KiwiSaver fish hooks

This is potentially the most positive and proactive Governmental policy initiative to lift our savings rate through employer based schemes that I have seen in my over 20 years in the investment industry in this country. However, it has obvious fish hooks.

On scanning through the over 200(!) pages that was released (including the draft legislation) my brief comments are:

• the $64,000 question is: will the $1,000 carrot be sufficient to entice employees into a scheme where your funds are locked up to age 65 (or even older if the Government raises the age of eligibility for Government Super payments). The Government is assuming a 25% take up rate and no-one really knows if this is going to be too optimistic, pessimistic or about right.
• the housing deposit assistance for first home owners is a free lunch (similar to student loans) that may attract some younger people but they are not going to be long-term savers in the scheme, as they will probably exit when they move to buy their first homes.
• how many people will only contribute for the first year to get the $1,000 and then stop? This is the nightmare scenario for KiwiSaver providers who would then have to service very low value account balances for many years.
• how does KiwiSaver interact with the massive taxation changes mooted for 1 April next year? For example, what impacts will a marginal tax flow through regime have for potential investors into a KiwiSaver scheme?
• what impact will KiwiSaver have on retail managed funds and financial planners? One only has to look to Australia to see that superannuation savings make up the bulk of investment products with most other investment products relatively less popular.
• which will be the most popular option chosen by existing employer schemes? Will some have duplicate schemes and how many existing employer based schemes will allow employees to "cash out" of their existing scheme, thus actually decreasing savings levels in the short term at least.
• how many employers will contribute as well as the employee? Not many I think, and one way to overcome this would be to decrease the corporate tax rate to 30% and enforce an employer contribution.
• will KiwiSaver be the first step of a process that eventually leads to a compulsory scheme, like Australia? Perhaps Winston Peters will eventually get his way (although well after his referendum)!

In summary, I feel that KiwiSaver is a positive step in the right direction and gives sufficient flexibility so that those who do and do not want to save through it are catered for. However, it is only the start of a long journey – not the final destination.

Anthony Quirk is the managing director of Tyndall Investment Management, email: anthony_quirk@tyndall.co.nz

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