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Retirement Commissioner urges government to review KiwiSaver

7 Jun 2024

| Author: Diana Clement & Jenni McManus

Nearly 17 years after its inception, KiwiSaver is pulling in big bucks. According to the Financial Markets Authority’s (FMA) most recent KiwiSaver annual report, the scheme now has $93.7 billion in funds under management.

Balances owned by its 3.25 million members are rising rapidly. But KiwiSaver’s assets are still peanuts compared with Australia, where superannuation contributions have been compulsory since 1992. The scheme is entirely employer-funded with mandatory contributions at 11% (soon to be 12%) and has A$300b in funds under management.

Since KiwiSaver was set up in 2007, the brainchild of the late Sir Michael Cullen, the financial services industry (among others) has pushed strongly for compulsory contributions. Retirement Commissioner Jane Wrightson was also in this camp, telling attendees at the Financial Services Council’s (FSC) annual conference in 2022 that when one looked at how well the Australian scheme had performed, “it’s a no-brainer”.

Now it seems that the commissioner has changed her mind. In a major policy paper on KiwiSaver for the government, due to be released later this month, Wrightson has pulled back on compulsion.

“The evidence doesn’t suggest that will change much,” she told LawNews. “What the evidence suggests is that the opt-out system is working. In other words, the people who aren’t members are either not working, too young [or] not earning.”

Along with the commission’s policy paper, Wrightson is calling on Commerce and Consumer Affairs Minister Andrew Bayly to undertake a review of KiwiSaver – a suggestion backed by Finance Minister Nicola Willis, when National was in Opposition.

Speaking on a webinar for FSC members two years ago, Willis urged the financial services sector to provide feedback on KiwiSaver, saying it played a crucial role in providing financial stability and had the potential to be a source of capital for businesses. “If you have a particular view about how you think the scheme could operate better….we are open to those ideas as we develop out policy platform,” she said.

 

Low contributions

Most important, in Wrightson’s view, is raising the low minimum contribution rate for members and employers, currently at 3% each. She told the FSC conference in 2022 that the minimum contribution should be ramped up to 5% if KiwiSaver were to remain fit-for-purpose for the next 30 years.

“If we concentrate hard on what the right default percentage is, that would be a significant and very good change,” she told LawNews late last month. “The paper is suggesting at least 4%. There’s an argument for higher in some cases.”

There might also be exceptions for low income earners. An estimated 20% of the population cannot afford regular contributions and according to the FMA, 39% of KiwiSaver’s 3.25m members are non-contributing.

Wrightson is concerned at the number of withdrawals, particularly by first-home buyers and those in financial hardship (hardship withdrawals reached a record 29,530 in 2023), because of the devastating effect this can have on members’ balances at retirement.

Although each hardship withdrawal is relatively small, she isn’t in favour of making the process any easier. “There’s quite a lot of chatter around increasing withdrawals in times of hardship [but] in my view, KiwiSaver has to be a really pure system. It is a retirement savings scheme.” The exception when it comes to withdrawals would be first homes, which, if paid off over time, make Kiwi better off by pension age, she said.

She herself is expecting to have “a comfortable but not luxurious” retirement when she ceases paid work “because I’ve had the privilege of a tertiary education” and will have worked for 40 years at that point. “I will be somewhat less well-off than some of my male peers though I’ve been relatively well-paid throughout my life, and I generally won’t have too many complaints.”

But Wrightson says she believes hers will be the last generation (“young boomer”) to enjoy this level of comfort. Not only are members not contributing enough but withdrawals are too easy, in her view.

Wrightson studied law in the 1970s and has spent much of her career in quasi-legal roles. She is halfway through her second term as Retirement Commissioner and is a strong advocate for changing the legal framework around retirement.

The policy paper her commission is presenting to the government focuses on three key areas: joining KiwiSaver, contributions and withdrawals.

Part of its purpose is to counter misinformation, Wrightson says. “When there’s a lot of discussion around the space, it’s really good that we come in with some evidence-based facts so [stakeholders] can then develop their thinking.”

The paper also considers ways in which employers could do better. “They have to contribute only 3% at the moment. If [a member] is contributing 6% or 8% or 10%, we’re suggesting that the employer might like to do that too,” Wrightson says. “It’s what happens overseas.”

In some countries, governments match member contributions. “There’s an inequity here compared to international schemes, which is worth thinking about.”

Another area of KiwiSaver policy that needs more thought is incentives for self-employed members. A change in the government contribution for self-employed people might help encourage participation. Or the incentives might be around tax. “More work could be done in this space,” Wrightson said.

 

Rebranding needed

KiwiSaver is overdue for a rebrand, Wrightson says. “I think we’ve got a bit carried away with the marketing. It’s my view that KiwiSaver is not well-recognised as a retirement savings scheme and it needs to be branded as [that].”

That might help people to build up emergency funds and understand that KiwiSaver should not be touched unless the circumstances are exceptional..

Current KiwiSaver marketing has also missed the mark with some Māori and Pasifika people, who view savings collectively rather than individually, Wrightson says. “What we know is if you’re trying to pitch KiwiSaver as an individual benefit, it’s not going to fly very well in many Māori and Pasifika communities. You need to pitch it as part of a collective resource, available to the whānau or to the aiga. That works much better.

