New Zealand's KiwiSaver scheme has been in operation for over two years, but recent cuts to contribution rates have threatened to damage the scheme, as Rachel Alembakis reports
As the New Zealand KiwiSaver, a voluntary individual retirement savings vehicle, surpasses its second year of operations, the industry is still dealing with another raft of government changes that halved potential employer and employee contributions.
After a November 2008 election that led to the National Party coalition taking over after three terms of Labour Party leadership, Finance Minister Bill English announced that from April 1, the minimum member contribution rate would be cut from 4% to 2% and that compulsory employer contributions would be capped at 2%. Employer tax deductions for contributions and a government subsidy of NZ$40 for member administration would also end.
New Zealand doesn’t have a good savings record, and to reduce the contribution that most people would be expected to make from 4% to 2% is a major step backwards
This move constituted a dramatic change from the initial structure and government approach to KiwiSaver. Commercial providers and some peak body representatives were undoubtedly disappointed with the decision.
“It’s a disappointing move,” said Investment Savings and Insurance Association chief executive Vance Arkinstall. “New Zealand doesn’t have a good savings record, and to reduce the contribution that most people would be expected to make from 4% to 2% is a major step backwards in terms of developing a long-term savings culture. It seems to be brought about by economic conditions, but nonetheless, in the long term scheme of things, it’s certainly not a good thing.”
Two steps back
English’s announcement was a major cut to what the previous government had started. KiwiSaver legislation was passed in 2006, and in May 2007, then-Treasurer Michael Cullen’s budget speech introduced a raft of changes and incentives, including mandatory matching employer contributions for employees with KiwiSaver accounts – 1% in the 2008/2009 fiscal year, rising to 4% matching by 2011/2012. The government also gave companies a tax credit of up to NZ$20 per week, per worker, and ruled contributions tax free. In addition, the government sweetened the deal for individual enrolees by matching contributions 100%, up to NZ$20 per week; and “kick-started” each individual account with NZ$1,000, and the NZ$40 fee subsidy.
But the Association of Superannuation Funds of New Zealand (ASFONZ) chairman David Ireland noted that the reduction in the minimum contribution rates did make it more attainable for low-income wage earners and did increase the flexibility for individuals and employers to direct funds for retirement savings.
“We welcome the move in terms of the concerns at the 4% member contribution rate for New Zealanders making it unattainable for a number of lower paid people,” he said. “Two percent does make it more flexible for members and their savings, and it opens up the possibility of those contributing to KiwiSaver to possibly divert the extra 2% that they no longer need to put into KiwiSaver into another form of retirement savings.”
KiwiSaver has proven a popular vehicle since its inception. As of the end of January 2009 – there were 932,636 members in KiwiSaver, according to Inland Revenue statistics. In KiwiSaver’s first year of operation, from July 1, 2007 to June 30, 2008, Inland Revenue, which works as a clearing house for all KiwiSaver contributions, distributed NZ$1.037bn in member, employer and Crown contributions to scheme providers, according to Inland Revenue’s first annual report on KiwiSaver. From July 1, 2008 to the end of January 2009, Inland Revenue distributed an additional NZ$1.33bn in contributions.
KiwiSaver is not directly tied to an employer. Individuals must actively opt out of the KiwiSaver scheme and if an employee makes no decision to either opt out or actively choose a KiwiSaver provider, Inland Revenue will automatically assign that employee to one of six “default” providers, as selected and registered by the government. Enrolees placed into a default provider are automatically placed in a conservative asset allocation – typically consisting of 70% bonds and 30% equities.
But with the cuts from April 1, the long-term savings potential will decrease by 35% to 40% and the cut to the accumulation of assets will make it untenable for some providers who have not been able to attain economies of scale, said ASB Group’s head of wholesale distribution Greg McAllister.
“Under the two plus two model, New Zealanders will only save 60% to 65% of what they would have otherwise saved as originally designed,” McAllister said. “One of the really interesting challenges for providers has been trying to develop their business models based on a changing legislative landscape. One of the comments I made to a forum of providers and superannuation fund providers is that changing from four plus four to two plus two has put a tremendous dent in the models.”
There are currently more than 30 KiwiSaver providers and more than 50 KiwiSaver fund options, and McAllister predicts that there will be provider consolidation.
“This [is] a crowded market landscape,” he said. “It’s a low margin industry. You can’t expect many schemes to survive given that the steam has gone out of the business model. The larger schemes are in a good position because they’ve got economies of scale. There is a downside [to scale], though. The downside of having too many members is that whenever the rules change, we have to communicate with the members. If I have 167,000 members and it costs me $1 to communicate with members I’m incurring a $167,000 cost.”
In reflecting on the first two years of its operation, one of the more surprising outcomes is the relatively limited role the workplace has played in rolling out KiwiSaver to members. KiwiSaver as designed by the previous government was to be a retirement vehicle through employment. But according to Inland Revenue’s first annual report into KiwiSaver, the opt-in rates via the employer only constituted 17% of enrolment, while opt-in via a KiwiSaver provider was 47% and auto-enrolled members constituted 36%. This means that the vast majority of members who enrolled in the first year opted in via a retail setting, rather than tying in with a provider as suggested by the employer.
“Employers are quite reluctant to allow advice [in the workplace], and employers don’t want to risk being seen as providing advice for employees and them being responsible for any underperformance that might result from that,” Arkinstall said. “It is an issue that does need to be resolved. There are a number of advisers that do provide advice to their customers, whether they provide a fee or not or do it as part of the overall package.”
McAllister of ASB calls employers the “reluctant suitors”.
“There are two reasons – one is, at that time [of launch], there was a bit of uncertainty in the financial industry overall,” he said. “Markets were showing mixed stories and we all know what’s happened subsequently. Secondly, employers didn’t want to be seen as giving a hint of advice.”
However, Ireland of ASFONZ pointed out that the relatively low employer opt-in percentages are a function of two factors – one being the unexpectedly large enrolment figures, and the other being that there are strict rules governing the extent to which employers can get involved with advising employees on enrolling in KiwiSaver, choosing a provider and choosing a fund.
“From the employers’ side, there’s not that much encouragement to get involved. In particular, the previous [government] regime had strict limitations on how employers could help and this discouraged employers from getting involved,” he said. “With the new changes, there is no employer tax credit, but now there is actually a bit more flexibility in it for employers to look at topping up, or having a combination contribution arrangement – a KiwiSaver and an employer superannuation scheme.”
Within all this, KiwiSaver providers are not considering changing their asset allocation given the economic environment.
“It’s steady as you go,” McAllister said. “They’re diversified, they’re mixed, they’re well stated, and there’s an appropriate range of risk return. That uncertainty could be driving people to stay in the conservative fund until they get a sense that markets are stabilised. Individuals in the KiwiSaver scheme are relatively unsophisticated investors. Most people have assigned themselves to the default option – a conservative index tracking option.”
Mercer is currently undergoing a global asset allocation exercise, and New Zealand is included in this activity, said Lewington. Mercer, which operates a default KiwiSaver fund, may change its benchmarks as a result of the exercise.
“We always take a very strategic view and are continually reviewing asset allocations,” he said. “We are going through an exercise at the moment, reviewing what our return expectations are across the various classes. Once we’ve done that, feed back in the modelling, might make some changes,” he said. “Certainly, the Mercer offering does include an allocation to the alternative assets – that’s hurt us over the past year – private equity, infrastructure and hedge funds. We will be reviewing that place as part of that exercise.”
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