ASFONZ says that the proposed scheme might result in a modest increase in New Zealanders’ savings in the short-term but could just as easily have unintended consequences and reduce national saving.
John Melville, the chairman of ASFONZ said that the “KiwiSaver” compulsory, work-based superannuation scheme is an answer to an apparent retirement saving problem that the government has yet to define. Melville said that there is a lot of talk about New Zealanders’ supposed bad saving habits but the most detailed research done on retirement saving by the Treasury itself suggests that New Zealanders are, on average, slightly over-saving for retirement.
Melville said that, while it was good to discuss the advantages of New Zealanders’ saving through workplace schemes, it was important for ASFONZ to raise its concerns on the design of the KiwiSaver scheme, its implementation and the risks it posed for existing employer-based schemes.
ASFONZ thinks that, even if the government were able to make a case for introducing the KiwiSaver scheme, there are many practical issues that have to be dealt with. First, ASFONZ says that 2007 is too optimistic a starting date for the new scheme. “There are many important aspects which we have yet to start discussing, let alone resolve. The tax treatment and ‘look-through’ provisions for income have not been detailed, discussed or finalised.” The Budget signals the government’s intentions on these but there is much work to be done.
Melville commented it seemed illogical that, while signalling a desire to have a low fees approach to KiwiSaver schemes, the government is also proposing a look-through tax regime that will impose significant extra costs on such schemes.
As well, the KiwiSaver regime will present new challenges for administration, approvals, securities legislation and public information programmes. ASFONZ says that New Zealand has had previous experience of these changes. From the present standing start, ASFONZ thinks that 2008 is a more realistic implementation date. This would also align the change with the timing of the increase in income tax thresholds.
ASFONZ has real concerns that the effect of the compulsory opt-out KiwiSaver regime will be negative for existing workplace superannuation schemes. Melville said that, at the margin, some employers will simply close membership of existing schemes or even wind them up. With the government now seemingly setting the rules on private provision for retirement (as well as public), those employers will simply leave it to the government to do whatever it wants.
ASFONZ thinks it is unlikely that many existing schemes will convert to the minimum requirements of the KiwiSaver regime; nor are they likely to want to qualify as being exempt from the automatic enrolment requirements. The required conditions will probably mean unacceptable changes to existing schemes. This means employers will effectively need to run two schemes for new employees – one that they want to have and the other that they have to have.
All this will, in ASFONZ’s opinion, be negative for existing schemes and their members.
According to ASFONZ, the KiwiSaver scheme may also deliver bad business for providers with many savers’ accounts having just the opening $1,000 contributed by the government and a minimum three months’ contributions from the saver. “These small accounts will simply be uneconomic” said Melville. “The KiwiSaver scheme will not be helpful if it results in lowering standards and restricting diversity because of an unbalanced focus on achieving low fees.”
ASFONZ says there is overseas evidence that such forced offerings do not work. The “Personal Retirement Saving Account” (PRSA) in Ireland has been an expensive, dismal failure. With a workforce about the same size as New Zealand’s, only 19,000 employees had signed up to a PRSA as of 31 December 2003 despite the fact that nearly all employers were forced to offer it. That’s about 1% of the workforce. And, says, ASFONZ, there are huge, continuous tax incentives for Irish employees that put the KiwiSaver’s proposed $1,000 “sweetener” completely into the shade.
“We may get an increase in superannuation scheme membership,” said Melville, “but at what price? ASFONZ thinks that more could have been achieved through other approaches that would have involved much less bureaucracy and intervention. ASFONZ is in favour of workplace superannuation, however we think that employers and employees should be free to make their own decisions about what’s right for them. This government thinks it knows better than New Zealanders what they should be doing with their own money. That’s a shame.”
ASFONZ applauds the government’s move to spend money on financial literacy programmes. It also suggests that more work needs to be done on improving the securities legislation. “We would like to work with the government to make workplace superannuation schemes better for employers and members”, said Melville. “Workplace superannuation is a great idea but that does not justify forced provision on all employers.”
This is a media release from The Association of Superannuation Funds of New Zealand (ASFONZ)
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