KiwiSaver

Concerns about KiwiSaver creating inequity in the retired population would be better tackled by abolishing the scheme entirely than introducing new tax incentives to get people saving more, the working group considering the future of tax policy has been told.

The Tax Working Group recently took submissions from the public on New Zealand’s tax system. Rob Dowler, former head of the Securities Industry Association and now an independent industry consultant, provided his submission to Good Returns ahead of the official release of submissions, likely in October.

A number of submissions are understood to have suggested changes to the way long-term savings, in particular KiwiSaver, are taxed.

Former Revenue Minister and former FSC boss Peter Neilson released his, which said his government got it wrong when it axed incentives for superannuation saving schemes. He said earnings within KiwiSaver should be tax-exempt to boost returns.
Dowler said such changes only served fund managers and savers who could afford to save and were doing so anyway.

He pointed to reported comments by the group’s chair, Sir Michael Cullen, in which he said the scheme should be mandatory, to tackle the problem of growing inequity between those people who had saved in their KiwiSaver accounts over their working lives and those who had not.

Dowler said some people were not contributing to KiwiSaver because they could not afford to. To mandate them to do so would come at the expense of their ability to meet their basic living requirements.

“If compulsion is introduced, to ensure that the living standards of this final group are not adversely impacted, government has no choice but to either enhance the income of this latter group to cover the contributions required to be made to KiwiSaver, or alternatively for the government to make some or all of the payments direct to KiwiSaver that such individuals would otherwise be required to make.

“It is at this point that one can ask, in the face of a universal NZ Superannuation payment and minimal poverty reported amongst the aged population, what the point of KiwiSaver is?

“It only has a point if it is believed that NZ Superannuation is insufficient in itself to provide an adequate retirement income, or if there is an as yet unstated intent to replace NZ Superannuation with KiwiSaver or make NZ Superannuation means-tested again.”

He said inequity could better be reduced by abolishing KiwiSaver and allowing voluntary savings for those who wanted it, with support from the pension.

“Retirement saving is simply about having enough money when one wants to retire to enjoy the lifestyle that one aspires to at that time. It does not need to be in a specialised ‘retirement’ fund. Providing incentives, introducing compulsion and locking money away until a specified age simply introduces unnecessary distortion, increases inequity, and reduces personal financial flexibility.

“Even without compulsion, KiwiSaver does all of this, with the restrictions on financial flexibility specifically recognised in the circumstances allowing withdrawal of funds in the case of hardship and buying a first home. KiwiSaver fails to recognise the other costs that the lack of flexibility within the scheme imposes.”

New Zealand’s fund management industry should do more to help shake Kiwis out of their too-conservative approach to investing, one KiwiSaver manager suggests.

Bruce McLachlan, chief executive of Fisher Funds, said his firm’s modelling showed the optimal strategy for a mid-50s investor was to have 60% growth assets at 55 and more than 40% at 60. Even at 90, they would have 20% in growth investments.

“Our analysis suggests a much slower reduction in growth assets is the preferred KiwiSaver strategy,” he said. “Because New Zealand started KiwiSaver so recently many fund managers are using lifestage models from overseas data, where retirement savings have been in place for much longer and at higher levels.

“Because most New Zealanders are way behind there is a need, indeed a requirement, for many to have more exposure to growth for longer.”

By contrast, ANZ’s Lifetimes KiwiSaver options guides investors over 60 into a conservative fund, and into cash over 65.

McLachlan said those who suggested risk be dialled down quickly were subscribing to a school of thought that arose in a time when life expectancies were less.

“We used to retire at 65 and die at 75. That led to a certain strategy. Now, life expectancy is 84 and on its way to 92. We all have to plan for life stages and that last life stage could be an extra 10 or 20 years. The strategy should be different.”

But he said, rather than schemes making changes, New Zealanders’ attitude needed alteration.

The amount of money people had lost over the last 10 years because of their conservative approach was massive, he said.

“It’s everyone’s job. It’s clearly our job, the regulators, the media, the product providers – we all have an obligation to educate and share that knowledge.”

McLachlan said too-conservative investment was a bigger concern than fees, which get more attention.

“If you’re focused on, say 50 basis points of fees and you are missing out on 5% in investment returns, are you focusing on the right thing?”

He said the default KiwiSaver funds should be balanced, not conservative.

