New regime to bite in 2007

April 2007 looks like being kick off date for a new savings and tax regime - whatever it finally looks like.

The government has released the results of the working group on workplace savings, and is asking for feedback on the proposals of the group.

However the other work in this area - the study into taxation of savings, headed by former BT Funds Management head Craig Stobo - is set to report next month.

Both Finance Minister Michael Cullen and workplace savings group chair Peter Harris emphasises that the Stobo work is vital to where this issue goes next.

His group has been liaising with the Stobo group.

And Cullen says any new regime will probably come in on 1 April 2007.

Cullen specifically rejects compulsory savings and also pretty much rules out tax incentives.

However the report suggests a number so “sweeteners” to encourage people to save.

As reported by Good Returns late last month, the report recommends making it mandatory for employers to offer workplace savings.

If adopted, the group’s recommendations would meant hat whenever someone changes a job, they will automatically be enrolled in a workplace savings scheme and put on a separate tax code for that scheme - unless they choose to opt out.

The funds will be deducted with taxes and other levies and paid to a separate administrator.

The report notes the various members of the working group have “some personal and subjective opinions” on the subject of sweeteners to encourage people to save, but adds that “those opinions are not grounded in any robust testing of their effectiveness.

The group suggests a number of options, including

• Group purchase of life insurance cover for those who join a workplace savings scheme
• The government pay for the administrator of the scheme
• “Kick starts” of various kinds for people when they join a scheme.
• Bonuses for when particular savings targets are met.

The group also recommends setting up focus groups to work out what will be the best way of encouraging people to save and generally aim at reducing the anxiety many people have about putting money into savings schemes.

This last point is vital, says Harris. The issue is less that people do not have the money to save, but that they lack the confidence or the expertise.

“It’s important not to be patronizing about this,” he says. “Poor people save - its why credit unions were set up in the first place.’

What is important is to develop a savings culture, he says, and that is why making workplace schemes “opt out” rather than” opt in” is so important.

“The status quo is very powerful.”

Interested parties have until the end of October to make submissions on the report, which is available at www.beehive.govt.nz/Documents/Files/WorkplaceSavings.pdf

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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