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Do not file New Zealand Superannuation just yet

Rob Walker argues an alternative superannuation case.

Wednesday, June 10th 1998, 12:00AM

by Philip Macalister

If last year's superannuation referendum was a political disaster for Winston Peters, it was also the seal of fate for the concept of compulsory superannuation. The result of the referendum virtually guarantees that New Zealanders will never experience a Government-sponsored compulsory scheme.
So, where to from here? Surely New Zealanders deserve clearer directions for the road ahead. The current contractual savings environment is clouded with numerous disincentives that impede positive growth.
Undoubtedly, the scheme proposed by Peters was ill-founded, the wrong design, and the referendum was painfully premature. The public expressed its opinion in resounding fashion, possibly reflecting the fact that very few voters either understood or wanted to understand the topic.
So if last year’s referendum was the Government’s solution to the thorny superannuation problem what other solutions represent the fallback plan? The final report from the Jeff Todd chaired Periodic Review Group (PRG) in December reiterated previous views and provided no more light to lead the way forward. For market observers who research and endeavour to remain abreast of the 'direction' in New Zealand savings, is it time to call for a ‘brand new’ consultative approach?
A risk is developing that the very important file on superannuation may be shelved, yet again. It is just not satisfactory for our political leaders to believe the PRG's views that New Zealanders will review their spending habits and start to save voluntarily as a result of passive education.

Improve the environment
The key to a more vigorous and healthy savings industry is where Government creates an environment that is more attractive for ordinary New Zealanders to save because they want to, not because they have to. This is achievable and our political leaders should not need public approval for subtle changes to make it happen.
Yes, Government has already sponsored some research. The reports produced by the PRG have set the scene at least, albeit without a proper conclusion for positive future action. It is pleasing to note that the Reserve Bank now collects and monitors managed retail and wholesale investment funds figures. This data was previously a minefield of inaccurate information. Also pleasing are WestpacTrust and FPG Research undertaking a periodic survey of local savings trends.
Accurate and published research is important as it provides both the public and private sectors with concrete facts to contemplate. Currently, the facts are that New Zealand may be falling behind in building a solid base of recognisable long-term private savings.

New action required
Did Government and the people of New Zealand recently take a wrong turn in the planning process? The Office of the Retirement Commissioner has done its best on minimal funding, to provide a basis for educating the public, but surely this process is the soft and cheaper option for our politicians. Recently, our community watchdog, the Consumer's Institute published a report on publicly offered superannuation that did very little for building public confidence. The process of ‘one step forward and one step back’ will get nowhere. Last year all media forms seized the ‘news’ opportunity and turned the normally dry subject of superannuation into a hot topic. Now, regrettably it has been put back on the shelf and may stay there for some time unless someone actively promotes further discussion.
Most industry observers understand the need for and support some Government intervention in ‘forward planning’ for the superannuation industry. Debate should not grind to a halt because the recent referendum squashed the compulsory scheme. We heard many valid arguments last year both for and against the Peters‘ proposed scheme.
The problem lay not with the compulsory superannuation concept, but with the actual scheme that was proposed. In addition some negative feeling may have been revealed for the person who promoted it. This may be harsh in hindsight, but there was virtually no chance that the referendum would succeed from the time the referendum was announced in February. Who did the market research, and who were the panel of experts that designed the scheme?

Government does intervene
The subject of Government intervention in superannuation in New Zealand is not new. There have been three major rulings since 1973.
1975 - Labour introduced a compulsory scheme without a referendum that caught all income earners for a percentage of their earnings. Collected taxpayer contributions were channelled into investment portfolios managed by a Government agency. The scenario of New Zealand Inc. emerged, and the public did not appreciate the potential scenario.
1976 - The Labour scheme was dismantled after only six months in operation by the new National Government. It was replaced with National Superannuation for all New Zealanders from age 60, funded on a ‘pay as you go’ basis. This scheme still exists, but the retirement age is being pushed out to 65.
It should be recognised that tax has always been used as an incentive or disincentive to saving. The dreaded ‘surtax’ came in under Labour in 1989 and is only now being removed, and for those who can remember the years prior to 1988 all private approved superannuation schemes were exempt from tax on investment earnings.
1987 - Labour did not change the superannuation regime, but it did introduce a new tax policy concerning a 'level playing field' for all income earners. Superannuation was caught in the net, and caused definable grief within the savings industry. Even though the value of funds had substantially dwindled in size as a result of the ‘1987 crash’ the change in tax treatment provided an effective catalyst for two out of three of registered private schemes to be voluntarily liquidated.
It is no wonder that the New Zealand economy and investment markets suffered in the late 1980’s. The New Zealand share market has never recovered. It is notable that a multitude of unit trusts and other assorted ‘shorter-term savings’ vehicles have emerged since 1988. In terms of funds growth the new vehicles have reaped considerable market share, and may now represent a mistaken surrogate for superannuation to many investors.