MPs including the Commerce Minister claim to be part of a scheme that was wound up five years ago. Good Returns checks out the latest register of pecuniary interests to find out where MPs have their money.

If the working group pondering potential tax changes for New Zealand alters the incentives around KiwiSaver, most MPs will benefit, too.

The latest register of pecuniary interests shows that just 14% of MPs are not members of a KiwiSaver scheme.

Most (25) are with AMP. Another 16 are with ANZ, 14 in ASB schemes and 11 with Kiwi Wealth.

Many MPs also have other non-KiwiSaver superannuation savings accounts.

Prime Minister Jacinda Ardern is saving for retirement in four schemes: AMP’s State Sector Superannuation Scheme, to which she has made no contributions since 2005, AMP’s Retail Superannuation Scheme, ANZ KiwiSaver and a Fidelity Life Super Plan.

National leader Simon Bridges is in Milford’s KiwiSaver scheme and is a member of the St Catherine’s Superannuation Scheme.

Green Party co-leaders James Shaw and Marama Davidson are in Kiwi Wealth’s scheme.

NZ First leader Winston Peters is not in a KiwiSaver scheme but is a member of the Government Superannuation Fund.

National MP Gerry Brownlee and Commerce Minister Kris Faafoi still list membership of an AXA KiwiSaver scheme – this was rolled into AMP’s scheme in 2013.

Minister for Building and Construction Jenny Salesa still says she’s a member of Tower KiwiSaver, which has been part of Fisher Funds since 2013.

It comes as former FSC chief executive and former Revenue and Assistant Finance Minister Peter Neilson lobbies the tax working group, chaired by KiwiSaver initiator Michael Cullen, for better tax breaks for KiwiSaver members.

He made a submission to the group, telling it that New Zealand workers on the average wage cannot save for a comfortable retirement in KiwiSaver. He said his government was wrong to drop tax incentives on superannuation schemes, but at that time, it was only the comparatively better off who had them.

Neilson said contributions and earnings to the schemes should not be taxed, which would enable people to amass larger amounts much more easily. He said, as it was, those who had term deposits and KiwiSaver were at a disadvantage compared to those who built their wealth through investments in real estate.

Tax changes to KiwiSaver are needed to encourage New Zealanders to start saving enough for their retirements, an AFA has told the Tax Working Group.

Drew Hoffman, an authorised financial adviser at Newton Ross, said New Zealanders were saving too little in KiwiSaver – and the lack of tax incentives on the scheme could be to blame.

He said it compared unfavourably to other countries’ structures. In the UK, contributions and fund growth are not taxed but distributions are. In the US, under the Roth option, contributions are taxed, growth is not, and distributions are not.

“Once an employee has contributed up to 3% of his or her salary, there is no incentive for him or her to contribute anymore under the KiwiSaver scheme. A contribution rate of 3% for most people is not going to result in a comfortable retirement,” Hoffman said.

“With the amount of New Zealand Superannuation likely to diminish because of population demographics, the New Zealand government needs to incentivise Kiwis to save more.”

He said the Roth option would be good choice for New Zealand.

“Income and growth on current amounts in KiwiSaver accounts would no longer be taxed and income and growth on additional contributions would not be taxed. I recommend that the limits on contributions be set at $15,000 per annum or 15%, whichever is lower, for employees under age 50. Employees aged 50 and over should have limits of $20,000 or 20%, whichever is lower, to encourage savings for those nearing retirement.”

He said the government was making money off KiwiSaver at the moment, even when the $521 tax credit for each member was taken into account.

“In the future, the amount made by the government on taxation of KiwiSaver will only increase under its current form. The New Zealand government needs to get serious about encouraging people to prepare adequately for retirement. In order to do that, it needs to give up some of its current revenue, otherwise it will have much larger problems on its hands in the future in attempting to fund New Zealand Superannuation.”

The government could drop the member tax credit.

He said employer contributions should also be increased to 5% and employees’ contributions to 7%, with the provision for employers to reduce employee pay to fund the match.

The public consultation period for the Tax Working Group generated 6700 submissions.

“I would like to thank the New Zealand public for taking part in the process and assure everyone that all submissions will be carefully considered,” said chairman Michael Cullen.

About 16,000 votes were received on the quick polls on the Tax Working Group website.

The unscientific polls revealed the majority of respondents thought the tax system needed major changes to be ready for the future.

The prospect of a capital gains tax topped the chart of important tax issues followed by funding retirement and protecting the environment.