KiwiSaver remains best saving option for most, says ISI

Despite the changes to KiwiSaver announced in the last Budget the scheme remains the best long term savings vehicle for most New Zealanders, according to the Investment Savings & Insurance Association (ISI).

As expected the changes signalled by the Government include halving the Government-paid Member Tax Credit from July 1, making employer contributions subject to Employer Superannuation Contribution Tax (ESCT) from April 1, 2012, and increasing minimum contribution levels from 2% to 3% for both employees and employers from April 1, 2013.

The ISI said some changes to the scheme were inevitable given the problems the country faces in the wake of the Christchurch earthquakes, but that “it remains the best long term savings vehicle for most New Zealanders.”

Analysis carried out by the ISI shows that for a 25 year old earning the median income of $48,000, the overall impact of the changes would see their pot of savings at retirement increase by $35,000 (in current dollar terms) if invested in a typical default fund. The combined effect of the reduction of the Members Tax Credit and ESCT would take $40,000 out of their final account but the increase in the contribution level to 3% by both themselves and their employer adds back another $75,000.

In this scenario, the impact of raising the employee contribution from 2% to 3% would see the employee’s contributions raised by $9.20 a week.

ISI chief executive Peter Neilson says that increasing minimum employer and employee contributions from 2% to 3% will create a more sustainable savings platform, and increase the level of capital required to invest in raising national productivity while reducing dependence on foreign capital over time.

He said he was pleased the Government signalled its long term commitment to KiwiSaver by announcing its intention to carryout further work on several of the Savings Working Group recommendations, particularly around automatic enrolment (with voluntary opt-out) and changes to the tax treatment of savings.

However, he said the ISI believes the Government needs to commit to raising the level of savings over time so that eventually contribution rates are at similar levels to Australia.

“The Government could do this by introducing a defined series of small but predictable annual increases over an extended period. This would allow employers and employees to plan for these changes with confidence and allow New Zealanders to increase their level of savings as the economy improves and real incomes increase.”

Neilson also said just as the superannuation industry plays a vital role in supporting the Australian economy, KiwiSaver will also become increasingly important to the national economy over time.

“The Government are predicting that KiwiSaver will grow into a $60 billion industry over the next ten years, making it a major contributor to the future success of our country. By creating a significant pool of funds for investment in business and infrastructure projects, the country will become less dependent on foreign capital.”

He stressed though given the importance of KiwiSaver’s future role, it was vital the scheme remained predictable and sustainable.

“This will require all political parties to come together to agree on the future structure and direction of KiwiSaver. Over the next year it is important that we have that debate.”