Opinion: The problem with compulsory KiwiSaver: it might not solve New Zealand's domestic capital starvation

Opinion: The problem with compulsory KiwiSaver: it might not solve New Zealand's domestic capital starvation

By Bernard Hickey

Prime Minister John Key was right to identify that any solution to our savings problem should be 'home skewed'.

Confirming a government backed review into pensions, Key identified that New Zealand had a foreign debt and local savings problem. The obvious answer is to save more domestically and the obvious mechanism is to make KiwiSaver compulsory while also retaining the current universal New Zealand Superannaution system as a safety net.

But what if that money saved compulsorily is then simply shipped offshore to be invested in foreign companies and assets?

That's what is happening at the moment.

Currently 69% of the NZ Super Fund's (Cullen Fund) NZ$15.6 billion of assets is invested offshore, once the cash invested here is included in the total. It's 81% without cash.

Just over 40% of the NZ$5.5 billion invested in KiwiSaver has been invested overseas.

That means that collectively around 62% of these extra savings are being invested overseas.

That's because of modern portfolio theory that says all our eggs shouldn't all be put in the New Zealand basket and because our own capital markets are so weak.

Yet we clearly have a capital shortage in New Zealand. Small to medium businesses are screaming out for domestic equity. Many growth companies, such as Navman, TradeMe and NEXT Window, have ended up bringing into foreign capital to grow.

What we have is a capital markets failure.

Investors are very wary of investing in the local stock market, which means it doesn't grow and means it isn't attractive for local fund managers.

There is a big chicken and egg problem.

John Key needs to make sure either that there are capital controls of some sort on all this extra compulsory saving that might be done. Or his government needs to ensure that we have an excellent and liquid set of capital markets that can connect our small, medium and large companies with all that cash.

This raises some deeper questions.

Should we have capital controls?

Do we trust the global capital markets?

Will equity still provide the best returns over the long run?

Would we be better off simply reducing government debt rather than investing in stocks?

Your views?

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32 Comments

They should think of some kind of Public Provident Funds scheme like in Asian countries like India, Singapore etc, where the funds collected from employees and employers are invested in infrastructure development and public works. The a/c holders get a decent return by way of interest and both principal and interest is guaranteed by the Government and paid out at the time of retirement in a lump sum.

There is no point in taking the help of managed funds to inveset and manage such funds as it is risky and there is no guarantee of proper use and return to the country.

I'd only support compulsory savings if there was a self-managed option. I don't trust anyone else to manage my money.

The only reason Donkey is fluffing on about savings is,he has had word from the banks that they need more capital and fast. One phone call and we get the spin. So expect some sort of forced savings scheme to pop up post the election and guess where the loot will go......into the bank's credit creation toasters...out pops a mountain of cheap credit backed up by the govt's super duppa forced savings scheme. Stupid public once again being shafted with their own munny....which the banks and the RE mob and the media will think is so bloody funny.

"you mean public infrastructure is no longer given away, but properly user charged? With profits going to investors, aka pension savers?"

As much as our neo feudalists in the round table would relish the prospect, there is no need to "user charge" public infrastructure or involve direct private investment or ownership.

The pension funds etc already have access to this type of investment through government or local authority bonds, modest return but safe as. Perfect for retirement funds in other words.

I think it is absolutely crazy that the Super Fund invests in Motorways in Melbourne when you can not even drive from Auckland Airport to the CBD without crawling through suburbs.

I would happily pay a toll to travel quickly from the Airport to Vero and back as quickly as possible - less time in Auckland the better.

If everybody including governments are into debt reduction, then the global economy will grind to a halt. What is required is smart investments in infrastructure, production, technology etc to keep people participating and benefitting from the economy.

Citizens should be encouraged to save by way of decent returns, safety, may be tax rebates even and government could appropriate some of it to fund development projects. There is no point in depending on only private equity for this.

In the present climate, there is not going to be many takers for investments in equity, especially in NZ stock market which has little depth or breadth.

 

 

 

 

The only reason they keep trotting out is the large increase in our external debt.  Seems thats highly linked with the "growth" in the housing market.  Once the houseing market eventually returns to fundamentals a lot of the problem with dissapear with it.

