Opinion: Why New Zealand needs to make KiwiSaver compulsory
17th May 10, 12:01pm
By Paul Glass Without compulsory superannuation New Zealand is destined to become an economic backwater. Our relative standard of living, particularly when compared to Australia, will continue to decline. We will keep on losing our best businesses to foreign (mainly Australian) owners, our teachers, healthcare professionals, engineers, entrepreneurs and others to markets where there are more opportunities. Two important actions can reverse our long term economic decline, effective financial regulation and compulsory superannuation. The Government is finally moving on the first issue with the establishment of a new super regulator, the Financial Markets Authority (FMA). This is to be welcomed and the first action of the new regulator should be to call for a Royal Commission of Inquiry into the finance company debacle. In terms of a national disaster it ranks up there with leaky homes and will ultimately cost NZ investors, mainly retirees, billions of hard earned dollars. In my opinion, the best that can be said for many of the directors of property based finance companies, who were clearly mis-selling risk to unsophisticated investors though elaborate ponzi-type schemes, is that they should be jailed. But protecting savings is only the start, we need to grow our savings base. Like most western economies our population is aging and our current superannuation arrangements are unsustainable. By 2050 the ratio of workers per retiree per worker will have fallen from 5 currently to 2 and superannuation costs will have grown from 4% to over 9% of GDP. Likewise heath care costs will also more than double to over 11% of GDP. The inference is clear, we need to save more effectively for retirement. Fortunately we also have a ready made vehicle in place - KiwiSaver, but it must become compulsory. Compulsory superannuation has been an unmitigated success in Australia and has helped transform their economy. While NZ academics can argue about whether or not it has increased their overall savings rate, it is clear that it has improved the productivity of their savings. Australia's capital markets are now deep and robust and it is little wonder that they have fared amongst the very best of the western nations when dealing with the Global Financial Crisis (GFC). ASIC, the Australian version of the FMA, is well resourced with a wide mandate and it is no coincidence that the success of Australia's capital markets has been overseen by a strong regulator. With A$1.3 trillion in superannuation assets, and growing at over A$100 billion p.a., Australian banks and companies were able to recapitalise during the depths of the GFC. These superannuation assets are pouring into infrastructure, venture capital, private equity and listed equity markets, providing a platform for future growth. Australia has just announced that it intends to increase the contribution to compulsory super from 9% of wages to 12%. As a result the average Australian male who is 30 today is expected to retire with superannuation savings of about A$400,000. Singapore is another excellent example, where traditionally 20% of wages have been saved. For a country the size of Lake Taupo and with a population the same size as NZ but without our natural resources it has left us in its wake. One of the best barometers of our national financial health is our stock market. The total value of all the companies listed on the NZ stock market has remained largely unchanged over the last two decades. The turnover of our stock market is often quoted at a about a meagre $100m per day compared to Australia's $6 billion but even this flatters NZ. Actual turnover on our market is artificially inflated by double counting Australian transactions and is probably closer to $40m. At this level it is at a critical tipping point where it can no longer serve the needs of investors and companies. The absence of any quality new listings attests to this fact. In 1992 the size of the NZ and Australian stock markets, when measured as a percentage of GDP were both similar at about 30%. Today NZ's market size is less than 25% of GDP while Australia's is close to 100%. Likewise, when looking at financial assets as a percentage of household balance sheets, we have actually seen a decline in NZ since 1992 against 40% growth in Australia. Equity and capital markets should play a vital role in ensuring that our best businesses have the capital they need for growth. The deep savings pools that result from compulsory superannuation would provide this capital, give retirees greater certainty and help NZ secure its own future. Without compulsory superannuation and strong financial regulation we will remain a low growth, low wage economy where our major exports are our best people and businesses. * Paul Glass is the Executive Chairman of Devon Funds Management.