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KiwiSaver: You know it makes sense
Although government budgets are usually about spending money, this year's focus was on saving.
The Government announced its new nationwide retirement savings scheme – the snappily named KiwiSaver.
Our Budget Report explains KiwiSaver's details, rules and figures.
This newsletter explores what KiwiSaver is and – perhaps more importantly – what it is not and looks at what the scheme may mean for Kiwis who are considering whether to become savers in 2007.
Voluntary scheme
Participation in KiwiSaver will be voluntary, unlike Australia's compulsory superannuation scheme.
Also, employers will not be forced to contribute to their employee's KiwiSaver – again, unlike their Australian counterparts.
KiwiSaver's voluntary nature may be its undoing, however. Its success will depend on how many New Zealanders – particularly younger workers – have a sufficiently long-term view to join a superannuation saving scheme.
Success will also depend on the number of employers who choose to contribute to their employees' funds, either as part of existing remuneration packages or as an additional benefit.
Small employers, in particular, may consider these contributions pose additional costs and administrative burdens they cannot meet.
These success factors are linked, as employees may be less inclined to participate if their employers decide against making contributions.
Although the scheme is voluntary, the Government has recognised that many Kiwi are lazy savers and has made it an opt out decision, rather than an opt in.
Each new employee will be automatically enrolled into KiwiSaver and will have to take steps to opt out if they wish.
Saving scheme not pension scheme
KiwiSaver is a savings-based scheme. On retirement, KiwiSaver rewards an employee with the savings contributed over the years, together with any return on the investment made.
This type of scheme differs from pension based schemes that are (or were previously) operative in New Zealand – such as the Government Superannuation Fund.
Pension-based schemes reward an employee's retirement with a guaranteed benefit or pension (which could be more than the savings contributed over the years).
As a savings-based scheme, KiwiSaver will complement the pensions currently paid under NZ Super, so KiwiSaver participants could enjoy a higher standard of living during their twilight years than they would on the NZ Super pension alone.
It isn't clear what would happen to KiwiSaver participants or non-participants if NZ Super was ever phased.
Retirement focus
KiwiSaver focuses on retirement – where savings are primarily locked in until retirement age.
There are some exceptions to this – including financial hardship, permanent emigration or (after a minimum of three years' participation) to go towards a deposit on a first home.
Again, this feature means the KiwiSaver's success may be contingent on whether New Zealanders have that long-term view of the future.
Perhaps to address this weakness – and appeal to those with short-term perspectives - the Government has offered a $1,000 kick start to the employee’s chosen fund.
The long-term "lock-in" feature of KiwiSaver also distinguishes the scheme from those in operation in other countries, such as Singapore.
In addition to retirement, participants in Singapore's Central Provident Fund (CPF) can make withdrawals from their savings for housing, medical expenses and, in certain circumstances, for tertiary education.
Interestingly, despite being established originally as a retirement savings scheme, the majority of current withdrawals from CPF are for housing investment, rather than retirement purposes.
State Sector Retirement Savings Scheme
KiwiSaver is similar to the State Sector Retirement Saving Scheme (SSRSS) introduced by the Government in 2004.
In broadening KiwiSaver to the general public, the Government has drawn on the enthusiastic response of the public sector – with 46% of state employees signing up to SSRSS.
Like KiwiSaver, SSRSS is a savings-based superannuation scheme implemented at a workplace level, with a degree of employee choice.
Where KiwiSaver might differ from SSRSS is in employer commitment. SSRSS has one employer – the Government – who is committed to promoting retirement savings by employees.
The Government has also committed to match its employees' contributions to SSRSS (to a maximum of 1.5% initially and, from July 2005, up to 3%).
The employer contribution was paid outside of employees' total remuneration package, making it an additional benefit.
Conclusion
KiwiSaver establishes a scheme that Kiwis should logically want to join – it enables them to save for their retirement to ensure a comfortable standard of living.
Whether or not KiwiSaver is a success is likely to depend on a number of factors – including employees' long term perceptions and employers' willingness to contribute to employees savings.
For further information, please contact your usual Bell Gully adviser or:
Auckland
Rob Towner
Partner
Wellington
Andrew Scott-Howman
Partner
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
