KiwiSaver

Changes to the number and nature of KiwiSaver default scheme providers is “worth examining in slower time”, according to a Treasury paper on Budget 2011 KiwiSaver reforms.

The paper, dated February 18, is one of a host released by the Treasury last week relating to Budget 2011.

The paper also revealed Ministers rejected proposals for a ‘soft’ compulsion recommendation and that the Treasury was aware the changes would create “uncertainty and unpredictability which is not helpful or encouraging to individual savers.”

One of the proposals rejected by Ministers would have seen “all eligible employees who have not previously been auto-enrolled and are not already members of KiwiSaver or an approved superannuation scheme, who do not indicate in advance of the enrolment that they do not wish to be enrolled.”

The need to carefully communicate the recommendations was also highlighted, as the paper acknowledges the changes “may reduce perceptions of the stability and predictability of the scheme.”

Budget changes to KiwiSaver may make the scheme less attractive for people to join, according to Tower Investments CEO Sam Stubbs.

“Perhaps more disconcerting for potential members is that KiwiSaver’s rules have been changed again by the Government, which starts to chip away at certainty around retirement planning arrangements.”

Stubbs made the comments as default KiwiSaver provider Tower released its monthly analysis of the IRD’s KiwiSaver member count for May.

“May saw continued overall increase in KiwiSaver sign-ups, with net total membership rising 1.5% for the month to break through the 1.73 million mark,” Stubbs said.

“Opt-in via KiwiSaver provider grew the strongest at 1.8% increase, to take membership counted by that joining type to more than 860,000.

“Coming in just behind for growth rate was the automatically enrolled by employer category, which grew by 1.4% to over 640,000, and after that opt in via employer, which lifted less than 1% to 230,000.”

Stubbs said that if monthly KiwiSaver membership growth rates continue to average around 1.5% for the rest of the year, over 26,000 new members will sign up per month, taking total membership to around 1.8 million by the end of the year.

However, the Budget changes have created uncertainty around future membership numbers.

“The wild card was changes to KiwiSaver announced in the Government’s Budget on the 19 th of May,” Stubbs said.

“There was some evidence of slowdown in KiwiSaver sign-up rates over Budget month, but the most affected categories were opt in via employer and automatically enrolled by employer, and these categories may be more expressive of labour market conditions.

“Opt-in via provider would have been the category most likely to have shown up as a bellweather for public concern over the impact of the Budget on KiwiSaver, but the monthly sign up rate for May was similar to April’s.”

While Stubbs said the Budget changes may make the scheme less attractive in the short run, “its financial impacts on KiwiSaver member accounts do not flow through until 2012 in the form of taxation of employers’ previously tax-exempt minimum contributions and halving payments of the Government’s Member tax Credit subsidy.”

He said Government rule changes to the scheme could dent confidence in KiwiSaver as a vehicle for long-term savings, but “we probably won’t know for a few months yet whether the growth rate of sign-ups to KiwiSaver has been seriously impacted by the Budget.”

Despite the recent changes, Stubbs remains convinced of the scheme’s worth.

“Even with KiwiSaver becoming less generously supported by the Government, it is still an efficient, low-cost, well-regulated retirement savings vehicle.”

The government’s changes to the KiwiSaver scheme aren’t likely to put investors off it, says Ian Park, chief executive of retail banking at ASB Bank, the second largest KiwiSaver provider.

“The scheme is such a good scheme, I think it will continue to see growth and new people joining,” Park says.

He doesn’t expect the changes will prompt many KiwiSavers to take a contributions holiday.

“As more and more people are exposed to it and start to see the benefits and, I guess, see their balances rise, it gives them a lot of confidence.”

However, “generally speaking, people that are saving like to have a stable, consistent approach.”

The increase in required employee contributions from 2% to 3% of earnings won’t affect all ASB’s KiwiSaver customers.

“There’s a significant chunk of people contributing more than 2% anyway.

From that perspective, some of our customers won’t be impacted by the increase.”

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.”