7.3.4  KiwiSaver design

The SWG's discussion focused on four areas where further improvements to KiwiSaver may be possible:

1. Whether the level of the subsidy is appropriate.
2. Whether the subsidy is in an efficient form. i.e. a lump sum matching contribution, rather than say a different tax rate on investment earnings.
3. Whether the default fund structures and the default saving portfolios are as good as they could be from the perspective of savers.
4. Whether the pay-out options are appropriate, or whether a case can be made for allowing people to use KiwiSaver money to purchase annuities in retirement in addition to NZ Superannuation.

The SWG does not have strong views about the level of subsidy, noting it is clear that there are fewer savings incentives in New Zealand than most other countries, and that the weight of evidence is that New Zealanders save too little rather than too much. It is not clear that the form of the saving incentives is ideal, however, and suggestions are made for improvements.

The SWG had particular concerns regarding the matters in points 3 and 4. The Group's view is that KiwiSaver has considerable potential to further help people select appropriate investment assets, both as they are accumulating funds and as they are decumulating funds in retirement. At the moment this potential is not being fully realised. If the purpose of subsidised saving schemes is to help people solve saving problems, much more could be done to ensure people find it straightforward to opt into low cost, diversely invested funds, and that they have an easy way to manage their funds in retirement, possibly by being allowed to purchase government-provided annuities.

KiwiSaver general design features

SWG would like to see consideration of the following changes to the general design features of KiwiSaver to enhance participation and better target incentives:

Automatic enrolment of all employees aged 18 and over who are currently not members, with the ability to opt out within 2–8 weeks.

Rationale: Increase participation. This is over and above maintaining the current auto-enrolment arrangements. About 28% of non-KiwiSavers said in Colmar Brunton's “KiwiSaver Evaluation: Survey of Individuals” in July 2010 that they haven’t joined because they haven’t got round to it. Auto-enrolment would also catch others who say they don’t know enough about KiwiSaver to join, as they would be prompted to learn more. Furthermore, it would be reasonable to assume that non-members are less likely than current members to be people who simply divert savings from elsewhere to KiwiSaver, as those people would have joined already. It’s very easy for them to participate. The new joiners are more likely to reduce spending to be in KiwiSaver – which will boost total savings.

Kick-start payments should be drip-fed (i.e., credited in $200 amounts annually for 5 years) and be contingent on ongoing contributions.

Rationale: If all employees over 18 who are not currently members of KiwiSaver are auto-enrolled (with the right to subsequently opt out) the SWG recognises that a large influx of new members would produce an immediate expense for government if the kick-start contribution of $1000 was paid out as a lump sum. It is recommended, therefore, that kick-start payments for all new members be spread over a number of years e.g., as 5 annual payments of $200. In addition, this may assist in fostering a saving habit by rewarding members for making ongoing contributions to KiwiSaver. It particular, it may encourage those under 18, and therefore not subject to the 2% employee contribution, to make ongoing contributions to their KiwiSaver accounts. It may also discourage employed KiwiSaver members from taking a contributions holiday after one year of membership.

The minimum employee contribution should remain at 2% of earnings; and the government should consider increasing the default contribution rate to 4%, with the ability to opt down to 2%.

Rationale: The minimum level of contributions from employees should stay at 2% of income, with the focus continuing to be on encouraging ongoing participation in the scheme, including participation by employees who are currently on relatively low incomes. However, the default rate does influence people's behaviour. The vast majority of members who joined when the default contribution rate was 4% did not change their rate when the minimum rate was reduced to 2%. Moreover, the majority of those who joined after the default rate was reduced to 2% have not elected a higher rate. Thus, the government may want to consider increasing the default contribution rate to 4%, but with the ability to opt down to 2%

Applying employer superannuation contribution tax rate to all of employers’ contributions to KiwiSaver to end the bias towards higher income earners arising from the tax concession to employers.

Rationale: Consider consistently taxing all employer contributions to KiwiSaver. Currently, the first 2% of employer contributions to KiwiSaver are not subject to tax, whereas employer contributions over 2% (and all employer contributions to other superannuation schemes) are taxed at rates approaching employees' marginal rates under the employer superannuation contribution tax regime. This does not seem equitable - providing greater advantages to contributors on higher incomes. Also, being a hidden subsidy, it is not the most effective way for the Government to incentivise KiwiSaver.

Employers should not be able to pay out their KiwiSaver contributions irrespective of whether employees join KiwiSaver.

Rationale: It is a concern of the SWG that the positive incentive created by the employer contribution is eroded by businesses that pay employees on a total remuneration basis (i.e., the employer pays the same gross salary irrespective of whether an employee joins KiwiSaver). In these cases the only non-government financial incentive to join KiwiSaver is the tax break on the 2% of earnings that the employer contributes (and if our previous recommendation on employer superannuation contribution tax is implemented, even this incentive will disappear).

We believe that serious investigation needs to be made as to the implications of this “packaging” of KiwiSaver. Intuitively, it would seem that if such packaging was outlawed there would be a significantly greater incentive to join, as joining would deliver an effective 2% salary increase for those in the scheme.

Reduce the starting age of the member tax credit, auto-enrolment and compulsory employer contributions from 18 to 16.

Rationale: Increase participation, and encourage discussion about KiwiSaver in schools. Also, it seems fair that people who are old enough to leave school and become employees are able to participate in all KiwiSaver benefits. However, it lifts the cost of employment a little and may have some negative impact on youth employment levels.

Consider relaxing withdrawal rules to permit partial withdrawal earlier than NZ Superannuation eligibility age for those for whom the eligibility age is inappropriate or unsuitable.

Rationale: Increase participation. Of particular interest to people involved in physical work all their lives and who are thus more likely to have to retire before 65, and also to Maori, people with disabilities, or other groups with shorter than average life expectancies. This would also encourage people to save extra in KiwiSaver, knowing they could withdraw it if needed. However, the design would need careful consideration.

Support/encourage transparency and comparability of fees and performance, with KiwiSaver providers producing a regular report, in simple language, to each member showing: the member's opening amount, contributions, earnings (including as a rate of return), fees, and final amount.

Rationale: The Group supports the move by the Ministry of Economic Development to establish reporting standards for fees and returns in KiwiSaver funds. The SWG notes the need to keep things understandable to members. KiwiSaver providers should be required to produce a regular report, in simple language, to each member showing: the member's opening amount, contributions, earnings, fees, and final amount.

There are two major disincentives facing people who wish to save in non-housing assets: the perception of poor rates of return provided by the funds management industry, and difficulty in understanding what exactly those returns are. The SWG believes that it is important that all investment vehicles report regularly back to investors in a transparent and easily understood manner. In particular, it is imperative that investors understand the total fees and any other costs applying to their investment and the impact that these are having on their returns. The bottom line is that investors must know what their actual return on funds invested is after tax, fees, and costs are deducted. Moreover, any comparatives that asset managers produce must show such net returns that the investor has made. It is inappropriate for asset managers to compare the returns of funds invested (pre tax and fees) against any benchmark as this provides the investor misleading information upon which to make investment decisions. Hopefully, changes of this type would not only improve clarity for the investor but also create heightened competition amongst asset managers.

Note that this improved level of disclosure should be applied to all funds under management, not just those associated with KiwiSaver.