Securing Your Future: Questions And Answers
19 may 2005
Securing Your Future: Questions And Answers
See also Cabinet papers released on the Securing Your Future website on Budget day: http:// http://www.securingyourfuture.govt.nz
Who is eligible to join? What is the expected participation rate? What is the government’s contribution going to be? How will the four per cent and eight per cent rate be calculated and what sort of amounts does it represent? How will members of existing superannuation schemes be affected? How does a contribution holiday work? Can KiwiSavers borrow against their savings?
Will the money be protected? How will this affect home buyers? Which existing schemes will be eligible for the housing deposit subsidy? Will the housing deposit subsidy drive up house prices? Why is the government not providing tax cuts instead? Is the government doing anything to improve financial literacy?
How will KiwiSaver affect employers? Do all employers have to offer KiwiSaver in their workplace? Are small and medium sized enterprises exempt from the scheme? What about the self-employed? Do employers have to give financial advice? Do employers have to contribute to the savings of their employees? How will employer contributions be handled to minimise compliance costs?
Will this increase employers’ labour costs? What impact will KiwiSaver have on employers with existing schemes? What are the implications for financial providers? What is the process for provider selection? Will provider numbers be limited? How will the schemes be regulated? How does this relate to the work of the financial intermediaries task force and other work on financial regulation more generally?
Where should the public go for more information?
Who is eligible to join?
From April 2007, employees aged 18 and over will be automatically enrolled when they begin a new job, but have the opportunity to opt out. Existing employees will be able to opt in to the scheme but will not be automatically enrolled by their employer. Employees under 18 and non-employees, such as the self-employed and beneficiaries, will be able to opt in to the scheme. Those already eligible for New Zealand Superannuation cannot join.
What is the expected participation rate?
It is difficult to predict how many people will join the scheme. There is little international evidence to draw on. Officials have assumed that up to 25 per cent of the eligible labour force may have joined the scheme after it has been running for five years.
What is the government’s contribution going to be?
The government will provide an upfront contribution per KiwiSaver account holder of about $1000. In addition, the government plans to negotiate fee levels and to fund ongoing fees up to a cap.
The home ownership deposit subsidy will equate to $1000 per year of savings in the KiwiSaver, with a minimum of three years and a maximum of five years i.e. $3000 to $5000.
How will the 4 per cent and 8 per cent rate be calculated and what sort of amounts does it represent?
The 4 or 8 per cent will be based an employee’s salary or
wages before tax. This includes salary or wages and other
employment-related allowances such as sums receivable by way
of bonus, commission, extra salary, gratuity, overtime or
other remuneration of any kind.
Annual salary/wage income 4% weekly contribution 8% weekly contribution
$10,000 $8 $15
$30,000 $23 $46
$50,000 $38 $77
$80,000 $62 $123
$100,000 $77 $154
How will members of existing superannuation schemes be affected?
KiwiSaver will complement rather than replace the existing registered superannuation scheme regime. This means existing schemes can continue to operate as they have done until now.
The trustee and members of any existing registered superannuation scheme will have the option, if they wish, to convert to KiwiSaver, subject to meeting the KiwiSaver criteria. If they convert, members will be eligible for the government contributions to KiwiSaver.
If an existing scheme does not convert, its members may choose to open a KiwiSaver account in addition to, or instead of, their existing scheme.
Members of existing government schemes such as the State Sector Retirement Savings Scheme (SSRSS) and Government Superannuation Fund (GSF) will not automatically be entitled to the government contributions.
How does a contribution holiday work?
KiwiSavers will be free to stop and start contributing as they wish by applying for a contribution holiday for up to five years at a time. At the end of the five years, contributions will resume unless a further option to cease them is exercised. Inland Revenue will oversee this process.
KiwiSavers will not be able to take a contribution holiday until they have been making contributions to the scheme for at least three months.
Can KiwiSavers borrow against their savings?
No. Scheme assets will not be able to be used as security for lending.
Will the money be protected?
KiwiSaver products will be regulated consistently with other superannuation products. Only approved providers will be able to participate in KiwiSaver. These providers will need to be registered, meet certain minimum ongoing requirements and disclose information to help people make a choice. The government does not guarantee any individual scheme.
How will this affect home buyers?
KiwiSaver will provide: an ability for KiwiSaver participants to make a one-off withdrawal of their own savings to use for the purchase of a first home (excluding the initial government contribution), following a minimum of three years participation a deposit subsidy to people who have contributed to KiwiSaver for at least three years to assist with the purchase of their first home. This will be $1000 for each year of contribution, up to a maximum of five years. Regional house price caps and household income caps will be used to target this assistance.
The Mortgage Insurance Scheme (MIS) will provide: assistance to households that can afford to service a high loan-to-value mortgage, but who do not have a sufficient deposit to access a commercial loan. The government contributes towards the insurance on the loan, which means the lender’s risk is reduced. In this way, the MIS allows lending to people who would not normally qualify for a loan. Applicants must have a good credit history, not already own a home, and intend to live in the house.
