Savings and financial markets

Directing the NZSF to increase its home bias is not the best way to grow New Zealand capital markets since:

• the key determinant of growth of the New Zealand capital market is the  quality of new listings
• in the absence of new listings, increased investment in New Zealand is likely to displace existing market investment, and
• the NZSF is a long-term investor so a larger market share could lead to a less liquid capital market.

If the policy is to fund infrastructure spending via the NZSF then:

• the policy would in effect reduce the level of pre-funding of NZS as the Crown would be the issuer of new debt (liability) and also hold the debt (asset) in the NZSF
• funding infrastructure through the NZSF is less transparent than debt.

If the policy is to ease finance constraints for firms other options can be considered with fewer risks.

Treasury can provide alternative options to develop New Zealand capital markets with respect to equity listings, venture capital and bonds.

If the objective is to provide capital for infrastructure spending then there are a number of options available including issuing new debt and suspending contributions to the NZSF. However, Treasury would want to talk to you further about how this could be achieved, and articulated within the context of the Government's fiscal strategy.

To ease finance constraints for firms there are current measures to keep banks and bank lending liquid. If these prove insufficient, there are further alternatives for both equity and debt.

Implementing this policy proposal would require legislative amendment and consideration of how it may be phased in. We can provide fuller briefings on this.

Reducing employee contributions to 2% may encourage more people to join the scheme. However, there is no clear evidence that the 4% contribution level is acting as a barrier to participation.

A 2% minimum contribution rate could:

• reduce the level and adequacy of the retirement savings of some middle income earners. This problem arises because KiwiSaver may be the main or only savings vehicle utilised by this group and, a 2% savings rate (when combined with NZ Super) may not be sufficient to provide a 70% replacement income[2], and
• result in a large number of KiwiSaver accounts having small balances, which could increase overheads and fees and reduce incentives for product innovation.

Treasury/IRD can provide further advice on the impact that a 2% minimum contribution level may have on household/provider  behaviour plus the costs/benefits associated with the following options:

• retaining the 4% threshold until the scheme's second year of operation has been evaluated. This would enable joint officials to provide more  reliable advice on the impacts that any threshold changes may have on specific income groups, or
• retaining default contribution levels at 4% but providing members with the option to move to 2% if they decide this is in their long-term interests.

An alternative option is removal of the ESCT exemption.

Signal the future removal of the ETC to give firms time to adjust thereby addressing the short-term negative impact on firms.

This policy reduces the fiscal cost of the MTC. It also potentially: reduces incentives to save and acquire savings habits; discourages part-time workers from joining (eg, students and seasonal workers); and discourages ad hoc contributions from lower wage earners (most likely to be new savings).

We need to clarify whether non-working members would still be entitled to the full $1,040 and the rules around the self employed, as it would affect part-time members and those people who work a few weeks or months a year.