Savings Working Group looks at auto enrollment, fewer providers and a more wholesale approach to KiwiSaver

Savings Working Group looks at auto enrollment, fewer providers and a more wholesale approach to KiwiSaver

The government-appointed Savings Working Group is looking at automatic KiwiSaver enrollment and a more wholesale approach to KiwiSaver's retail structure, with possibly fewer providers.

Group chair Kerry McDonald made the comments today in a media briefing accompanying the group's interim report to Finance Minister Bill English on how to improve New Zealand's national savings. The group will release its final report in the New Year, ahead of the Government's May 2011 budget.

McDonald said automatic KiwiSaver enrollment could be triggered in various ways, such as when a person over 18 gets their first job, or when they reach a certain income threshold such as NZ$20,000.

'NZ's credit almost maxed out'

The report continued the group’s rhetoric that something had to be done to turn New Zealand’s savings record around, and that changes would not be easy.

"High foreign debt puts New Zealand in a difficult economic situation. The country is vulnerable – some say “highly vulnerable”. And continued increases in debt are unsustainable,” it said in the report.

"New Zealand’s vulnerability is heightened by the sensitivity of international capital markets to high debt, weak balance sheets and crumbling fiscal positions in the wake of the global financial crisis. It has also been reflected in Standard and Poor’s recent decision to put New Zealand’s foreign currency rating on negative outlook, itself a reflection of the nervousness of others about our vulnerabilities," the report said.

"The bottom line is that New Zealanders collectively have been spending too much and saving too little, using large amounts borrowed offshore to fund new investment. Its credit is about maxed out. It’s time to get real. We need less consumption by both government and households, more savings, better quality investment, more exports and increased import-substitution," it said.

"It’s akin to standing on top of a crumbling cliff, uncertain of the exact risk and needing to step back quickly to reduce the risk."

The position had improved slightly in recent months, but this largely reflected the weak economy and lower consumption, investment and imports, and lower profit remittances offshore.

“This is no reason for complacency though as this seems likely largely to reverse when growth resumes,” the report said.

Fewer and bigger providers

There could potentially be fewer Kiwisaver providers, with those left large enough to capture greater economies of scale, McDonald said.

"There are issues around disclosure of information, there are issues about charges and the levels of fees, there are issues with getting a better after-tax return to savers," he said.

"One of its problems is it operates at the retail level, and retail service providers tend to be smaller, so you’re not getting the economies of scale that you might at the wholesale level. Wholesale fees tend to be lower anyway. 

There were overseas providers of similar schemes that operated at a very large scale, with very much lower fees, McDonald said.

"Now, we haven’t finished the detail of this yet, but our thinking is very strongly focussed on those issues," he said.

Auto enrollment

McDonald said the group was still considering the pros and cons of compulsory savings, with evidence from Australia showing compulsion might, "at least to some degree," help increase savings.

"We're not convinced that's the way to go, but we think there may be quite an attractive 'soft compulsion' option, ie, auto-enrollment for KiwiSaver," McDonald said.

The 'soft compulsion' option would come with an opt-out option, he said.

Too much NZ wealth invested in housing

There was a view that the element of compulsion got people much more strongly focussed on the question of saving, how they save and the quality of savings, McDonald said.

“Because another issue is a lot of New Zealand’s wealth is currently in houses. So if you’re taking a portfolio view of savings, the portfolios aren’t very good - too much housing from a wealth portfolio point of view and not enough in other areas. So if the housing market goes down, it leaves people exposed, he said.

"Australia’s probably got a much more balanced portfolio, with a higher level of superannuation savings, and correspondingly less in housing. Interestingly, compared with Australia, New Zealand’s got much more savings, or wealth, in small businesses or closely-held businesses.

"But that portfolio and quality issue is quite a key one," McDonald said.

Tax-free, inflation-indexed govt bonds

There were also currently no rules on how KiwiSavers should withdraw their savings in retirement and there was a shortage of suitable investment products for retirees who were not financially savvy, McDonald said.

"Should the government issue tax-free, inflation-indexed bonds with, say, a 2% real rate of return, so that individuals can inflation-proof their own retirement investments. Or should their be an option for individuals to use part of their KiwiSaver funds to buy a higher level of NZ Super? Or should the government provide annuities, on a full-cost basis, to remove the risk of institutional failure?"

