ACC and what you receive is not impacted by the earnings of your partner. If you are sick and off work for longer than your sickness or annual leave covers, you are eligible for a sickness benefit that is slightly lower than NZ Superannuation but if your partner also has earnings above the benefit level you will not be eligible for a sickness benefit. Many New Zealand families living with long term sickness find they are too rich to receive a sickness benefit but too poor to pay the rent or mortgage. Here is the kicker, you are 2 to 3 times more likely to be off work for six months or more because of sickness than you are for an accident. There are 972,000 households in New Zealand with a household income above benefit levels that are without income protection insurance. Our missing million customers. Most people with a mortgage have life insurance but only a minority have income protection insurance. Your partner is currently more secure in your home if you die than if you have a long term illness. 5

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What can we do about the Income Protection Insurance Gap? The industry has funded the FSC study undertaken by Massey University into the size of the personal insurance gap. Of the $650b gap about 2/3rds of it is related to income protection insurance. The launch of the Massey report put this issue on the agenda but we will need sustained follow-ups to keep it there. We know from our focus group and polling work undertaken by Nielsen’s and Horizon, that: Potential customers find the whole topic intimidating, the language impenetrable and mistrust the industry and perceive the products as expensive. We make people offers they don’t understand, we talk numbers when they want to talk about preserving their family going forward, the purchase, underwriting and claims processes are all seen negatively. We are talking with the industry about how to overcome these issues and achieve ongoing promotion and increased take-up of income protection insurance. 6

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What can we do about the Income Protection Insurance Gap? Continued... There is product innovation to make products simpler and more flexible. (If you want to see an example look at KiwiBank’s online calculator and Life and Living insurance product or ANZ’s Lifestyle product.) There are more places where you can work out what you need and obtain a quote without feeling hassled. (See Cigna’s Income Protection Policy on its website.) We will be talking more with the IRD and Ministers about the issues to do with the taxation of income protection insurance. At the moment lump-sum policy premiums are not deductible and payouts are tax free, whereas payments based on a percentage of previous earnings are taxable and the premiums are deductible. A 128 page technical paper provided little help in clarifying this issue. If the industry does not respond to fill this market gap, it is likely eventually that either ACC will be extended to cover illness or a base level of life and income protection insurance will be bundled into KiwiSaver. In the meantime take our advice and ask your adviser, bank or broker about income protection insurance. 7

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. Gradually Stepping up contributions into KiwiSaver to 10% We currently have little action and great inertia regarding increasing KiwiSaver contributions to get them gradually up to the 10% required to provide most New Zealanders with comfortable retirement incomes. The Government has decided that given its concern about the cost of the KiwiSaver incentives likely from a day of enrolment for those not yet enrolled in KiwiSaver, this has been abandoned for the foreseeable future. The Opposition parties seem likely to support a gradual step-up in contribution rates to KiwiSaver and the Labour Party has signalled that it will retain its 2011 election policy to make KiwiSaver universal but probably only up to 7% of incomes. The minimum contribution into KiwiSaver will lift from 2% employee and 2% employer to 3% plus 3% from 1 April. This move is popular and suggests that a programme to step up contributions each year by 1% would also get general support. As part of its contribution to the debate on achieving a comfortable retirement income for New Zealanders, the FSC will be an active participant in the revision of the Long Term Fiscal Projections and the Three Yearly Review of Retirement Income Policy. Our Best contribution to these debates is to make sure they address the right questions. 8

Source: Infometrics from Statistics New Zealand Number of New Zealand Live Birth

10

Source: Infometrics 11

Retirement in the 20 th Century Retirement in the 21 st Century Funding retirement incomes in 1955 Over 65 population less than 300,000 Life expectancy at years for males and 16.9 years for females. Seven working age people support one pensioner. Age pensions cost 3% of GDP when the universal pension was available from 65. Funding retirement incomes in 2055 Over 65 population reaches almost 1.7 million. Life expectancy at 65 – 31.3 years for males and 33.9 years for females. Two working age people support one pensioner. Age pensions will cost 9-10% of GDP if the age of eligibility for NZ Superannuation stays at

