KiwiSaver

Prime Minister Christopher Luxon told the recent FSC Outlook come to us with your five best ideas and let's see what we can do. So Good Returns asked some fund managers for their top five KiwiSaver change ideas.

KiwiSaver providers are united in their view that KiwiSaver should not be subject to political cycles.

John Berry, founder of Pathfinder, said a cross-party, long-term plan for retirement savings was top of his KiwiSaver wishlist.

“We’re lifting the savings rate from 3% plus 3% to 3.5% plus 3.5% to 4% plus 4%.  If we want to get to where Australia are, which is 12% from the employer, that could be six plus six in New Zealand, but how are we going to do that?

“That should be something that's got cross-party support… a 10-year plan that is supported by everyone as a good idea for increasing savings over the long term.”

Pie Funds chief executive Ana-Marie Lockyer agreed. She said a long-term cross-party strategy was important. “KiwiSaver has enormous potential — both for improving retirement outcomes and for supporting productive long-term investment — but we need consistent policy settings to unlock that fully.”

Fisher Funds general manager of KiwiSaver David Boyle said there should be a planned runway of contribution increases that was clearly signalled to members well ahead of time.

“It’s not a surprise, they get comfort in advance… how we can see ongoing contributions increasing not just to 2028 but how do we get the further in a way that would allow both employers and employees to be able to plan ahead and take into account other business expenses. Having that really well signalled gives a lot of comfort for New Zealanders.”

Koura founder Rupert Carlyon said there should be more clarity on the purpose of KiwiSaver at government level, too.

“It feels as though KiwiSaver is all of a sudden seen as a free pot of money for everything and the government is happy to open up withdrawals as it is an easy and free win for them.

“It’s not a tool to build infrastructure, housing or buy farms. It’s a tool to fund people’s retirements.”

Morne Redgard, SBS Wealth chief executive, said the only way the country could make its superannuation system sustainable was by changing the KiwiSaver settings and putting individuals in a better financial position.

“That's not an easy, quick fix, but I think contributory rates is certainly part of that.

“And National have committed that if they come back into governance over the next six years or so, you know, they'll lift it to 6%, which again, I think would be a great thing. But it would be really good to see that timeline put in writing that people can work towards.”

Splitting contributions

Berry said he would also like to see members able to split their contributions.

He said the majority of Pathfinder members were women and the gap between male and female balances was significant.

That could be closed by allowing a couple to direct KiwiSaver as appropriate, he said. “If someone was off work to mind the children, their partner could direct their KiwiSaver contribution to both KiwiSavers, or just to their partner, if they wanted to.”

Total remuneration

Total remuneration packages have been a topic of discussion this year and many providers, as well as the Retirement Commissioner, have called for a ban.

Lockyer said this was something that needed to be attended to so that employer contributions were “truly additional”.

Chris Wilson, co-chief executive at Harbour Asset Management agreed that this was a problem. “Employers should not be able to include KiwiSaver contributions into total remuneration packages. Employer contributions should be on top of wages or salary, not lumped in so the employee ends up paying all of it.”

Redgard was also supportive of a change to the rules. “Contributions need to be over and above your income…some people aren't benefiting as much as some others. So it all depends what industry you're working in and what your employer is like."

"That just needs to be standardised, so the number that you get paid is the number that you get paid, and then your KiwiSaver contributions should be over and above that."

“I think that's more just about standardising the actual (language so that people can understand that. And it's just a standard across the industry.”

Compulsion

Lockyer said there should be a serious conversation about compulsion to lift participation and outcomes.

Boyle said it could work to make it compulsory for those who were turning 18 now, to get them into the habit early.
“It’s automatically enrolled, it’s compulsory and that’s your experience going forward. It might be a great way for the next generation to get used to it… for someone leaving school that’s the norm.

“A bigger conversation is do we take that any further but that could be a first step.”

Wilson said he wanted to see more New Zealanders in KiwiSaver.

“This would involve making it compulsory but also designing targeted measures to help the self-employed to fully participate and benefit.

“We see a lot of merit in the idea of kickstarting a KiwiSaver account from birth. Time is the ultimate builder of wealth, so a dollar saved from birth will deliver more for a member than one squirreled away at 18.