McDonald said the group was more inclined to the principal of higher GST and lower income tax from a savings point of view because high income taxes were a disincentive to save.

"The language we’ve used is an increasing shift from income taxes to expenditure taxes ‘over time’," he said.

"This is from a savings perspective, because income taxes are clear disincentives to save. We’re conscious that there’s just been a shift, so we’re not saying there should be another shift now. We say as a matter of principal, it is a good way to go and all of the thinking would be all of the shift is on a compensated basis."

'Taxes on savings too high'

Another key issue was that effective marginal tax rates varied quite markedly between the income of different lines of investment.

"So owner-occupied housing – you can do well out of that, tax is zero. Investment housing – the marginal tax rate is pretty low. Foreign and domestic shares – it gets higher. And the highest of the lot – if my grandmother puts NZ$1,000 in a basic savings product to get interest, that incurs the highest tax rate of the lot, which we think is anomalous," McDonald said.

"So we are focused strongly on the view that there needs to be indexation," he said.

"Either just the inflation component, so you’re taxing on a real basis, or if that’s too complicated within the tax system, just making an equivalent arbitrary adjustment. So you might have a different tax rate for particular savings products.

The group was “playing around” with various rates.

“My preference would be to do it on an indexation basis rather than to introduce another rate of taxation,” McDonald said.

See the full interim report here.

(Updates with GST over income tax, tax on savings too high, more from report, too much in housing, link to full report auto enrollment, tax free bond option, fewer and bigger providers)

More soon.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I smell a dirty big fat dead rat.

Nice to have your Mother-in-Law come to spend Christovmas with you , ain't it !

Bigger is better - Yeah right!

There's quite an argument out there that NZ has too many KS providers that are too small = costs very high compared to in some other countries

"..Or should there be an option for individuals to use part of their KiwiSaver funds to buy a higher level of New Zealand Super..." Now there's a real suprise!

Have updated with more comment from report on NZ's credit almost maxed out, also McDonald's comments that we have too much of our wealth in housing

The reason why we have over investment in houses is because there is nothing else here to invest in. The government wont partially float some of their assets, they wont do PPPs, they wont open up for mining (except of course OGC). All they do is bleat and moan at us.

I have had a spectacular run on the ASX in mining shares so I keep saving and putting more money in there. Create the right mind set that it is good to be a capitalist rather than run this country like some scandanavian utopia (minus the oil wealth) and you might solve half the problem.

Alex - The Herald say:

"It concluded New Zealand had a national savings problem and that was linked to a number of other serious problems in the economy and policy choices."

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10694739&ref=rss 

What do you say, incite on this aspect?

Cheers, Les.

 

Hi Les,

Yes, basically when things looked like they were going well, we didn't stop and think about it.

McDonald's said that before. This from my first story on the Group in October:

http://www.interest.co.nz/news/savings-working-group-eyes-govt-savings-first-says-compulsory-savings-may-not-be-magic-wand

"When you see that tradable vs non-tradable graph that is quite alarming.

"It is showing the consequences of what I think are the wrong policy and market signals through the last decade, which made life particularly difficult for the export or foreign currency-earning sector."

Cheers

 

Alex

Thanks Alex.

My concern is that "we" are still not stopping and having a think about it, in anywhere near the breadth and depth required. So I was hoping to find something less observational and more penetrating, specifically around the "policy choices" that have led to the outcome. For instance our ineffective monetary policy and a taxation system biased toward property/land/passive investment. I wonder why these aspects have not been analsyed too deeply?

http://www.interest.co.nz/opinion/opinion-why-covered-bonds-risk-turbo-charging-new-zealands-foreign-debt-appetite-and-derailing-our-e#comment-593435 

"Someone recently told me:

"Borrowing in US dollars to lend in NZ dollars means exposure to the exchange rate is a major lurking risk.  For the banks in NZ, their interest and repayments cashflows come in in the form of NZD, and their big outflows are USD and Euro.  That gives them a strong vested interest in stability or appreciation of the NZD, makes them very unhappy about depreciation, and keeps them relaxed abut the carry trade."

Somehow that last sentence kinda grates with me for some reason?

