Saving – the future?

Governments have an interest in citizens saving for their retirement - and after considerable debate, significant policies have been introduced and promoted. Kiwi Saver had its first reading in Parliament at the beginning of 2006, and the New Zealand Superannuation Fund was building up its assets.

1. What is KiwiSaver?

KiwiSaver was announced in Budget 2005 as part of a package of government initiatives designed to increase the level of savings by New Zealand households and support New Zealanders in retirement. Other initiatives include:

• Introduction of the State Sector Retirement Savings Scheme, a voluntary savings scheme aimed specifically at state sector employees;
• Establishing the New Zealand Superannuation (NZS) Fund, aimed at pre-funding the future cost to the government of NZS.

KiwiSaver’s purpose is to encourage a long-term savings habit and asset accumulation to improve financial wellbeing, particularly for retirement.

KiwiSaver also offers a first home deposit subsidy of $1000 per year of membership in the scheme, up to a maximum of $5000 for five years, to eligible KiwiSaver members after three years of saving.

2. How does KiwiSaver work?

KiwiSaver focuses on encouraging saving through the workplace. Saving through the workplace allows for deductions at source and provides a way to reach a broad section of the population.

Under the proposal:
• All New Zealand residents below the age of eligibility for New Zealand Superannuation will be able to opt in to KiwiSaver;
• Contributions will be at 4 per cent or 8 per cent of gross salary or wages before tax and will be “locked in” except for certain circumstances (such as serious financial hardship, or permanent emigration);
• After a minimum of three years in the scheme, first home buyers will be able to make a one-time withdrawal to assist with the purchase of a first home;
• Self employed, people under 18, current employees and beneficiaries may join but need to make payments directly to Inland Revenue or providers;
• The government will make a kick start contribution of $1,000 per person (to be locked in until the recipient reaches the age of eligibility for NZS or for five years of membership, whichever is the later) and provide a contribution towards members’ fees.
The government wants to ensure that a broad group of New Zealanders can save through KiwiSaver for their retirement.

3. 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 on an employee's gross salary or wages before tax. This includes salary or wages and other employment-related taxable allowances such as sums receivable by way of bonus, commission, extra salary, gratuity, overtime or other remuneration of any kind.

4. Is participation in KiwiSaver compulsory?

All New Zealand residents below the age of eligibility for New Zealand Superannuation will be able to join KiwiSaver but participation will not be compulsory because it may not suit everyone including:

• Those who would be better off repaying debt;
• Those who may not wish to save or are saving for something else;
• Those on low incomes and for whom New Zealand Superannuation may provide an adequate income in retirement.

It is recognised that each individual’s circumstances will be different. KiwiSaver is another option for New Zealanders to increase their own well being and financial independence, particularly in retirement.

5. What happens if an employee changes jobs or is just starting in the workforce?

Employees starting a new job on or after the implementation date will be automatically enrolled in KiwiSaver, with the ability to opt out.

International research suggests that automatic enrolment leads to higher participation in retirement savings schemes, as it helps overcome inertia, which prevents some people saving.

Automatic enrolment will apply to all new employees aged between 18 and 65 (age of eligibility for New Zealand Superannuation) who begin a job with a separate payroll (it will not apply to an employee who gets a promotion with their current employer).

An employee will be able to opt-out by notifying Inland Revenue in weeks 2-6 after starting employment. This period gives employees time to consider the decision of whether or not to join KiwiSaver, and to seek financial advice if desired. If an employee opts out, Inland Revenue will notify their employer.

6. How do savers choose which KiwiSaver scheme to join?

In making financial decisions, many people find too much choice overwhelming. At the same time, individual choice is important in encouraging individuals to take an active interest in their financial decisions.

All KiwiSaver members will be able to:
• Choose their own KiwiSaver scheme and investment risk profile, such as conservative, balanced, growth;
• Choose a contribution rate of either 4 per cent (default rate if no choice is made) or 8 per cent of the gross salary or wages before tax paid by the employer (an employee will be taxed on these contributions as with other income);
• Transfer between KiwiSaver schemes at any time;
• 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 up to 5 years (minimum three months) and can be renewed at the end of the period.

Individuals will be given information to help them make decisions about KiwiSaver. Members will be able to select their own investment product and can change scheme providers, but can only have one KiwiSaver scheme provider at any time.

Employees will be randomly allocated by Inland Revenue 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.

