Cullen: Kiwisaver Speech to Women in Super/ASFONZ
Hon Dr Michael Cullen
Deputy Prime Minister, Minister of Finance, Minister for Tertiary Education, Leader of the House
23 March 2006 Speech Notes
Embargoed until: Thursday 23 March at 8.00am
KiwiSaver – Speech to Women in Superannuation/ASFONZ Breakfast
Wellington Club, 88 The Terrace
When I introduced the KiwiSaver Bill into Parliament recently, I said that it represents a landmark in social and economic legislation in New Zealand. The Bill adds an important new element into the savings landscape by creating a readily accessible vehicle for all working New Zealanders to set aside a portion of their earnings to fund their long-term income security.
As such, it is a logical extension of other measures the Labour-led government has introduced to create a secure environment for planning retirement income. When we were elected in 1999 we took immediate steps to restore the level of New Zealand Superannuation and ensure that its value relative to the average wage would be preserved.
Then we moved to create the New Zealand Superannuation Fund, which provides long-term stability to the basic state pension by partially pre-funding the scheme. As a result, future governments will be better placed to negotiate the cost pressures brought about by demographic change.
Thirdly, we recognised the need for government to show leadership in providing workplace savings options by introducing the State Sector Retirement Savings Scheme, a voluntary savings scheme aimed specifically at state sector employees.
What was missing was a mechanism for providing easy access for all employees to a long-term savings scheme.
Like most western nations, New Zealand has struggled to improve rates of participation in long-term retirement savings schemes. We had a brief flirtation with the notion of compulsory savings with Roger Douglas’s scheme in the early 1970s. Unfortunately, that scheme was introduced at the start of a period of profound social and economic change and was not well designed to cope with it.
It was predicated on a pattern of long-term career stability (primarily by male partners) which would change dramatically in the decades that followed. It also relied upon a high degree of faith in the ability of the state to manage financial assets, just at the time that we were becoming aware of how weak our system of public financial management was when it came to protecting us against unscrupulous or incompetent governments.
Even if the scheme had survived the 1975 election, it would have had to adapt to cope with factors such as the high levels of inflation in the 1970s and 1980s, rates of unemployment that were previously unimaginable, the steady increase in female participation in the workforce, and the challenge of transparency in governance and prudential management.
We had a slightly longer flirtation with a policy of tax breaks for superannuation schemes, finally realising that they tended merely to influence the form that savings took, rather than increasing the quantum. They also provided scheme managers with a ready-made marketing tool, and in so doing reduced the incentive for managers to seek to educate the market into the merits of various savings options.
The only question of relevance was: is it tax deductible? One could argue that, partly as a result of this, New Zealanders in their forties and fifties are less savvy when it comes to savings than they should be.
In the event, the late 1980s saw us go cold turkey with a savings environment that provided no particular encouragement for New Zealanders to address the issue of retirement savings early in their working lives. It must be something of a disappointment to the economic rationalists that many New Zealanders have not developed a regular savings habit and have delayed any serious attempt to save until relatively late in their lives.
KiwiSaver addresses that problem, not through compulsion or through distortionary tax breaks, but through a relatively simple mechanism of automatic enrolment organised in the workplace. This allows for deductions at source, provides benefits from economies of scale, and reaches a high proportion of the population who are able to save.
This aspect of the scheme has already earned it international accolades.
I should point out in passing that there has been some very sloppy journalism in response to the Bill, notably in the Sunday Star Times, suggesting that contributing to the KiwiSaver scheme is beyond the means of a large proportion of the New Zealand workforce. That suggestion is quite untrue, and was based upon an entirely unsupported contention that 80 percent of New Zealand workers earn less than $40,000 per annum, and that middle income earners had slipped relative to the minimum wage since the late 1990s.
The figures used put together two incompatible measures, a 1989 Statistics NZ Quarterly Employment Survey and a 2005 NZ Income Survey. The QES is based on weekly incomes for someone working full-time, while the Income Survey reports the average income of everyone in work, including part-timers and the self-employed.
The fact is that since the late 1990s New Zealanders have experienced nominal wage growth of some 31 percent and real wage growth of around 16 percent.
According to Statistics NZ 346,000 workers aged eighteen and over earn $12 an hour or less, not 400,000 as the Sunday Star Times reported. More importantly 1.2 million Kiwis earn more than $12 an hour.
I am citing these figures simply to reinforce the fact that KiwiSaver is designed to cater to the large proportion of working New Zealanders, and it undoubtedly hits that target.
