Cullen: Address to EPMU on workplace savings
Tue, 2 Nov 2004
Address to EPMU on workplace savings
2 November 2004 Hon Michael Cullen Speech Notes Embargoed until: 3.30pm Tuesday 2 November 2004Address to EPMU National Executive MeetingEagle Room, Miramar Golf Club
I would like to say a few words about workplace savings, in light of the recent report of the Savings Produce Working Group.
This is an issue that more or less fell off the agenda completely during the 1990s, due to a combination of laissez-faire economics, changes to work patterns that made traditional workplace super schemes unwieldy, and a degree of suspicion towards professional money managers with a corresponding rise of a culture of do-it-yourself retirement savings amongst New Zealanders.
The dust has cleared considerably in the last five years, and we have been eager to get the issue back on the agenda. Laissez-faire economics is skulking in a corner at the Orewa Rotary Club. New patterns of work are settling in, and superannuation schemes have learned to adapt to a greater demand for portability, clearer vesting, and flexible investment strategies. There are forces within the financial services industry - both regulatory and industry-led - that are raising performance standards.
And meanwhile many New Zealanders are seeing the limitations of do-it-yourself retirement savings, partly because they understand the issues better and how much they actually need to save, and partly because the favoured vehicle for such savings (a mortgage free home, and preferably another investment property) has started to lose its shine as many New Zealanders realise they have a highly undiversified portfolio.
To my mind the workplace is the logical place to aim policies for improving savings. There are excellent opportunities to communicate the message about saving, and to provide good quality, unbiased information. The capacity for deductions at source enables workers to access a 'painless' regime of savings. And the group dynamic within a workforce can increase confidence about savings decisions.
For these reasons, many workplace savings schemes have survived despite the decline of the 1990s. Around one in seven workers is a member of a scheme, and their average balance is around $37,000.
However, we do not think that rate of membership is enough; and we need to find ways of overcoming the obstacles to workplace savings schemes. Workplace schemes can provide bulk discount opportunities on administration and service fees, but only if participation rates are high. Compliance costs are an issue for employers, and especially smaller employers. Employers sometimes also perceive them as carrying the risk of liability if things go wrong.
What I asked the Savings Product Working Group to do was to come up with proposals that would promote workplace savings, and do so in such a way that compliance costs and risk for employers were kept to a minimum.
Their key proposal was mandatory offering of access to a savings plan, with a generic scheme that works off existing employment routines. Contributions would be deducted at source, using a standard tax code, and would be forwarded by IRD on to the relevant fund manager.
Any employee could enrol in the scheme, and one proposal would involve an 'opt-out' mechanism whereby new employees are automatically enrolled unless they choose not to.
The question of employer-matching contributions would continue to be subject to employment negotiations.
Savings would not be 'locked-in', although it is fair to consider rules on frequency of withdrawal, amounts that are accessible, and notice periods. These would reinforce the message that savings are not just another bank account.
The most contentious question around workplace superannuation policy is that of 'sweeteners' to encourage workers to join. The experience with tax incentives is pretty clear and pretty negative: they are expensive, tend to go to the better off, and tend to produce a shift in savings rather than a net increase. However, the working group has indicated a number of other incentives for joining the scheme and for staying with it.
No decisions have yet been made; however, I expect to be able to give a definite response to the working group's proposals in the context of next year's budget.
What I can assure you is that broadening savings so that a larger portion of the population has some kind of deliberate plan to improve their retirement is an important issue on the government's agenda. Research shows, not surprisingly, that ownership of assets is correlated with a range of other indicators of social well-being, including health and vulnerability to unemployment. Part of a commitment to building a skilled workforce that will aid economic growth involves promoting the broader set of life skills that enables people to live fuller, more satisfying lives. That goal is something the union movement and this government have always shared.