7. What is the role of employers in KiwiSaver?

Employers will have responsibility for:
• Distributing an information pack about KiwiSaver, provided by Inland Revenue, to new employees and employees that opt in outlining how the scheme works;
• Automatically enrolling new employees that do not opt out;
• Deducting employees' contributions and forwarding them to Inland Revenue along with PAYE;
• Providing Inland Revenue with the name, IRD number and address of new employees and employees that opt in via the employer.

8. When will KiwiSaver start?

KiwiSaver is anticipated to start on 1 April 2007.

9. Will KiwiSavers’ money be protected?

KiwiSaver schemes will be governed by trust deeds and regulated similarly to registered superannuation schemes. All KiwiSaver schemes will need to be registered by the Government Actuary.

KiwiSaver investment products will be regulated consistently with other superannuation products. Only registered providers will be able to offer KiwiSaver schemes.

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.

10. How does a contributions holiday work?

After 12 months in the scheme, KiwiSaver members will be free to stop and start contributing as they wish by applying for a contributions 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. The minimum period for a contributions holiday will be three months unless the employee’s employer agrees to a shorter period. This minimum period is to reduce compliance costs for employers in having to stop and start contribution deductions frequently.

11. Why can’t members take a contributions holiday in the first 12 months of joining?

A member will not be able to take a contributions holiday during the first 12 month period. This is to promote long-terms savings without deterring participation or penalising people for an unexpected change in their circumstances. During these 12 months, these employees may be able to access their funds in the event of serious financial hardship, excluding the $1000 government contribution.

12. What is the government’s role in Kiwi Saver?

The government will make a kick start contribution of $1000 to individuals’ KiwiSaver member accounts when contributions are first paid by Inland Revenue to the scheme provider. This up-front contribution will not be able to be withdrawn to purchase a first home or for financial hardship.

The government will also appoint the providers of the KiwiSaver default schemes, negotiate fees down with providers of default schemes, and pay a contribution towards fees paid by the member.

The government will provide additional targeted assistance to individuals purchasing a first home. Individuals who have saved for at least three years, and meet the eligibility criteria, will be entitled to a home ownership deposit subsidy of $1000 per year of savings, up to a maximum of $5000 per person.

13. How will KiwiSaver help first 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.

14. How will KiwiSaver affect employers?

KiwiSaver has been designed to minimise compliance costs for employers where possible, by building off existing processes.

Employers will be required to:
• Provide all new employees and those who opt-in via a tax code declaration with a KiwiSaver information pack, supplied by Inland Revenue. This pack will include general information about the KiwSaver scheme, where to obtain more information and an opt-out form;
• Notify Inland Revenue that a new employee has started and pass on the new employee’s name, IRD number and address. This requirement will apply also to employees who have opted in via a tax code declaration;
• Automatically enrol new employees by ensuring contributions commence from week 11 for all new employees if no advice is received from Inland Revenue that the employee has opted out;
• Make deductions of KiwiSaver contributions from the gross salary or wages before tax paid to employee members.

Employers will be able to choose whether or not to:
• Elect an initial provider for their employees who do not select their own KiwiSaver scheme 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;
• Make voluntary employer contributions to KiwiSaver. Generally, an employer will be able to determine their own rules and conditions around such contributions;
• Apply to the Government Actuary for an exemption from the automatic enrolment requirements if they have a registered superannuation scheme that meets certain criteria. This aims to ensure that KiwiSaver does not encourage good employer schemes to wind up. Employees who join such schemes will be eligible to apply for the home ownership deposit subsidy, subject to meeting eligibility criteria, but will not be eligible for any other government contribution, i.e. $1000 kick start or fee contribution.

In addition, an employers’ current superannuation scheme may choose to convert to a KiwiSaver scheme under their existing trust deed.

15. Do all employers have to offer KiwiSaver in their workplace?

Yes. All employees should have the opportunity of joining KiwiSaver.

16. What if an employer already has an alternative registered superannuation scheme?

An employer with an existing registered superannuation scheme will be able to apply to be exempt from the automatic enrolment requirements if that scheme meets the following criteria:

• Open to all new permanent (including part-time) employees;
• Portable (members can transfer balances to other schemes when they leave their employer);
• The minimum employee contribution combined with the maximum employer contribution is at least 4 per cent of gross salary; 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).

In addition, an existing employer scheme has the option of converting into a KiwiSaver scheme under their existing trust deed.

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.

17. Can KiwiSaver members borrow against their savings?

No. Scheme assets will not be able to be used as security for borrowing.

18. Do employers have to give financial advice?

No. Employers will be provided with KiwiSaver information packs to give their employees that outlines how the scheme works, and provides details of how employees can receive further advice, including financial advice.