The government will support KiwiSavers in three ways:
- First, we will meet the costs of the administration through IRD;
- Second, a $1,000 upfront contribution will be provided to each new KiwiSaver, including members of an existing registered superannuation scheme that fully converts to a KiwiSaver product;
- And third, the government will provide a fee subsidy at a capped level to savers in approved KiwiSaver products. The details of this subsidy will be determined after consultation and negotiation with providers
The emphasis from the contributor’s point of view is on choice, with competing providers and a capacity for contributors to specify their preference for risk. Nevertheless, there are clear expectations that savings will be locked in for retirement or, under certain circumstances, for the purchase of a first home.
Savers will be able to select their own investment product and can change scheme providers, but can only have one provider at any time.
Employees will be randomly allocated to a provider of a default scheme with a conservative investment profile unless they make an active choice to become a member of a scheme or their employer has nominated a preferred scheme to which their employees will become members.
KiwiSaver also encompasses an ongoing education programme aimed at raising public awareness and skills regarding savings and investment. What this reminds us of is that what we need to achieve is both an increased volume of retirement savings and an increased understanding throughout the community of how to approach investment.
For those involved in the superannuation industry, there are two key questions about KiwiSaver:
- First, how KiwiSaver relates to existing superannuation funds; and
- Second, how KiwiSaver will impact upon employers with existing schemes.
On the first point, it is important to see KiwiSaver as a generic framework for workplace savings. It provides three things: a mechanism for encouraging enrolment; modest incentives for those who do enrol; and a low cost collection system.
These features establish, as it were, a common gateway enabling employees to access a range of schemes which conform to a basic set of requirements. Those schemes may offer a wide array of options, and may target particular sectors of the market with tailored services.
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.
Our intention has always been that, within the parameters of the basic scheme design there would be room for a diversity of schemes and vigorous competition for the right to manage the KiwiSaver dollar.
We have sought to reflect that in the detailed provisions describing how schemes qualify and how existing schemes migrate into the KiwiSaver framework.
Inevitably there may be some perceived inequities in the transition, as new entrants benefit from incentives that are not available to those who have been saving for some time. This is to be expected, and we should bear in mind that the purpose of KiwiSaver is to induce more people to save, not to induce savers to shift their existing savings to a different form.
That brings me to the issue of employers with existing schemes. There is nothing in the new policy that seeks to dissuade employers from continuing to support existing superannuation schemes. If that scheme satisfies the KiwiSaver features, employers can convert it into a KiwiSaver product and access the benefits in terms of government contribution to new entrants, collection via IRD, and so on.
Employers will have some clear choices regarding:
- Whether to elect an initial provider for their employees who do not select their own provider. If an employer has elected a preferred KiwiSaver scheme for their employees, the employer will be required to provide an investment statement for that scheme to all new employees and those that opt-in via a tax code declaration;
- Whether to make voluntary employer contributions to KiwiSaver. Generally, an employer will be able to determine their own rules and conditions around such contributions.
- How to handle the situation where they have an existing superannuation scheme.
In cases where a scheme already exists, employers will be able to apply for an exemption from automatic enrolment for new employees, provided that they have an existing superannuation scheme that is:
- Open to all new permanent (including part-time) employees;
- Portable (that is, members can transfer balances to other schemes);
- The minimum employee contribution combined with the maximum employer contribution is at least 4%; and
- Employer contributions vest in the employee within 5 years of the employee becoming a member of the scheme.
Employees whose employer is exempt from the automatic enrolment provisions will still be able to join KiwiSaver (by opting-in).
If an employer is merely acting as a conduit or passing on information about KiwiSaver to its employees, or selecting a preferred KiwSaver scheme for its employees, the employer will not be liable as an investment adviser or promoter under the investment advisers and securities legislation.
An important feature of the scheme is the provision for contributions holidays. These are designed to cater for those who have a break in employment, or perhaps a period of reduced earnings, due to childcare or other family responsibilities.
KiwiSaver members will be allowed to cease contributions by applying to Inland Revenue for a contributions holiday after a minimum contribution period of 12 months. The contribution holiday will be for a period of between 3 months and 5 years and can be renewed at the end of the period.
The government intends to have the KiwiSaver scheme up and running by 1 April 2007. This would require the KiwiSaver Bill to attain Royal Assent by early October to ensure that providers of default schemes have around 6 months from appointment to be ready for the scheme to commence. This means the tender to select providers of default schemes will occur in parallel to the Select Committee process, and these providers will be appointed after the legislation attains Royal Assent.
Standing back from the detail of the scheme, it is important to bear in mind that KiwiSaver is an attempt to foster a much stronger savings culture in New Zealand. Making workplace savings a common feature of New Zealand life should have something of a multiplier effect, encouraging ordinary working New Zealanders to become more financially literate and seeing their stake in the country extending beyond the labour market and the residential property market.
This is an important opportunity for the government and the superannuation industry to deliver both economic and social benefits to a generation of New Zealanders. I trust that we can work together to make that a reality.