Which existing schemes will be eligible for the housing deposit subsidy?
Members of existing retirement superannuation schemes whose employers have an exemption from the automatic enrolment provision will also be eligible for the deposit subsidy if they save for a minimum of three years from 1 April 2007. (Employers’ exemptions only apply for existing superannuation schemes that have at least four per cent total contributions that vest immediately; that are offered to all permanent employees; and whose members have the ability to transfer funds to other similar products.)
Will the housing deposit subsidy drive up house prices?
The deposit subsidy is expected to be taken up by around 3000 households per annum, which is a small proportion of the total houses purchased in New Zealand each year. Therefore the subsidy is not expected to have a significant effect on house prices. However, as the subsidy will not become available until 2010, it is difficult to predict how it and other factors will influence house prices after that date.
Why is the government not providing tax cuts instead?
Tax cuts are expensive in aggregate, but do not deliver much to the individual. There are roughly three million taxpayers. Giving them $5 a week each will cost around $750 million a year. For tax cuts to make a difference, they have to be limited to the top end of the scale: they reward the better off disproportionately.
Is the government doing anything to improve financial literacy?
International experience indicates that promoting financial literacy is key to ensuring the success of any retirement or superannuation savings package. The government plans to run an education campaign explaining KiwiSaver, as well as a more general financial literacy campaign aimed at explaining financial concepts and terms.
These initiatives to improve New Zealanders’ financial literacy will be developed over the coming year. A financial capability survey is due to be undertaken in mid-2005, which will provide information on the current level of financial literacy in New Zealand.
How will KiwiSaver affect employers?
Do all employers have to offer KiwiSaver in their workplace?
Yes. All employees should have the opportunity of joining KiwiSaver.
Are small and medium sized enterprises exempt from the scheme?
No. However, the subsidy to payroll agents to meet PAYE-related compliance obligations imposed on small employers will help reduce costs for employers that take up the subsidy. The subsidy is voluntary and will apply to the first five employees of a small employer.
What about the self-employed?
Self-employed people will be able to contribute by making voluntary payments directly to Inland Revenue. Self-employed people will determine how much and how often they contribute. Those wanting to access the housing deposit subsidy must meet the same criteria as salary and wage earners. This will include providing evidence that they have contributed at least four per cent of their last three years’ taxable income (up to a maximum of five years).
Do employers have to give financial advice?
No. Employers will be provided with an information pack to give their employees that outlines how the scheme works, and provides details of how employees can receive further advice, including financial advice.
Do employers have to contribute to the savings of their employees?
No, but employers can choose to contribute. Employers will have flexibility to determine most of the terms and conditions attached to their contributions. Ordinarily, these contributions will be treated in the same way as employee contributions.
How will employer contributions be handled to minimise compliance costs?
Employers will have the option to make contributions via IRD, along with their employees’ contributions.
Will this increase employers’ labour costs?
As employees are not being compelled to save, there should be no impact on labour costs.
What impact will KiwiSaver have on employers with existing schemes?
Employers with an existing registered superannuation scheme that has total contributions of at least 4 per cent (vesting immediately), provides full coverage to permanent employees, and allows employees to transfer balances to other comparable schemes, can apply for an exemption from the automatic enrolment provisions for new employees. However, any employee with such an employer can still opt in to KiwiSaver.
Employers can still contribute to any existing superannuation scheme as they do now.
Employers also have the option to convert their existing scheme into a KiwiSaver product if the scheme satisfies the KiwiSaver features.
What are the implications for financial providers?
What is the process for provider selection?
The government will use a combination of a tender process and a requirement to meet a set of minimum specified criteria to identify KiwiSaver providers.
Will provider numbers be limited?
The number of default schemes (for those who do not select a scheme) may be limited to ensure that the fees for these products remain low and that schemes have an incentive to take small balances. However, the government is seeking to permit a wide range of other providers to encourage competition and innovation and reduce distortions to financial markets.
How will the schemes be regulated?
Schemes will be regulated in a manner consistent with registered superannuation schemes and the Superannuation Schemes Act 1989 framework will apply. This framework focuses on ensuring adequate disclosure, investor protection, registration of funds, and ongoing monitoring. The Government Actuary has oversight of all registered superannuation schemes.
How does this relate to the work of the financial intermediaries task force and other work on financial regulation more generally?
The recommendations of the financial intermediaries task force will feed into the review of the current regulatory environment for non-bank financial products and providers, which is being led by the Ministry of Economic Development. This review should provide a cohesive and effective framework for the regulation of financial products and providers, with legislative changes expected to be introduced into the House in 2008.
The government is also improving the quality of information disclosure by financial advisers and brokers, as well as business practices across the advisory industry.
Where should the public go for more information?
The website www.securingyourfuture.govt.nz contains links to a range of other sites for information.
For questions about KiwiSaver, go to www.ird.govt.nz or ring the Inland Revenue on 0800 SAVE4ME (0800 728 346).
For more information on the Mortgage Insurance Scheme, go to Housing New Zealand Corporation's website: www.hnzc.govt.nz