Funds industry plots strategy to get MPs to upgrade KiwiSaver

Saturday, 7 September 2024

When the late Michael Cullen created KiwiSaver, the intention was to review it every few years. That hasn’t happened.

ANALYSIS: The KiwiSaver industry wants upgrades for the 17-year-old scheme, but it’s realised it’s time to stop touting ideas rejected by government after government.

Gathered at the Cordis Hotel in Auckland this week, the great and good of the industry lamented how the scheme, which now holds more than $110 billion of our savings, has been neglected.

All agreed a thorough government review of the scheme was long overdue.

And everyone agreed what that review would find: People were not saving enough into the KiwiSaver funds from which fund managers earned their livings.

Jealousy of the A$3.5 trillion ($NZ3.796 trillion) Aussie super industry was rife, but so was injured national pride. Super settings in Australia were helping drive a huge economic divide as the Lucky Country sees its wealth compounding as Godzone’s trails behind.

But what could be done to interest MPs, and especially the sitting Government?

What fresh ideas were there that had not already been consigned to the reject bin?

How the KiwiSaver scheme has changed over the years.

Ideas were knocked around. The most promising were the ones that would involve asking for the least money from the public purse, consensus held.

The problem with KiwiSaver

Conference delegates felt New Zealand was sleepwalking into an unsustainable future, one in which an increasingly aged society struggles to pay NZ Super - the Government-provided pension - at its current levels.

It’s a future in which KiwiSaver could become more than a bit extra to supplement NZ Super. It could be a mechanism for taxing the workers of today to save over-taxing the workers of the future.

One politician at the conference worried about that future.

Labour’s Barbara Edmonds told delegates: “By 2060, 10% of our GDP will be spent on superannuation. 7% will be spent on healthcare.”

Superannuation was the fastest-growing expense on the government’s balance sheet, she said.

“As a mother of eight. I am thinking, what is the world I want to leave my children?” she asked.

Labour Finance Barbara Edmonds is willing to take tough choices on KiwiSaver, but it’s the Labour policy-making machine that will do the choosing.

She was willing to be the bearer of “tough choices” because our next generation deserved better, but Labour’s slow policy-making machine hadn’t got round to deciding whether tough choices would be taken on KiwiSaver.

Kim Mundy, ASB economist, compounded Edmonds’ message. The dependency ratio of working age people to retirees would shift dramatically in the next 30 years, she said.

“We are looking at it going from four taxpayers funding one retiree, to two taxpayers funding one retiree. That’s putting a massive burden on future taxpayers to pay for my super, should it still exist then.

“If we don’t change the system, it will become unaffordable,” she said.

Prime Minister Christopher Luxon has acknowledged this direction of travel. He favours lifting the age at which people qualify for NZ Super to 67, only he doesn’t plan to start the process during this government term.

A political blueprint for KiwiSaver

Finance Minister Michael Cullen thought New Zealand’s savings rate was awful, and created KiwiSaver to change that.

Conference talk was for an industry-agreed political action-plan for KiwiSaver to be developed under the Financial Services Council’s new leader Kirk Hope, the former head of Business NZ, taking office later this month.

It would seek “quick wins as well as a long-term upgrades to KiwiSaver.

A key early part of the plan would be to lobby the current Government to order the Retirement Commission to focus its next retirement report, due next year, on KiwiSaver.

Compulsion is dead

The KiwiSaver industry views Australian-style compulsion with envy, but politically, they now see it, at least for the moment, as a dead horse no longer worth flogging.

That’s partly because KiwiSaver has been really successful in signing up salaried workers.

Around 90% of wage-earners are in KiwiSaver.

People who are not actively saving in KiwiSaver are doing so largely for one of two reasons: They earn so little they are just scraping by, or they are employed in non-standard ways.

Non-standard ways include being employed as “contractors” (including many lowly-paid commercial cleaners, hairdressers and childcare staff), and people whose employers are exploiting a loophole created by a former National government that allows them to offer “total remuneration” employment contracts to avoid having to make KiwiSaver contributions.