“Work needs to be done to look at whether the current government contributions approach remains fit for purpose or whether these might best be redirected to provide a head start to newborns. This would encourage greater financial capability for all New Zealanders as kids would be able to watch their balance grow over time with some real skin in the game.”

Redgard said the opt-out model was not delivering the best outcomes for some people, who might not realise the impact of decisions made earlier in their working lives.

“I think as people are coming into the workforce, liquidity is probably the tightest thing on a monthly basis. So if there is an opt-out, a lot of people just jump on that, because every dollar counts.

“Every dollar always counts but especially in the beginning phases, it’s probably an easy decision to make for some.

“I think we should take that option off. And because retirement, although most people, probably 90-odd percent of people don't think about that when they're 20 years old.

"And there's a lot of water to go under the bridge at that stage. So, you know, we should start looking after people at an earlier base.”

Incentives

Carlyon said there needed to be incentives to give people more of a reason to invest in KiwiSaver.

Most of the initial KiwiSaver incentives have disappeared, such as the member tax credit and $1000 kickstart payment. Carlyon said there was little on offer for investors to encourage them to tie up their money, compared to other countries that offered things such as tax breaks for retirement savings.

Carlyon said if any moves to compulsion were made without new incentives, people would just see it as a tax. “It can’t be done without incentives.”

Redgard said if KiwiSaver was to be made compulsory or contribution rates increased, people would need to see the benefit.

“Making the contributions tax free into the scheme will certainly take the sting out of making it compulsory and increasing those contributory rates. So I think that's something we certainly would like to see the government considering.

“I haven't done the numbers on that, and how is that going to impact the overall fiscal situation, because obviously, taxes feed superannuation. But I think those are some of the things we should certainly be looking at.”

 

Image source: LinkedIn

Director and investor Fraser Whineray has delivered his plan for “KiwiSaver 2.0” to political parties this week.

The plan sets out changes that he thinks would make the scheme more robust into the future.

Whineray says contribution rates are low by international standards, access is tied to the age of eligibility for NZ Super, which makes it open to political change, and youth participation has dropped sharply since the $1000 kickstart was removed.

On top of that, contribution rates are insufficient, and people taking parental leave end up with less in their retirement savings. The distribution of Government incentives, now worth about $500 million a year, is also uneven, he says.

“They disproportionately benefit those already well engaged with KiwiSaver and are absent from early childhood, where time and compounding could do the most work.”

He wants $5000 to be given in a growth fund to each child at birth, and for families to contribute $100 a year matched by Government. He estimates that would give 18-year-olds about $25,000 in their accounts.

“There's a social side to that, but if we're just talking pure economics and technicals,  time in the market and compounding is absolutely the game, and I just think that half a billion dollars we currently spend today is regressive and it should be put to a much better and fairer use.”

Contribution levels would also be increased over 20 years, starting with a 2 percent compulsory employer contribution, increasing by 0.5 percent a year until it reaches 12 percent in 2047.

Employee contributions would be voluntary

“Any increase in compulsory employer contributions raises a legitimate question: what does it mean for wages? The honest answer is that over the long run, the cost of higher employer contributions tends to be reflected in the labour market, through modestly lower wage growth than would otherwise have occurred, higher prices, reduced profits, or some combination of all three. The mix depends on the sector, the economic cycle, and the bargaining power of employees at any given time. Pretending otherwise would undermine the credibility of this proposal,” Whineray said.

He said for changes to KiwiSaver to last, they had to be durable.  That was why he modelled a 20-year contribution rate transition, he said. “That has to be done incredibly slowly otherwise ethe impact on wages, the economy, or inflation –  a whole range of things – will be too much of a shock.”

A gentle transition would stop people being left behind.

He said the Government should also take over employer contributions from people taking parental leave, to ensure that people who took time out of the workforce were not left behind.

He would also set the KiwiSaver withdrawal age at 65, and add a decumulation framework to help people access their money.

Generate says providing advice on KiwiSaver can help create “a moat” around an adviser’s business.

