Public submissions invited on workplace savings
Hon Dr Michael Cullen Minister of Finance
15 September 2004
Public submissions invited on workplace savings
The public and interested parties are invited to make submissions to the Government on savings schemes in the workplace.
This follows the presentation of a report prepared for Finance Minister Michael Cullen by the Savings Product Working Group, which the Government is yet to formally consider.
Dr Cullen established the Working Group in May under the leadership of economist Peter Harris.
He says the Group has delivered a generic design and a how-to-guide to get workers into saving for their retirement.
“It has come up with some practical options for one of the country’s most serious long-term economic problems - our poor levels of savings. The country’s private debt levels and low savings is a weakness in our economy that is recognised internationally. I am committed to a dialogue on how we can encourage workers to save.
The Working Group’s ‘generic scheme’ proposes that all new staff are automatically enrolled in a savings scheme which they can withdraw from if they choose. There is a range of options to determine employers who would be covered and timing for employees to opt out.
Employers would deduct employee’ savings using a special tax code – in the same way that tax and payments such as ACC are deducted now. The aim of the design is to minimise compliance costs for employers. The savings would be forwarded to IRD, which would then forward the funds, through a central administrator, to a designated provider.
Dr Cullen says “the Group has delivered a practical proposal for workplace savings and has tackled a number of difficult issues with a range of alternative answers.
“I am pleased to see the Group has looked at methods to encourage workers to join a savings plan and further commit to long term savings.
Dr Cullen invites interested individuals, organisations and companies to make a submission on the Working Group’s report between now and 31 October.
“I am committed to seeing progress made on workplace savings in my 2005 budget, Dr Cullen says.
To view the full Savings Product Working Group report:
Savings Product Working Group: Report to Finance Minister Michael Cullen
Questions and answers prepared by the Savings Product Working Group
For further detail and explanation please refer to the full report available at: www.beehive.govt.nz/cullen and www.retirement.org.nz. Peter Harris can be contacted on 04 470 5558 or 025 684 0909.
1. Why should the government get involved with personal decisions on financial management?
There are two key reasons. First changes in savings patterns suggest younger generations will enter retirement in a significantly worse financial position than their predecessors and secondly significant increase in private debt (household debt has doubled from 65 percent of household income in 1990 to 130 percent now). This debt is financed internationally with borrowing from foreign banks around 90 percent of GDP. It has been identified as a serious weakness in the New Zealand economy.
2. Why don’t workers save?
International and domestic evidence shows it is not simply because people do not have enough money. People lack confidence about how, put off difficult decisions and fall back on non-saving habits. Establishing a saving habit is the single biggest factor in spreading the practice of regular saving and lifting the savings rate.
3. Does education provide a solution?
Education assists but, even when combined with employer obligations to offer employees access to a savings scheme, results are modest.
4. Why target the workplace to improve savings?
The workplace has a number of advantages. This is where people earn income and deductions from salaries at source for savings are considered less “painful.” Workers gain confidence about a savings decision if others are also doing the same thing. In addition bulk discounts are available. 5. How will the low paid be helped?
Collecting small amounts on a regular
basis through a cost effective mechanism will help lower
income groups to save without having to meet the high
front-end costs associated with conventional retail schemes.
The ‘generic’ scheme
1. Will a scheme increase compliance costs for employers?
The Savings Group has designed a generic scheme that would work off existing employment obligations and routines to minimise compliance costs. Savers would have a specific IRD or tax code which would simply add an amount that is deducted from their salary (as tax and other payments like ACC are deducted). This would be sent off to a central administrator who would pass it on to a chosen savings provider. For the employer it would be business as usual – making salary deductions in line with IRD-supplied tables and sending a single cheque to IRD.
2. Would all employers be covered?
The Savings Group suggests two options. One is to exempt the large number of small employers employing five or fewer workers from the automatic enrolment rule. The other involves a slower roll-out by linking the obligation to use the automatic enrolment code to those employers who use the electronic “ir-File” computer system that IRD has developed.
3. Are there protections for employers and employees?
Yes. Laws that already apply to ensure employers pass on deducted tax and others payments would apply. The Savings Group has recommended that securities legislation be upgraded to clarify that employers are not promoters or financial advisors. Employer liability would also be clarified.
4. Do employers have to subsidise the savings of the employees?
No but they can if they wish.
5. Isn’t this compulsory superannuation by the back door?
No. The employee can opt out of the scheme by advising the employer to revert to using the standard tax code. The employee can also suspend contributions for a time if finances are stretched and can leave accumulated balances in the fund.
6. Why limit the enrolment to new employees?
Existing workers will be able to opt into the scheme however enrolling all workers on a set day would be complex.
7. How would the scheme impact on existing occupational schemes?
The Group has made a number of recommendations to protect existing savings.
8. Who sets the savings rates?
There is scope to test what would be regarded as acceptable levels of savings. The Group has developed a basic starting point that standardises all decisions on when to start saving and how much to save. Under that scheme, there would be a basic salary on which no savings would be made. Five percent of income above that base would be channelled into a saving plan, provided the amounts saved were above $10 per week.
9. Will savings be locked-in?
No. However, depending on other contributions made, some restrictions could be built into access rules. Some rules on frequency of withdrawals, amounts that are accessible and notice periods will need to be developed.
10. Will there be caps on the fees that providers can charge?
The Group opposes fee caps but does propose that fees be transparent.
11. What about the government: tax breaks, subsidies?
The Group does not recommend tax incentives. They tend to be expensive and invariably assist the better off. However, the Group invites the government to look at some “sweeteners” to encourage workers to join and stay in a savings plan.
12. Why use a central scheme administrator?
The scheme needs to be flexible but cost effective. A central administrator can avoid all of the costs of collection and transfer between multiple employers and multiple providers. It will also carry out a “registry” function, tracking and matching employees and providers as the employee changes employer, goes in and out of the workforce, and changes provider.
13. Is this just extending the monopoly of the existing industry?
The Group envisages a streamlined and uniform regulatory and tax structure that will open up the savings market to a wider range of providers to offer more savings plan choices. However, only approved providers would be able to participate in the generic scheme. An approvals body will have to be established to set and maintain standards.