The political, and practical, complexity of compelling those people, and people on lower incomes, to save into KiwiSaver is daunting.

Edmonds injected a little political realism from her own life.

She recalled when she was a young mum with a growing family, she ended some weeks with as little as $8 unspent.

“Every dollar counted,” she said, which is why she was later than most in opening a KiwiSaver account.

Finance Minister Nicola Willis indicated to KiwiSaver providers that the Government had no intention of making changes to KiwiSaver.

The current government has shown no interest in closing the total remuneration loophole, which is something the Retirement Commission has called for, and individual Labour MPs have fought to do, though the party did not do it when it was in power.

There is a long tradition of governments of both blue and red tinges ignoring Retirement Commissioners’ recommendations.

Finance Minister Nicola Willis showed zero interest in a KiwiSaver upgrade when she addressed the conference.

Looking for quick wins

“It’s widely recognised New Zealanders aren’t saving enough for their retirements,” said Penny Sherrin, a Chapman Tripp lawyer leading a conference panel discussion.

What were the quick wins that were possible, she asked.

“Contributions,” said panelist Harry Koprivcic, chief executive of Guardian Trust.

At the moment, savers can choose to contribute 3%, 4%, 6%, 8% or 10% of their before-tax income, but the default contribution rate is 3%.

KiwiSaver providers all think that is too low.

“The settings clearly need changing,” said panelist Nigel Jackson, chief executive of BT Funds Management.

“At the moment, there’s a clear retirement gap. People aren’t saving enough to have a dignified retirement, and the way to address that by increasing the level at which we are saving, and people won’t do that unless the settings are changed.”

This is what another panelist called KiwiSaver’s “apathy problem”.

But, if compelling under-pressure households to save more was off the table, what else could be done?

There was talk of turning things around, and asking the Government to lift compulsory employer contributions.

“Personally, increasing employer contributions has real merit,” Jackson said.

It could be phased in over time, he said.

Changing the ‘soft compulsion’ settings

Some considered there might be an even more acceptable change that could have a real impact.

Retirement Commissioner Jane Wrightson had advocated for changes to make KiwiSaver fairer. Her calls have largely fallen on deaf ears.

KiwiSaver was world-leading in its use of soft compulsion. When people start work, you they are automatically enrolled, and if they didn’t want to be, they had to take an active decision to opt-out.

So, what about setting the default employee contribution rate at 4%, for example, some asked, and sending a message that 3% isn’t high enough.

This is not pie-in-the sky thinking.

Research by the Retirement Commission found people aged 30 to 39 contributed on average 3.4%. However, those nearing age 65, perhaps engaged in a last dash to build the nest egg were contributing an average of 4.6%.

“These higher contributions may also be due to the fact that those in older age groups are more likely to have joined KiwiSaver when the default rate was at 4%,” the commission said.

Some heretics even thought the industry might stop asking for rule changes from government, and organise an industry push sell the idea to people saving at 3%, to increase it to 4%.

A fairer, kinder KiwiSaver

There were other suggestions to get more into KiwiSaver, which would cost the taxpayer more in government contributions.

Employers could be required to make employer contributions for workers aged under 18, or over 65, for example.

Some conference delegates even privately confided in break-out rooms and chats over coffee, that it might not be a bad idea to rework the tax incentives in KiwiSaver.

The government contribution, which is up to a maximum of $521.43 each year to each saver, wasn’t actually incentivising much saving, one said.

If it were removed, most people would carry on saving in order to continue to get contributions from their employers.

In the 2023 financial year, the Government made contributions of $971 million.

What if that was reditected to incentive the self-employed and contractors to start saving, or people on leave from work to have and raise children, or even to subsidise savings of lower-income workers?

It was an idea with merit, another delegate said, but he could not imagine any party taking that idea to the ballot box.