Hatching plans for bigger Kiwi nest eggs 

While the kiwi lays the biggest egg, the same can’t be said for Kiwi nest eggs. In international terms we’re a savings hummingbird.

The need to lift New Zealand household savings was starkly illustrated by the recent global downturn. It clearly demonstrated the risk of being so heavily dependent on other countries’ savings and on the vagaries of international investor sentiment. As a result, envious eyes have been cast across the Tasman at Australia’s $1.3 trillion superannuation savings pool.

Little wonder then that calls for New Zealand to make KiwiSaver compulsory have become louder. But what can we learn from the Australia’s experience with compulsory savings?

Last month the Australian Government released the final report of a review into Australia's   superannuation system (“the Cooper Review”).

Commissioned by the Australian Government, the Cooper Review makes a number of recommendations to make Australia’s superannuation system simpler, safer and more efficient.

At the heart of the Review is a belief that the superannuation system should be member oriented, rather than industry oriented. As the Review states, “Members should not have to be interested, financially literate, or investment experts to get the most out of their super. If members want to engage and make choices, then the system ought to encourage and facilitate them doing so. If members are not interested, then the system should still work to provide optimal outcomes for them.”

Its recommendations could deliver more than $1.5 billion in the short-term alone to an already bulging Australian national savings wallet. Better still, they aim to build trust and promote transparency in the financial sector – something the Australian savings industry itself will no doubt welcome.

So what can or should New Zealand learn from the Cooper review?

The main message is that before we make savings compulsory we should ensure that our savings industry is ready for the responsibility. Compulsory savings means just that – compelling working people of all incomes to save a proportion of their money, whether willing or interested or not. The resulting responsibility that goes with this for those entrusted with the funds and with oversight of the sector cannot be underestimated.

It’s pleasing, then, to see calls from the New Zealand industry itself to introduce greater transparency and institute stronger oversight. The current Government has already moved to improve the sector’s regulatory framework, including around KiwiSaver.

Secondly, savings policy should be designed for the real world. The reality is that not everyone is going to have the interest, aptitude or willingness to make investment choices. While efforts are being made to lift our levels of financial literacy, differences in individual ability and interest will still remain.

We should follow the Cooper Review’s lead and have a savings system that gives the best results for both active and passive savers. Introducing a “life-cycle” approach for KiwiSaver default funds – where the asset mix adjusts to match a member's age – would be a good step in that direction.

Thirdly, compulsion would inevitably mean more changes to KiwiSaver. In a compulsory scheme there’d be no reason to retain the current incentives to join KiwiSaver – it would be compulsory after all - although there may be an argument for retaining some ongoing government contribution for those on low incomes.

Removing the current subsidies would create a sore point between those who had joined before and those who had joined (or been made to join) after the scheme became compulsory. One way to balance fairness and overall affordability may be to time limit the subsidies. Time limiting would make it fair because everyone would get the member “tax credit” for the same period of time, for example, for five or ten years only, irrespective of when they joined.

In addition it’s likely that some sort of transitional arrangements would need to be put in place for those near retirement age whenever the compulsory scheme was introduced – perhaps by government “topping up” the savings of those who were at that stage, say, within five years of retirement age. The existing right to take, in effect, unlimited KiwiSaver contributions holidays would also need to be re-examined.

It’s unlikely that there’d be an immediate return to the 4% minimum employee contribution rate. Union submissions on the original KiwiSaver scheme and Inland Revenue’s first Annual Report on the scheme itself all pointed to the hurdle that 4% created for would-be savers, particularly for those on low incomes.

Immediately returning to the 4% rate would therefore simply be making the unaffordable unavoidable for these earners.

This doesn’t mean the rate shouldn’t be increased in the future. As the Australian experience has shown, where increases in the contribution rate are signalled well in advance, employers and employees are better able to factor this into wage expectations and negotiations.

The introduction of compulsory savings would also put pressure on current retirement income settings. The Government has firmly ruled out making any changes to universal NZ Super, but the addition of compulsory savings into the existing mix of an ageing population, and government finances under increasing pressure and multiple demands means that a “no changes ever” stance will simply not be tenable.

Finally, making people save will inevitably mean people will make savings elsewhere. A study by Australia’s Reserve Bank suggested that about 38 cents in every dollar saved under their compulsory scheme was offset by a decrease in voluntary savings. Even if that was also the case here in New Zealand, two thirds of something is better than all of nothing.

If Kiwis want bigger nest eggs we need to lay the right savings foundations. Current moves to increase transparency and put in place tougher oversight and better accountability are in the right direction. Compulsory savings might then be egg-xactly what we need.

Jan Dawson, Chief Executive, KPMG in New Zealand.

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