Sure they can hedge the risk BUT, that, "...strong vested interest in stability or appreciation of the NZD,..." would still be present when acquiring funds offshore.

The negative outcomes are clear for all to see and you say parliament are about to pass legislation that will only exacerbate the problem .... funny that - not! Why am I not surprised....."

Yep, am not surprised.

Cheers, Les.

even the rats know when desert a sinking ship

It's is both the kiwi population and the governments fault that we are in this mess.

Kiwi's fight with each other to buy a house, pushing the price up. The seller then taking his extra cash and buying more houses like a gambling addict just after a win putting all his/her winnings back in. All fuelled by debt.

The government should have taken measures to not let this happen. Jumped on 90%+ mortgages and said no. Introduced a 50% tax to foreign buyers. A tax on second home sales.... But no they were in the "game" too. I wonder how many people who could influence the government decisions on tackling the housing bubble own an investment property(ies).

Now how many young families can afford a house? They'll rent forever, unless house values drop and wages increase. If wages increase we can't be as competitive internationally.

What should we do?

Pay down debt

Build more houses, release a heap of land, say for Auckland, North of Albany (extending the northshore bus way) & west of Swanson (around the existing rail). Increasing supply.

Compulsory 20% deposit for mortgages

50% tax to foreign buyers of residential houses

A tax on second homes sales, baches included (no loop holes)

&?

But will the government do this? And why won't they?

 

Transport giant Linfox will lift super contribution, increase wages by 12 per cent and make casual employees permanent after six months.

The ground-breaking workplace deal has been hailed as a pacesetter by the Australian Council of Trade Unions leadership.

Unions and Linfox management yesterday welcomed the agreement that delivers three annual 4 per cent pay rises and commits to increasing superannuation by one percentage point each year over six years, taking the rate from 9 to 15 per cent.

 

Straight off the OZ wire ...  

All this hand wringing about saving is good and well but if you are getting say 4% on call, paying income tax on the interest and deduct inflation...arguably 3% or so.....why would you save cash? At least a house keeps you warm and dry.

My parents, retired in Canada, are being offered 2% on a 5yr term GIC (guaranteed investment certificate). So after tax and inflation they lose money. Most other investment options are just as unpalatable. It's really tough for retired people these days. I guess it's ironic that they did scrimp and save to retire in the first place!

I feel we under tax wealth, land, buildings, etc and overtax labour through GST and an increasingly regressive tax system. We seem to be under investing in our infrastructure and now we want to sell off public services and essentially add tollbooths (through user fees) to an already uncompetitive economy. The costs also fall mainly on wage earners raising the cost of labour.

What are peoples thoughts on the enormous overheads on the economy through interest payments to banks? They would have no interest in us not owing anything and having savings. Conflict of interest? (no pun intended)

Nigel

 

 

 

You are spot on Nigel.

Fixed interest investors get taxed to hell.

NZ has always encouraged investment in real estate.

No capital gains tax.

And an Inland Revenue with insufficient audit staff.

Labour gets taxed to hell.

Capital does not.

no inheritance taxes,capital gains taxes,land tax,stamp duty,death duties and now no gift duties.

People who do not go for capital gains with low income components are mugs.

This is what the government are telling you to invest in.

Not telling.

Encouraging is the word.

 

DC- note you have some suggestions but ask why won't the government do these ?

Same reason they won't slash national super 'entitlements' etc.

 

OK, yes it's good that the Govt has organised this Working Group...but it might just be another talk fest following by tweaking & tilting policy by the Govt...Wild Bill needs to get real and listen to Don Brash..slash some sacred cows.

"High foreign debt puts New Zealand in a difficult economic situation. The country is vulnerable – some say “highly vulnerable”. And continued increases in debt are unsustainable,” it said in the report.

Well DUH! For f*** sake, many of us have said this for YEARS! Do these clowns actually believe they are telling us something new or profound?

Bill English, STOP BORROWING for WFF's and other benefits we CANNOT AFFORD NOW!

The rest of you, It's time to TAX the HELL out of property or we will NEVER get cash going anywhere near something productive like new business and innovation. Subsidize all SMALL business R&D with export potential, support local Intellectual Property ideas with government incentives. 

Why are we making it an incentive to BREED without the infrastructure and economy & education to support such population increases?

Just stupid! WAKE UP!