“The more problems you solve, the more like they are to stay with you,” Generate’s head of distribution, Kristian James, told advisers, adding that advising clients on other managed funds is also an opportunity for advisers.

Speaking to a mix of investment, mortgage and insurance advisers in Wellington as part of Generate’s current roadshow around the country, James noted that research has shown that those with advisers are 4% better off each year and have 50% more in their KiwiSaver accounts.

Advisers should play a part in increasing KiwiSaver’s value and, with the average KiwiSaver balance now at about $36,000, “the KiwiSaver story has become more and more important to people.”

With a $1.6 trillion inter-generational wealth transfer happening over the next 30 years, property investment and term deposits are no longer as appealing as they used to be.

Generate has grown to 185,000 members with $8.7 billion in funds under management and more than 90% of its business coming from advisers said.

James said more needs to be done with KiwiSaver to drive the need for Kiwis to save more especially as New Zealand Superannuation comes under increasing pressure.

Quoting a Massey study, Generate’s head of distribution, James said that by 2065 it is estimated that there will be only two workers paying each retiree’s NZ Super.

“The numbers aren’t quite working out,” James said. “The retirement gap is real and it needs to be solved.”

He noted that the current government has recognised the gap between the amount people are saving and the amounts they will need to live on in retirement by pledging to lift contributions to 12% by 2032 with individuals and their employers each contributing 6% of that individual’s income into KiwiSaver.

While more than $123 billion is currently invested in KiwiSaver, that pales into insignificance alongside Australia’s $5.12 trillion invested in its superannuation schemes, which already require 12% contributions and which is compulsory whereas KiwiSaver remains a voluntary scheme.

While NZ has about a fifth the population of Australia, KiwiSaver’s value is just 0.2% the size of Australia’s superannuation scheme, James said.

He said Generate is ready to assist advisers in educating and empowering Kiwis, offering training, technology and administration so that advisers can offer their clients Generate’s products seamlessly – the company launched six new funds last year, three of which were KiwiSaver funds.

KiwiSaver providers are cautiously supportive of changes to make it easier for farmers to buy homes – but would prefer the tinkering with the system stopped.

The Government announced at the weekend that the laws would change so that people who have jobs where accommodation is provided can still use their accounts to buy a house.

The rules have previous required that people withdrawing money for a first home do so with the intention of living in it.

"Workers in service tenancies, such as farm workers, rural teachers, country cops, and defence personnel, have effectively been locked out of first home withdrawal because their jobs require them to live in employer-provided housing," Finance Minister Nicola Willis said.

“That’s not fair, so we're making a technical change to the KiwiSaver Act to ensure workers in service tenancies aren't denied the opportunity to put a foot on the property ladder.

"The change will allow service tenancy workers to use their KiwiSaver for a first home purchase without having to live in it."

People will also be able to use their KiwiSaver balances to purchase a farm through a commercial entity they majority own, when they plan to live on it.

Pie Funds chief executive Ana-Marie Lockyer said the service tenancy change was logical.

“Allowing balances to be used in connection with purchasing commercial farming operations raises more complex issues. The devil will be in the detail, and as a provider, we’ll need to understand the operational impact once that detail is clear.

“Stepping back, I’d prefer to see less tinkering with KiwiSaver settings and more focus on a bipartisan long-term strategy. KiwiSaver is now central to New Zealand’s retirement system — it deserves stability and a clear roadmap for the next 20 to 30 years.”

Financial Services Council chief executive Kirk Hope also told media he had similar concerns. He said any time the scope for withdrawals was widened, it could undermine the scheme as a retirement savings vehicle.

Koura founder Rupert Carlyon said he was not convinced the changes would make much difference.

“The changes look sensible, but the devil will be in the detail. Personally, I very much doubt there will be very many farmers that end up using KiwiSaver to buy their farms that are not already doing so – you are already allowed to use them if buying in your personal name. 

“I also support the idea that people provided with housing for their work will be able to buy a house using their KiwiSaver.

“My only concern would be, is this a great use of Parliament’s time? I suspect we are talking about hundreds of additional withdrawals a year here – a lot of effort for a pretty small change.”