by Bill English
Good Morning and thank you for this opportunity to address your conference on Workplace Super – Strategies for Growth.
Security and certainty are two things most New Zealanders hold dear. Politicians would like to have both, but don’t get much of either and even less under MMP.
But security and certainty matter a lot in the workplace because that’s where the money comes from to pay the household bills. And they matter a lot more when you’ve retired because your income then is dependent upon whatever super the State or you have provided for yourself.
And with State super linked to real wages, it matters a whole lot more that workplaces are productive because they drive growth.
These remarks may seem obvious, but they are made so the linkages are clear. Because unless our workplaces can deliver real wage increases they cannot deliver the real levels of savings needed to support either State super or workplace super.
The levels of sustainable growth New Zealand needs to support an aging population requires us to make decisions now to back our workplaces by reducing their costs. By doing that we will increase investment in those businesses.
It is a given that the material living standards of retired people ultimately depends on the performance of the economy, between now and when they retire.
The levels of quality of healthcare, housing and other goods and services that make our lives more enjoyable depend largely on how productive our economy is. The more we produce the more we can consume. To be able to consume more goods and services in the future we need to lift our rate of economic growth.
In other words we cannot have security in retirement, world-class health and world-class education without a world-class economy to pay for them.
That’s why National wants to see investment put into New Zealand businesses and why we have a fundamental difference with Labour over the New Zealand Superannuation Fund.
The fund is a $50 billion difference in policy options for this country. It’s a huge opportunity to invest in our country, but it will be lost to a generation of young New Zealanders because this Government wants to back Wall Street rather than them.
Our opposition to the fund is not a knee jerk reaction, but is fundamentally sound, and I want to take a moment to remind you of what our arguments are:
Given all these arguments against the fund it would be irresponsible of National to support it.
Increasingly, others have come to the same view, with most economists now arguing that the fund has little to offer on economic grounds.
It will do nothing to lift the performance of the economy and therefore the living standards of future retirees.
But there is another major problem facing retirement income today – and that is the lack of a clear framework setting out the role of the State and the individual in the provision of retirement income.
People think the fund solves their problems. You and I know different. There is considerable uncertainty in the community about what people should be doing for retirement saving and too many are doing nothing.
National believes that a strong emphasis should be placed on the private provision of retirement income because New Zealand Superannuation will only ever afford a modest lifestyle in retirement. It provides the minimum level of income in retirement for everyone.
Your own industry is only too aware of the decline in the proportion of the workforce in workplace superannuation schemes. The latest figures I have seen show that less than 15% of the labour force is in such a scheme.
It would be nice to think that employees have replaced work-based saving with other types of saving, but I suspect that has only happened to a limited extent.
One way to turn this around is to reduce the costs and complexity for both employers and employees. Master trusts have played a role in responding to that challenge in recent years.
They offer a means to reduce costs and make schemes more attractive to employees. A key difference to stand-alone schemes is that the trusteeship is outsourced and usually undertaken by a corporate body trustee, rather than by the employer, elected employee representatives or an independent professional person.
Usually the product provider will provide the trustee services, administration, legal, investment and insurance needs, so saving the employer much time and effort. And because they are outsourced many employers and employees can belong to the same master trust.
Not only are costs often less, but trusts also offer investment choices for members which are rarely available in stand-alone schemes.
For their part, employers can provide their employees with access to the trust. Some may make no financial contribution, others may pay the fees, and yet others may make a contribution.
The Government also has a part to play to encourage membership of workplace super schemes by providing the right legislative framework and appropriate support.
Let me give some examples.
At a high level, Government can remove some of the disincentive to save that is the result of our tax system.
Earnings from savings invested through superannuation funds, life offices and similar entities are taxed at 33 cents in the dollar.
This tax treatment acts as a disincentive to save for people who earn less than $38,000 a year. They would generally be taxed at a rate lower than 33 cents in the dollar, though it is important to recognise the effective marginal tax rate for some people, for example, someone coming off a benefit, may be much higher.
At the other end of the spectrum, those on marginal tax rate of 39c (those earning over $60,000) are given a tax incentive to save.
National’s tax policy is to reduce personal, company and related rates of income tax. This will reduce the disincentive over time as the tax rate that applies to savings is brought down in line with the corporate tax rate.
National is also committed to further reduce any inequities in taxing savings at a different rate to the true tax rate of the saver. We attempted this in 1998 when Labour voted against this.
