Someone needs to turbocharge the KiwiSaver scheme
Over the past few months, I have been quietly hoping for the politicians – certainly as they get into election campaign mode – to start talking about how we can improve and help KiwiSaver reach its full potential. The strongest version of KiwiSaver was introduced in 2006 by Sir Michael Cullen. Not a single politician has talked about strengthening KiwiSaver since, instead the various proposals from politicians seem adamant on removing it from its purpose of helping fund New Zealand’s retiring population.
The Key / English National government made the most significant changes to the scheme early in its tenure. It reduced the default contribution rates from 4% to 3%, removed the $1,000 Kick Start payments, halved the annual Government Contribution from $1,042 to $521 and most egregiously introduced provisions removing the requirement for employers to match employees KiwiSaver contributions. I do acknowledge that the Government was battling with the fallout from the GFC at the time.
Although not quite so damaging (regarding KiwiSaver at least) the current Labour Government has achieved very little in this space. It had planned a KiwiSaver review to see how the rules could be tweaked to achieve its founding objectives, but unfortunately that review became yet another Covid victim. It did try to introduce GST on KiwiSaver scheme management fees but luckily the public outrage at this suggestion meant that it was quickly put to bed, in fact and incredibly the backdown was within 24 hours of it being announced!
Rather than working out how KiwiSaver policies could be improved, the focus over the past six years has been exclusively on fees. I know because I am the chair of KiwiSaver provider, kōura Wealth. Although the level of fees investment managers charge can be an important contributor to long term returns for KiwiSavers, getting people into the right KiwiSaver fund, making sure contributions are right and investing in the right assets will be much bigger drivers of outcomes.
The incessant drive from Government and regulators to lower fees make all of this necessary work a lot harder: investing in people and technology to deliver advice or investing in investment teams to deliver specialist products such as private equity, venture capital, infrastructure or community housing is difficult if the only real focus is on fees.
This brings me to the current political campaign and what has been promised.
The Labour party appears to be completely ignoring KiwiSaver and saying very little, simply promising that the long promised review will actually happen (another promise of another review!). The National party has introduced two KiwiSaver policies. One completely misses the mark, the other looks promising but (as with most things) comes with some pitfalls.
The National party wants KiwiSavers to have the ability to use their KiwiSaver balances to fund rental bonds. This proposal has been criticised by all and sundry. It is unclear what problem this policy will solve. Students and others that cannot afford to pay for a bond for rental accommodation are able to access a Bond Grant through Work and Income. By creating another avenue to get money out of KiwiSaver we move the scheme further away from its core purpose and will reduce the amount of money available to people in retirement. For example, using FMA forecasts, an 18 year old withdrawing $1,000 for a student bond will actually be missing out on over $12,000 (assuming they were invested in an aggressive fund) by the time they reach 65 years of age.
The National Party has also promoted the ability to split your KiwiSaver balances across multiple providers. I like the concept which to me appears to be a good idea on its face value, but I think work needs to be done on the implications and mechanics of this facility:
- This splitting proposal is not a small change to how KiwiSaver works. It would require a significant redesign of the entire KiwiSaver infrastructure ie how your contribution leaves your salary, where it goes and to which scheme it is allocated, and accounted for. This is an IT nightmare giving me a headache just thinking about it and would take years and cost many millions to achieve. That’s not a reason not to add the flexibility to what you do with your KiwiSaver investment, we just need to be aware.
- Splitting may result in higher overall fees somewhat counter to the stated aim of lowering fees as administration costs ie overheads will now need to be incurred and recouped by multiple providers rather than a single provider.
- Splitting might make it harder to invest in illiquid assets like venture capital, community housing and infrastructure as balances by definition will be smaller and more prone to switching which may make it hard to manage the liquidity profile for those illiquid assets.
The current KiwiSaver system (where members are only able to have a single provider) is looked at favourably by Superannuation / Pension regulators in Australia and the United Kingdom which have way more “advanced” arrangements than we do here in New Zealand. Their regulators have spent the past five years trying to encourage consumers to consolidate all of their accounts to a single provider to reduce costs, make them easier to manage and remove the incidence of “lost pensions”. This proposed change would be moving to the offshore systems that they are in some ways trying to unwind.
So, nothing from Labour and some OK thinking from National but as always, the devil is in the detail.
In my view and the overriding principal of any proposed change to the KiwiSaver space is to ensure that any proposals to tinker take KiwiSaver back to its core purpose: helping us save more for retirement. And although not explicitly stated, we need KiwiSaver enhancements to progressively remove the requirement for the state / taxpayer to fund people’s retirements.
NZ Super is not affordable or sustainable. As noted in last week’s PREFU document, a staggering 17% of every dollar generated in tax is now used to fund NZ Super payments and Treasury pointing out that superannuation payments as a percentage of GDP are expected to grow by almost 50% over the next 30 years. That is not a sustainable path – we either need significantly more tax or a change in how we think about National Superannuation. Delaying the retirement age by two years in the future (as proposed by National) is a must and is better than nothing, but in reality, is really just noise with life expectancy projected to be three years higher by the time this policy comes in.
A brave and forward thinking politician would be one who looks to refine KiwiSaver policy to help it become the preferred and most viable option to fund peoples retirements and in the process removing the pressure from the Government books. Australia has shown us how to do it with its Superannuation structure (although not perfectly of course), and we should be trying to move closer rather than away from such successful examples.
And for those of you wondering, I just couldn’t bear to give my two cents worth to the PREFU announced earlier in the week as I was too shocked by the staggering levels of spending, deficits and debt. “Light at the end of the tunnel”? Give me a break…