Hardship withdrawals and savings suspensions have jumped in the past year as households struggle with the high cost of living

The Financial Market Authority’s annual KiwiSaver report shows a sharp increase in the amount of financial hardship withdrawals and savings suspension relative to last year. 

During the year ended March 2023, about 54,300 New Zealanders started a savings suspension—bringing the total number to 121,000—while another 18,300 made withdrawals due to financial hardship. 

John Horner, the regulator’s director of markets, investing, and reporting, said there was a fairly rigorous process for hardship withdrawals and he was happy with the current settings. 

On the higher level of saving suspensions, he said the FMA would encourage providers to help members restart their contributions when the pause came to an end.  

“It is not something we want to sit by and ignore, but we do have a limited impact on what changes can be made,” he said. 

These numbers are still lower than during Covid and are only a small proportion of the total members in the scheme, but it demonstrates that some households are struggling to save. 

The total balance of the KiwiSaver scheme has risen to be just short of $100 billion, but the bulk of this growth has come from member contributions with many markets in decline.

KiwiSaver has only made an annual loss four times in its history and always during a financial crisis such as in 2008, 2009 and 2020. 

Lesser lump sums

While most members have continued contributing to the scheme during 2023, there have been fewer lump sum payments than in the previous year. 

Only $832 million was paid into the scheme in one-off payments, down 63% from 2022. 

The number of members who stopped contributing altogether increased almost 20% from last year to 121,000. This number may have been boosted by the reorganization of the default scheme which took place in December 2021. 

Horner said the process of moving people into new default funds may have raised awareness of the scheme and unintentionally boosted the number of savings suspensions. 

The process engaged the KiwiSaver members who were otherwise least engaged and possibly unaware they were setting aside a percentage of their paycheck each week. 

“When you are making a positive decision … it brings into play all the options across the board, which could include deciding to take a pause,” he said. 

Cost-of-living

The regulator said the increase in contribution suspensions could be attributed to both the current economic environment and the recent cyclone events.

Withdrawals for significant financial hardship increased by 37% to $145 million, similar to the level seen during 2020 and 2021 when Covid-19 caused high economic uncertainty. 

There were 21,000 withdrawals during the worst year of the pandemic compared to 18,300 during 2023, at an average of $7,921 each. 

While the percentage increase makes the number look big, the number of people making hardship withdrawals are just a tiny fraction of the 3.5 million members in the scheme.

The regulator published a survey in September last year which asked 2000 New Zealanders various questions about the KiwiSaver scheme. 

“Among the insights were reasons roughly two-fifths of members choose not to contribute: unemployment or irregular income, or just not being able to afford it,” it said. 

Members aged over 65 years withdrew $2.8 billion from the scheme, a 46.3% increase on last year which was likely driven by the much higher term deposit rates now on offer from banks.

Term deposits were mostly under 4% this time last year, but have climbed as high as 6%.

Withdrawals for first home purchases fell 35.6% from last year, with mortgage rates soaring and the real estate market freezing up. 

Good news: lower fees 

For the first time in KiwiSaver history, the total value of fees declined during 2023. The Financial Markets Authority has increased pressure on providers to lower fees in recent years. 

The total value of fees declined 8.1% year-on-year, despite inflation and higher costs elsewhere in the economy.

The FMA said the fall was the combined effect of lower default fund fees, some providers removing membership fees, and others not earning the same level of performance fees as they may have in previous years.

Administration fees were at a record low of just $17.3 million, down 66% from the previous year and down 81.2% from their peak of $91.8m in 2019. 

In July 2021, the regulator told the industry there was “little justification” for schemes to charge both a fixed administration fee and a base management fee. 

Investment management fees accounted for the bulk of the overall fees charged at $626.3 million, which was just 2.5% less than last year’s all-time high of $642.3 million.

Horner said it was important that service levels didn’t fall with fees and that KiwiSaver members were still getting good value for money.  

“That's the balance we’re striking, it's not all about fees. We want fees to be looked at alongside the value that's been provided to investors”.