As you know, the 39 cent tax rate has attracted some of those earning more than $60,000 to receive part of their remuneration through superannuation schemes.
This raised immediate concerns about leakage from the tax system. The knee-jerk reaction was to implement the fund withdrawal tax regime to minimise, the problem before an assessment was made of its extent.
The regime has added complexity and costs to administer. Now, while I have no wish to see the tax base eroded, questions need to be asked about whether it has all been worth while.
This may be a somewhat technical issue, but it seems to me that many of the problems facing workplace super schemes are of that nature. There needs to be a review mechanism to deal with these issues and fortunately there is.
It is a creation of the 1993 Superannuation Act which established a Periodic Report Group that is required to meet every six years. Unless Parliament amends that legislation the group will be required to be convened in a few months time because the law requires it to meet in 2003.
Another thorny issue confronting employer super schemes which the group could look at is the prospectus requirement.
This is the requirement for employers with their own schemes to produce a prospectus. I am sure this has contributed to the decline in the number of workplace schemes on offer.
It has arisen because two pieces of legislation, two different regimes – the Superannuation Schemes Act and the Securities Act – apply to workplace super schemes.
A straightforward, commonsense approach is needed.
The objective surely must be to ensure employers provide information on the benefits and obligations of a scheme to employees in the more cost effective way.
Work needs to be done to amalgamate the disclosure requirements under a single regime and I am sure the Periodic Report Group could make some firm recommendations to improve matters.
In general, public policy should be putting its hand up to say how can it help private, commercial interests in this area. Support and encouragement should be given to employers to provide good quality information to their staff about schemes where there is no pressure of a sale.
And in the broader public policy context, I think it was a backward step to reduce funding for the Office of the Retirement Commissioner when the need is greater than ever for the public to be informed.
Fresh problems are also beginning to emerge as a result of another piece of Labour legislation, the Property (Relationships) Act, which recently came into effect.
Employer schemes are now required to calculate the accrued benefits to an individual when a marriage or relationship separation occurs.
You can imagine how difficult that could be if calculations had to be made for someone who joined a scheme 25 years ago, got married 15 years ago and was now getting a divorce.
And what say the scheme that the member first joined disappeared in a restructuring years ago?
Again this would be another candidate for the review group.
In another area - and much as I don’t like saying this - there are some lessons we can learn from Australia. We can learn from the Aussies how to be simple – now I don’t mind saying that given what they’ve been saying across the Tasman about the IQ of Kiwis.
Seriously, I am thinking of the rules for so-called successor funds. In Australia, in the event of a company takeover the requirement on the new owner is to largely replicate the existing workplace scheme if it wants to amalgamate schemes to cut administration costs.
However, here in New Zealand, there is a requirement to gain the consent of individual members for the transfer to a new scheme. Obviously, I would not want to see any erosion of benefits or rights for employees, but this is an area the working group could usefully review.
The disincentives for savings that exist largely due to Government policy can’t be mentioned without talking about incentives.
National’s policy this past election was to provide some modest assistance to encourage people to save for their retirement by offering a tax rebate of 15 cents in the dollar for up to $100 saved a fortnight.
We also said we would want to evolve this policy as fiscal conditions permit to add a tax deferred option.
There is considerable conjecture about the impact of incentives on the amount of savings in the economy. Some say that incentives will not lift the overall level of savings.
However, we believe there is a need to change the type of savings people make. Our policy was designed to shift the focus to long-term savings and to saving for retirement income in particular.
Some will argue for better ways of encouraging savings. National is open to debate on the issue and incentives for savings should be one of the focal points for the Periodic Report Group.
To sum up, regulation and public policy must be clear, simple and light. Encouragement must be given to retirement savings and the decline in workplace schemes has to be turned around.
The industry should be consulted on compliance cost implications of any changes to the current savings regime so that those costs can be minimised.
All changes to the tax system must act to reduce rather than increase tax anomalies for employer contributions and investment earnings to superannuation plans.
But above all New Zealand needs to back its workplaces to generate the growth for future security. Nothing is more important than that.
Thank you and I wish you well for the remainder of the conference.
This is a speech National Party leader Bill English made to the Association of Superannuation Funds Conference in Auckland on August 12.
Bill English is the deputy leader of National and the party's spokesman on finance and superannuation.
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