New Zealand's savings dilemma?
The basic facts on private savings in New Zealand are disturbing. Notwithstanding that many New Zealanders own (or desire to own their own homes) the savings level in ‘organised’ managed funds for the purpose of funding retirement incomes is pitifully low compared to the sum represented by investment in housing. Yes, owning your own home does satisfy two objectives in life, a place to live and a medium for creating an asset of value. Your own home does not pay you an income when you retire.
The simple comparison of savings industry data between Australia and New Zealand is disturbing. It reveals Australia has an 'industry' size 10 times larger than New Zealand. As the Australian population is only five times larger, here is an anomaly worth immediate research and analysis. Recall that Australia introduced compulsory superannuation in 1992 and that might assist to explain the disparity in ‘dollars per head’ long term savings between the two countries. New Zealand does not need to copy Australia, but it would pay to investigate and monitor its savings regime to establish a benchmark for measuring our regime from time to time.

Where to now?
In the absence of a public mandate in New Zealand condoning introduction of compulsory superannuation, there are limited options to move forward. One prime option is to take another serious look at taxation.
Tax appears to be the only prime motivator that the New Zealand public understands, and our political leaders do not need to turn to a public vote to fine-tune the tax law. This suggestion will awake dissenters from their sleep to cry 'No, never again' as past evidence suggests that tax subsidies on superannuation fund earnings only encourages short-term arrangements.
Free-market liberals should take time to fully consider the potential for a fiscal and perhaps social disaster in years ahead. They may feel personally insulated, but what about the other 75 per cent who do not?

Don’t be complacent
We all know time marches relentlessly on, and around the year 2015 the current 'post-war baby boom’ generation will move into retirement. Current statistics reveal that only one in four of this generation belongs to a private superannuation scheme, so how are the other three going to be funded in retirement?
The New Zealand economy has shown some ‘form’ in recent years and Government now enjoys fiscal surpluses. The tax cuts this year are effectively a social dividend after the last decade of fiscal reconstruction. The original reconstructive surgeon, Sir Roger Douglas still believes that an even lower and flat rate tax is achievable.
Our current Government can afford to be in fine-tuning mode, but there is no reason for it to be complacent about future contingencies.

Only two options?
It does not require an expert to ascertain that New Zealand governments and taxpayers from 2015 onwards may experience diminishing ability to provide ‘real value’ retirement benefits to an increasing percentage of the total population. To counter this possibility our political leaders have only two options from which to select a course of action:

  1. Hold the present course and encourage voluntary long-term savings through education. This option involves: Following the recommendations of the Todd reports using the Retirement Commissioner’s Office as the teaching vehicle, monitoring progress and implementing change when problems emerge or are recognised.
  2. Acknowledge that risk potentially exists for a major fiscal liability in the area of provision of retirement benefits, within 20 years. This option involves: Reinstating objective consultative research and a positive stance to evaluate scenarios of potential fiscal risk, and when risk is ascertained, to use all means available to create a meaningful savings environment to minimise the risk. A meaningful savings environment is one that is conducive for personal taxpayers to voluntarily enter long term contractual savings.
An accountability issue differentiates the two options. The first option is the low-key approach akin to ‘steering towards land with storm clouds on the horizon’, while the second option represents a standard approach in risk management situations.
The second option is arguably more acceptable as risk is both quantifiable and manageable. A positive move to assess risk followed by an action plan to counteract it is definitely prudent in any business practice. In this situation ‘risk’ represents any possibility that damage could occur to the social and economic fabric of New Zealand, in the event of Government’s inability to fund ‘real value’ retirement benefits post 2015.

One logical approach
There is still room to move forward. One logical approach for Government to pursue includes:

  • Undertaking in-depth market research to determine and peg the current ‘base’ of funds held in long term savings vehicles, projecting the future contingency for providing ‘real-value’ retirement benefits, restating ‘national superannuation’ objectives, and moving to ‘ring-fence’ all current and future schemes with revised criteria for approval covering quality standards for administration, service and performance, through amendment of existing legislation.
  • Concurrent with the first set of actions, review and amend taxation legislation applicable to approved superannuation arrangements to achieve ‘equity, incentives and encouragement’ and removal of all current anomalies to allow bona fide long term and contractual saving by individual taxpayers through private superannuation schemes.
This is one solution that would move New Zealand towards a meaningful and long lasting superannuation structure. It would also enable Government to manage and minimise the fiscal risk associated with an ageing-population explosion early next century.

Rob Walker is the principal of Investment Management Consultants Ltd, a research house and advisor on the New Zealand investment industry. He was until 1995, the managing director of Southpac Investment Management Ltd.
This article originally appeared in the ASFONZ journal.

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