Written by NBR
For a few days last week, kōura wore the wrath of the National Party due to its position that KiwiSaver is not a “rainy day fund” and is actually a retirement fund. We think it is important to keep it that way.
What truly astounded us was the very high levels of support we received for our position, and also for retaining KiwiSaver as a retirement product.
I want to use my moment of fame, though it has already passed, to voice the need for further KiwiSaver changes. When KiwiSaver was introduced in 2006, it was seen as the first step in a process to bring New Zealand’s retirement system in line with the rest of the world.
Unfortunately, the path has been the opposite. KiwiSaver was weakened with legislative changes in 2009 that reduced default contribution rates and removed the incentive for many people to participate in KiwiSaver with the introduction of total remuneration policies.
If you’re wondering why KiwiSaver is important, we just need to look across the ditch to Australia. There we can see what a successful pension scheme has done to the population and the economy. Australians have $A2.7 trillion invested in their private retirement savings. This has benefited everyone, not only those possessing the savings, in three ways.
- The country has been able to remove the universal pension, which enables a significant reduction in government expenditure, leading to lower taxes or higher spending on other things such as education and healthcare.
- Australian superannuation funds have helped push the country through numerous global recessions – $A130 billion was invested in Australian companies through the 2008–2009 GFC, enabling the country to sail through that recession.
- Australia has an amazing infrastructure, with airports, metropolitan rail systems, toll roads and cross-city tunnels all funded by people’s pension schemes.
Problems to be solved
New Zealand is one of the few countries in the world where retirement saving is not mandatory. There are currently 2.9 million people enrolled in KiwiSaver, and the only 1.7m of them are regular contributors. This means they are either living overseas or contributing the bare minimum to receive the $541 annual government contribution.
In our view, we can do three things to better incentivise people to participate:
- Make the scheme mandatory. This will bring us in line with what happens overseas, though it is unlikely to be popular in New Zealand.
- Remove the total remuneration exception. Employers will no longer be able to contract out of KiwiSaver by including their employer contributions as part of employees’ wages, instead of paying the contribution on top of the wages.
- Tax incentives. Most governments around the world incentivise participation by taxing pension contributions at a lower rate than standard earnings.
2. Aligning KiwiSaver expectations with outcomes
Our KiwiSaver contribution rates are the lowest in the OECD and well below the average OECD contribution rate of 18%. In Australia, contribution rates will grow to 14% of the average salary by 2025.
Source: OECD Pensions at a Glance, 2019
The scary thing is what people will get from their KiwiSaver; many people assume their retirement is sorted because they contribute to the scheme. A recent survey we did found 68% of people saw KiwiSaver as being important for their retirement, and the same survey showed 49% of people under the age of 45 had no savings outside KiwiSaver. Unfortunately, the average Kiwi will only get 60% of their current income (including NZ Super) if they stick to the 3% contribution rate. That requires a massive life adjustment, just when life is meant to get easier.
We would like to see changes made to contribution rates to ensure KiwiSaver delivers what people expect of it. In action, this would look like the gradual increase of contributions to 12% – rising 6% over time, in line with the Australian model.
3. Lifting engagement levels
An ASB survey in late 2019 showed only a quarter of Kiwis have a good understanding of KiwiSaver. The same survey showed many investors believed bank term deposits would deliver the same returns as KiwiSaver funds over time.
This blatant lack of understanding reared its ugly head back in March during the COVID-related market meltdown when up to 10% of customers switched out of growth funds into conservative ones.
By switching then, they effectively locked in their losses and missed out on the gains enjoyed by customers in growth funds as the markets recovered. It is estimated these customers have missed out on billions of dollars in returns cumulatively.
We put the lack of engagement and understanding down to three simple reasons:
- The default structure allows people to tick a box and never think about KiwiSaver again. More than 20% of customers remain in default funds. These funds are meant to communicate with and educate their customers, but they have had a poor rate of quality communication, and providers only increased their efforts to move customers following pressure from the FMA and an upcoming review of default processes. Providers have only lifted their success rate to 15% – which is far too low since they have been given large customer bases and are making millions of dollars in fees from these customers.
- The dominance of banks in this space means that customers believe that KiwiSaver is another bank product. This is made worse by the fact that banks will offer discounts on mortgages if a customer transfers their KiwiSaver, and have untrained branch tellers selling KiwiSaver to customers.
- The digital sign-up process preferred by most providers puts fund selections as an afterthought. We need to change the sales process so an understanding of our customers, and helping them make better financial decisions, is at the centre of it rather than using a traditional online sales model.
In an ideal world
The changes we would like to see made here are:
- Penalties imposed on default providers if they cannot engage with their default customers and have them actively choose a fund.
- Banks forbidden from using KiwiSaver as a cross-sell opportunity.
- Allowing only trained specialist staff to sell KiwiSaver, and ensure individual objectives sit at the centre of each conversation.
- Ensuring all digital sign-up processes ask about and consider personal investor circumstances.
Rupert Carlyon is the founder and managing director of KiwiSaver provider Kōura Wealth.
This content has not been paid for or commissioned by NBR.