“We’ve done a fair bit of on-the-ground financial capability training with Māori and Pasifika cohorts. Particularly with Pasifika, you start off by saying ‘how are you going to support yourself in your retirement?’ And the answer is always, ‘my children will support me’.”

When the discussion is framed in terms of having a little bucket of money to help the children to buy a home, pay down their mortgage or contribute to family costs, then the light goes on, Wrightson says.

 

No purpose

As part of its framework, the Retirement Commission/Te Ara Ahunga Ora’s vision is a better retirement for all.

One difficulty in achieving that is that neither the New Zealand Superannuation and Retirement Income Act 2001 nor the KiwiSaver Act 2006 has a purpose, Wrightson says. Because of this, she formed an expert advisory group of academics and policy specialists to come up with a retirement income framework and purpose statement.

That purpose statement says: “A stable retirement income framework enables trust and confidence that older New Zealand residents can live with dignity and mana, participate in and contribute to society and enjoy a high level of belonging and connection to their whānau, community and country.”

Although the public most often hears Wrightson commenting on KiwiSaver, the commission has three workstreams: retirement income, financial wellbeing and retirement villages.

The two key pieces of legislation that most directly impact the role are the New Zealand Superannuation and Retirement Income Act and the Retirement Villages Act 2003. Although it does regular work around KiwiSaver, its policy role derives from the NZ Superannuation and Retirement Income Act rather than being set out in a piece of dedicated legislation.

In fact, no single government agency has overall responsibility for KiwiSaver and Wrightson has decided to take the retirement savings scheme under the commission’s wing.

“The thing about KiwiSaver is that the organisations that monitor it are fragmented,” she says. “I don’t think anybody looks at the health of the system much, which is where I’ve decided we can have a view.”

Both the Ministry of Business, Innovation and Employment (MBIE) and the Inland Revenue Department (IRD) have roles but they don’t extend to leading the thinking around KiwiSaver, Wrightson says. MBIE works on behalf of Bayly and the IRD is simply a conduit for the contributions. Unlike the commission, neither agency is member-focused and because of this fragmentation, KiwiSaver can fall through the cracks in the government’s work program.

 

Bayly’s thinking

The minister is signalling that he wants to do something, Wrightson says, but exactly what this means is not yet clear. Bayly has said publicly that he would like KiwiSaver providers to invest in New Zealand businesses, that the settings need tweaking and that KiwiSaver members should be able to split their savings across different providers. He has also flagged the idea that some renters could use KiwiSaver to pay tenancy bonds.

But such approaches stray into territory that, in Wrightson’s view, are not KiwiSaver’s prime responsibility.

“Should KiwiSaver providers be required to invest in [illiquid] New Zealand companies? Should KiwiSaver members be able to withdraw their funds for a rental bond? Those ideas, in my view, substantially detract from the purpose of KiwiSaver, which is individual retirement savings.

“It’s not an emergency fund. It’s not anything else. And retirement savings are the hardest of all savings to keep going, particularly when you’re in times of financial difficulty.”

When it comes to New Zealand Superannuation, that is important. Discussion around NZ Super settings arises relatively regularly and Wrightson doesn’t believe sufficient thinking goes into potential changes or how they might be intertwined with KiwiSaver.

“When you [say] ‘we need to change NZ Super’, the first question I always ask is, ‘why?’ Because NZ Super has to be really stable over time to encourage trust and confidence and to enable people to save.

“When you say ‘why’, they generally start off by saying, ‘we can’t afford it’. Then you go, ‘who says?’ And then you see lots of Treasury modelling and lots of assertions from relatively welloff people in suits. Nobody thinks about the universality of it.

“Nobody thinks ‘if we change things, who will it hurt?’ Which has been my main message. If we, for instance, put the age up, who does that hurt? This has to be the most important policy question, not ‘how much money do we save?’ Who does it hurt? It hurts women, Māori, Pasifika and manual workers.” Thinking around mitigations generally doesn’t happen, she adds.

“I advocate quite strongly, and wherever people will listen, that you have to look at these things from a long-term and holistic view. And if you do want to make changes, then you have to look at KiwiSaver, you have to look at incentives, you have to look at barriers, you have to look at tax, and then make any change holistically and with proper evidence. ‘It’s not just about cost’ is my short version of that statement.”

Wrightson adds that increasing the age of eligibility is the simplest administrative thing to do, which is why people default to it. “I quite naughtily suggested income testing as another option, which is one of the hardest ones to do. I don’t mean means-testing because it’s not unreasonable for people at pension age to have assets.”

Income testing, however, would result in a whole new industry of avoidance. “So it becomes complex and then people default back to the age and we go round in circles.”

Wrightson says her role is to publish independent and principled research on such topics. “That hopefully shines a light on situations where people sometimes opine but there’s not much fact behind it. And every once in a while, I will say to a minister, ‘look, this is how we can do this, if you wish’.”

A summary of the commission’s recent Super Summit where these ideas were discussed can be found here

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