How KiwiSaver can help our extreme weather response
These past few months of really, really bad weather at least in many parts of the North Island has shown us all the stark reality of the state of critical infrastructure in New Zealand. Although occurrences of such wild weather is always somewhat unpredictable (notwithstanding our weather people seemed to do generally well in forecasting the past few months), we can predict with 100% certainty that wild weather events will continue to occur in the future. Unfortunately our people and infrastructure will continue to suffer the consequences of this unless something changes.
As a nation we need to plan for how we can and should make every day New Zealanders more resilient to these events. At the very least we need to upgrade our infrastructure to minimise the damage these weather events can cause.
The cost of upgrading our infrastructure will be significant, but it pales in comparison with the cost of having critical economic regions such as Northland, Hawkes Bay and Gisborne cut-off and the base of its (largely agricultural) output undermined and even debilated. Not to mention the personal cost incurred each time the existing infrastructure fails.
Members of Parliament and certain journalists have talked about special taxes to help pay for this much needed upgrade – my slightly skeptical guess is that we will end up avoiding this conversation. Historically in New Zealand we have hated paying for infrastructure and only invest in it well after it is needed (like now for instance…).
But it doesn’t have to be this way. In thinking of a new approach, I think KiwiSaver is a crucial piece of the puzzle, and can play a substantial role in our infrastructure upgrade and resilience / wellbeing enhancements.
1. Using KiwiSaver to build individual resilience
For most people, KiwiSaver is a critical tool to help them purchase their first home or prepare for their retirement.
But one of the lesser known benefits of KiwiSaver is its use in times of financial hardship. If a Kiwisaver member is suffering financial hardship then he or she is able to withdraw a part of the KiwiSaver to help get them through the tough times.
In times of difficulty and stress this facility can be an extremely important tool, a lifesaver even. Over recent weeks, the Kiwisaver industry has seen a spike in financial hardship claims related to the effects of Cyclone Gabriel. Many Kiwisavers have needed to withdraw their savings to pay for emergency accomodation, emergency home repairs while they argue with their insurers about payouts and/or to feed their families after their jobs suddenly disappeared.
In my view, KiwiSaver is an important tool for people in trying times, not just in retirement. This view led my team at kōura Kiwisaver to send a team member to Hawkes Bay last week to assist people make Financial Hardship claims to readily enable access to emergency funds and start to rebuild their lives.
Some may say, “this is allowing people to steal from their retirement”. But my answer is there will be no retirement if we don’t help people get through the current moment. An added benefit is that making KiwiSaver savings accessible in times of need will actually encourage people to contribute and potentially even increase their contributions.
2. Using KiwiSaver to fund infrastructure
Australia has been one of the global leaders in private superannuation and her ever-growing pool of retirement funds has also led the way in infrastructure investment.
Australians have A$2.7 trillion invested in their Superannuation schemes. That’s A$2,700 billion or A$2,700,000,000,000. Of this A $2.7 trillion, approximately A$215 billion (8%) is invested in domestic infrastructure.
That number is many multiples of New Zealand’s entire private infrastructure market combined. For example, Australian superannuation funds are directly responsible for over 10% of Australia’s investment into renewable energy generation.
My challenge to KiwiSaver funds and the Government is to create an environment where we can achieve these same outcomes for New Zealanders.
New Zealand has a succesful track record of using Public Private Partnerships and mixed-ownership models where both Government and private partners develop and/or own key infrastructure assets (airports, ports and energy companies). Our task is how do we accelerate and broaden this thinking and create more products that private investors can fund. We have seen that private or mixed-ownership of key infrastructure assets typically delivers significantly better outcomes for all parties, Governments, KiwiSaver members and citizens.
On current settings, KiwiSaver is expected to be a $200 billion pot by 2030. Just imagine if we funneled $20 billion of that amount into delivering improved infrastructure for every day New Zealanders. And just imagine if that $20 billion was just the equity component of a funding structure ie with appropriate long-term debt funding the pot could be at least $50 billion. That’s a lot of bridges, roads and rail…
Evidence out of Australia shows that infrastructure has been one of the best performing assets for superannuation funds. If that trend continues, and we at least partly adopted the Australian approach, this would also be a massive win for individual KiwiSaver members.
3. Can KiwiSaver do this in the current settings
Arguably none of this will work with the current KiwiSaver settings. Contribution rates here are probably too low to allow balances to grow to where they need to be to deliver resilience. The current relentless focus by regulators on fees also makes it hard to access expertise needed for infrastructure investment.
New Zealand’s default Kiwisaver contribution rate of 6% of one’s salary (3% employer and 3% employee) is significantly lower than international norms. The OECD average pension contribution rate is 15% and Australia is moving to a compulsory contribution rate of 12%. Now I know that our incomes here are commensurately lower and that is another challenge but contribution rates in New Zealand need to rise. Our modelling suggests a contribution rate of around 13% is required for most people to achieve the industry benchmark of 80% income replacement rate when in retirement. By increasing contribution rates, we make people more resilient and prepare them for a much better retirement.
The relentless focus on fees mean currently managers are focused on finding the most efficient ways to deliver KiwiSaver. For many this means low cost passive equity managers.
But the truth is that KiwiSaver is already one of the lowest margin products in financial services, so we can afford to think differently. Until we have a realistic coversation about fees, fund managers will struggle to work with external infrastructure specialists with the expertise to deliver great outcomes for both the communities and their KiwiSaver investors.
Superannuation in Australia is a A$2.7 trillion asset base with A$215b invested in infrastructure. If we get the settings right, we could potentially create $50b of infrastructure investment in New Zealand. This would be paid for using KiwiSaver funds and delivering better outcomes for New Zealanders.