If an employer is merely acting as a conduit or passing on information about KiwiSaver to their employees, or selecting a preferred KiwiSaver scheme for its employees, the employer will not be liable as an investment adviser or promoter under the investment advisers and securities legislation.

19. How will the default KiwiSaver scheme providers be selected?

An open competitive tender process will be run to select a limited number of default KiwiSaver scheme providers. The tender process is expected to commence in mid-March 2006.

20. Upon reaching the age of entitlement for New Zealand Superannuation, will people be able to get their savings out in a lump sum or will it be paid out in an annuity?

Upon reaching the age of eligibility for New Zealand Superannuation all members will have the option of withdrawing the funds as a lump sum (although providers may choose to also offer other options, such as an annuity).

21. Will Inland Revenue pay interest on contributions held by it before those contributions are transferred to the KiwiSaver scheme provider?

Yes. Inland Revenue will pay interest on contributions held. The rate of interest will be the Commissioner’s paying rate set for the use of money interest rules. This rate is set at the 90-day bill rate less 100 basis points.

Find out more
http://www.treasury.govt.nz/kiwisaver/

Updated Tuesday, 28 February 2006

The New Zealand Superannuation Fund

Autonomous, accountable
Autonomy
Accountability

The New Zealand Superannuation Fund was championed by Dr Michael Cullen, Finance Minister, and set up by the Labour Government early in the 21st century.

The Fund is first and foremost an instrument of long-term fiscal policy. Its objective is to smooth the impact of New Zealand’s ageing population on the Crown’s finances, and hence ensure fiscal and policy stability. Over the next 50 years or so, a permanently higher proportion of the population will become eligible to receive New Zealand Superannuation. This change arises primarily from increasing longevity and declining fertility in the population.

The Fund does not meet all the needs for income, health and other support for older people. People are also encouraged to make their own savings for retirement.

Autonomous, accountable

The Fund is managed by a Crown entity, known as 'The Guardians of New Zealand Superannuation'. The Crown owns all assets of the Fund. The key principles that apply to the governance of the Fund are autonomy and accountability.

The effect of the policy is to build up a portfolio of Crown-owned financial assets over the next few decades while the annual costs of New Zealand Superannuation remain relatively low. Those assets will then progressively be drawn on to supplement the annual Budget as the Crown’s finances adjust to a much higher level of ongoing expense for New Zealand Superannuation, providing a smoothing mechanism for what remains fundamentally a 'pay as you go' universal benefit. By 2007, the Crown’s financial assets are projected to be $34.3b (or 23% of GDP). By that year, the NZ Superannuation Fund’s financial assets are projected to be over a third of this figure, at $12.4b (or 8% of GDP).

Future retired people will not receive any larger entitlement to New Zealand Superannuation because of the Fund. The beneficiaries will be the taxpayers of the future, who will not have to face the steep rises in tax rates that would be otherwise needed. Given that the cost of New Zealand Superannuation is forecast to rise from the current 4% of GDP to around 9%, these tax increases would, in the absence of the Fund, be very significant.

David Cunliffe, MP for New Lynn, and then Parliamentary Under-Secretary to Finance Minister Dr Cullen, says the Fund can be seen as an extension of the regime of responsible long-term financial management that has been put in place in New Zealand over the past couple of decades. It is about fiscal responsibility, managing long-term fiscal risk, properly balancing assets and liabilities, and avoiding volatility in tax rates.

Autonomy

The Minister of Finance can give directions regarding the government’s expectations as to the Fund’s performance. However, a direction cannot be inconsistent with the Guardians’ duty to invest the Fund on a prudent and commercial basis, and the Guardians must ‘have regard to’ any direction, rather than being required by law to follow it.

The only major constraint on the Fund is that it cannot take a controlling interest in any entity. The Fund operates subject to income tax.

Accountability

The Guardians are required under the Act to publish an annual Statement of Intent, which sets out the Board’s expectations about the performance of the Fund and the key risks to the performance of the Fund. In addition, an Annual Report must be presented containing an analysis and explanation of the Fund’s performance, a statement of investment policies, and a schedule of investment managers and custodians used by the Guardians and the asset classes for which they were responsible.

The performance of the Guardians is independently reviewed at least every five years. All of these documents will be tabled in Parliament and available for public scrutiny.

This governance framework is not unique to the Fund. It is essentially the framework that the government is applying to all significant Crown-owned funds.

By the time current students such as Timothy Setefano reach retirement age, the Superannuation Fund will be ‘topping up’ his retirement income, and he may have benefitted from Kiwi Saver and his own investments.

By Anthony Haas, who is also publisher of DecisionMaker Planning Pays Off