A major advance for retirement savings

"The Labour-Progressive government has a strong record in promoting New Zealanders' long-term financial security. We have secured the public pension by restoring the 65% wage floor and setting up the New Zealand Superannuation Fund.

"Budget 2005 commits a further $2.3 billion in 2005-06 to the Fund, which enjoys high public and political support. The Fund is now projected to have a balance of $19.4 billion by June 2009.

"We have always recognised, however, that most New Zealanders aspire to a higher standard of living in retirement than NZ Super alone can provide. That is why we have tirelessly encouraged people to save.

"Last July the government established the State Sector Retirement Savings Scheme for public sector employees. The response has been enthusiastic, with 46% of eligible employees already signed up.

"This demonstrates that New Zealanders have an appetite for this form of saving. Work-based schemes are an area where government can act constructively to increase savings rates, because they offer a broad 'reach', particularly to middle income earners. They also allow for deductions at source and have significant economies of scale.

"The combination of KiwiSaver and the state sector scheme will lift the proportion of working people participating in work-based saving. Participation declined from 22.6% in 1990 to 14.1% in 2003 and we are confident of reversing that trend. Our working assumption is that 25% of the eligible labour force will join KiwiSaver by 2012-13."

Key facts on KiwiSaver

Savers:

• participation is voluntary
• employees are automatically enrolled when they begin a new job, but can choose after one week to opt out, in which case they will have two weeks to advise Inland Revenue of their decision
• contributions will start from the next pay day after eight weeks with the employer
• this money will be held by IRD on the employee’s behalf for an initial eight week period during which the employee can seek financial advice and select a fund provider
• enrolment is not automatic for workers under 18, or for existing employees, but they can join if they wish – as can beneficiaries and the self-employed, although the latter will have to make the payments to IRD themselves
• savers can select their own fund and can change fund providers, but can only have one provider at any time
• those who do not specify a fund are randomly allocated to a default provider
• contributions are deducted from wages at a rate of 4% of gross salary, unless the individual prefers to contribute at the higher rate of 8%
• savings are primarily for retirement and are locked in until the age of eligibility for NZ Superannuation, except in cases of financial hardship, permanent emigration or – after a minimum of three years – to contribute toward a deposit on a first home
• all individuals can stop contributions for up to five years at a time.

Employers:

• enrol new employees in KiwiSaver and existing employees who opt in
• deduct employees' contributions and forward them to the IRD along with PAYE.

Employers will be encouraged to use the infrastructure provided by the government through KiwiSaver to contribute to their employees’ accounts, with some flexibility over the terms and conditions of those payments.

The automatic enrolment provisions will not apply in workplaces where the employer is already running a work-based scheme, provided that scheme is portable, open to all permanent employees and has a total contribution rate [employer plus employee] of at least 4 per cent. Members of these schemes will be able to access the KiwiSaver home deposit subsidy.

The government:

• makes an upfront contribution of $1000 per person, to be locked in until the recipient is eligible for NZ Superannuation or for five years, whichever is the greater
• increases the net rate of return to the saver by providing a fee subsidy, up to a cap to be negotiated with fund providers
• offers a first home deposit subsidy of $1000 per year of membership in the scheme, up to a maximum of $5000 for five years, to eligible KiwiSaver members after three years of saving.

To minimise the compliance costs for employers, KiwiSaver will be administered by Inland Revenue which:

• receives the contributions and channels them to the individual’s chosen fund
• collates and distributes information about the scheme to employers for distribution to employees
• receives notification from employees wishing to opt out or take a contribution holiday and advises the employer accordingly.

Budget allocations for KiwiSaver include:

• $384 million over four years for the upfront $1000 lump sum and the ongoing fee subsidy
• $109 million over four years for operational costs, including the proposed financial literacy programme
• $25.7 million in implementation funding to IRD plus capital of $12.8 million in 2005-06 and $14.8 million in 2006-07.

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