The Pension Gap with Australia in 2055 Assuming No New Zealand Policy Change *This table compares the compulsory retirement systems in both countries. Australia has its age pension and its Superannuation Guarantee whereas New Zealand has New Zealand Superannuation and no compulsory retirement savings scheme. ** The ratio of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since Source: Coleman (2012) Source: Australian Treasury New Zealand NZS pension in 2055 Australia pension for someone retiring in 2055 having earned the median income Ratio (AU/NZ) Australia pension for someone retiring in 2055 in Australia having earned the average income Ratio (AU/NZ) Retirement income Dollars$NZ 31000$A *$A ** % per capita GDP 34%52%1.5059%1.70 Contributions %7.2% %9.9%1.34 Average %9.2%

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What are the right questions to ask about retirement income policy? 1.Should the objection for retirement income policy be a comfortable retirement not just the avoidance of absolute poverty? Only 9% of New Zealanders think NZS alone will be adequate. Its not just about the financial sustainability of NZS, NZS on its own is inadequate as an income and needs supplementing with an expanded KiwiSaver. 2.Shouldn’t we be talking about NZ Superannuation and KiwiSaver, not or KiwiSaver? With 2 million New Zealanders already enrolled, shouldn’t we stop pretending PAYGO (NZS) and SAYGO (KiwiSaver) are competitors and treat them as complements? 3.What really is happening to longevity after 65? We have consistently underestimated the improvements in longevity after

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What are the right questions to ask about retirement income policy? Continued... 4.Do we really have a hang-up about KiwiSaver compulsion? Why do we think compulsory taxation to pay for someone else’s pension (NZS) is OK, but compulsory contributions to fund your own 2 nd tier pension (KiwiSaver) is not OK? If we have universal coverage (compulsion) can we avoid the cost of the current KiwiSaver incentives? 5.Are we prepared to do something about the tax and other bias against savings in equities or bonds, particularly those products with compounding returns, while we treat preferentially investments in real estate? If not, should we offset this with compensatory tax reductions on long- term savings such as for retirement? 15

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What are the right questions to ask about retirement income policy? Continued... 6.Shouldn’t we start this debate with a realistic Business As Usual BAU case? The Treasury draft Long Term Fiscal Projections assume that: Longevity stops increasing at a rate it has for the past 40 years. Labour productivity growth rates will be 25% higher than the last 40 years. The Government will not give tax cuts to return fiscal drag for 50 years. These assumptions would produce a low ball estimate of the likely cost of funding NZS and provide more excuses for delay. 7.On reasonable assumptions, doesn’t SAYGO (KiwiSaver) cost less than PAYGO (NZS) to produce the same pension, or a larger pension, for the same consumption foregone? What therefore, is the optimal balance between NZS funded from taxation and KiwiSaver funded by contributions and when do we need to start the transition if we need to afford to pay for both? 16

What the Report is Not About 1.How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. 2.Relitigating the debate about National Savings. What are the right questions to ask about retirement income policy? Continued... 8.Can we make this NZS/KiwiSaver hybrid fair for women, the low paid, Maori and Pacifica, and how? 9.If we do have universal KiwiSaver, should the savings be guaranteed? 10.Should we require that you take part of your KiwiSaver “pot” and turn it into a pension? We are in for an interesting debate during

Source: Infometrics from Statistics New Zealand 18 Population Aged 65 and Over

19 Actual over 65 Population Compared to SNZ Mid-Series projections

20 Period Life Expectancy at Age 65

Contribution rate needed to achieve same KiwiSaver Plus account balance at age 65/70 for (Cohort turning 65 in 2061) Median Income Account balance at 65Account balance at 70 MaleFemaleMaleFemale KiwiSaver Plus Account Balance if you start at Age 25 on 10% contribution rate:638,000420,000781,000515,000 Starting ageRequired contribution rate (%)