I thought Phil Goffs comment as shown on Kiwblog yesterday showed the lack of thinking on this issue. To paraphrase "Kiwisaver has been a huge success with 1.3 million joining up, however it hasn't increased national savings at all, therefore we need to make it compulsory".  Seems like thats the definition of a total failure to me.  All the government topups should be returned to the government and anything left returned to the 1.3m people who were scammed into it.

What's wrong with our 'capital markets' Bernard? Plenty of "speculators"! See my point now?

I have no problem at all with compulsory saving BUT I'LL BE BUGGERED IF I WILL LET SOME A-HOLE IN WELLINGTON OR THE IRD CONTROL WHERE I PUT IT AND HOW MUCH!   I will also not tolerate finance companies taking their cut via annual fees etc like Kiwisaver is open to abuse of. Kiwisaver at the moment is total bollocks! and 1.5 million NZders will eventually find this out when they see any growth in their balance is getting suck away through fees and admin via who ever they have it with( accept for maybe Gareth Morgan's) NEVER let the government control YOUR finances let alone a finance company. Has no one learned a thing?

The biggest liability this country has is WELFARE! The WFF's was nothing but a Labour political bribe which is costing us billions every week to maintain, hence any surplus Cullen thought he had went bye bye. NZder's MUST learn to get off the government handouts, they have no dignity attached and only open a door to allow government too control you. Get off WFF's or continue bankrupting your childs future. Which is it to be NZ?

So... they government wants us to save, well here's an idea for you boneheads in Wellington, Make it an "incentive".

1: Remove RWT which is daylight robbery and does NOTHING to encourage local savings.

2: Faze out National Super over a 10 year period while at the same time dropping personal tax rates on an annual basis. This will also encourage a savings culture

3:limit access to UB too a six month period maximum every 5years, this will encourage a work ethic

4: Remove the DPB and WFF altogether. It's unaffordable and downright discriminates against every tax paying childless couple
 

The problem is earnings. Sort that, problem solved. Practical solutions, actually, abound. Shame gubmints of either colour can't do what is really required. Many know what needs to be done, even the stuff we dare not speak of in polite company, err, about 4 to 6% of NZ wasn't it, and at least 60% of parliamentarians?

How can we save enough before we are earning enough?

Address earnings. 

Cheers, Les.

www.mea.org.nz

Garth George gets it:

Poor pay leaves little for forced savings 

http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10667088 

there's a problem, Les. Earnings have to be made by selling something to someone, at a profit. The problem is that the profit is then an expectation to spend. That requires underwriting, and each go-round requires more underwriting. A growth, and an exponential one at that, in demand for resources.

Those of us who study energy (for me, that's since '75) realised that nothing happens without it, and therefore this growth was going to be hamstrung when peak nett energy flows happened. We therefore watched and plotted them.

When they happened, as inevitably they had to, we were slightly bewildered - the 'economy seemed to be trucking right on. According to us, it couldn't.

And, when you think about, it hadn't. Fiscal-reserve backed debt issued on the lever of real estate 'valuations'? Smoke and mirrors. Didn't exist. Wishful thinking in overshoot.

Yes, you can still 'earn', but the ability will dwindle, as will the underwriting of the 'wealth' you accumulate,

Better we list the things we need to get the country sustainable, and go for it.

The broadband / fibreoptic initiative is absolutely the way to go. So would two-way rail (roads are made of oil, serviced by same). Ports will stay (were there long before fossil fuels) but I wouldn't be investing in airports - what's going to be flying? We need to look at agriculture, too . It's too fossil-fuel dependent, as it stands. Should be possible to get more of the return to the farmers, less to the parasitic middle corporates in the process. We need more local power production, less transmission losses.

Much to do! How many of our leaders understand this, though?

PDK - we're not poles apart with recognition about exponential demand and what appear to be ever more scarce resources and the negative impacts. Money is a proxy for energy, money is debt, so sort debt growth and we stress the environment less, in a variety of ways, and could earn, sensibly. (I nearly used that other 's' word there.) 

You know my thoughts on ETS, AGW and all that, but maybe NZ does have a debt to pay the world and so should lead the charge - because of Ernest Rutherford's work. Sick thought eh, sorry, add nuclear deterrent to deregulated and unbridled debt growth and .... kaboooom. Why do we get so surprised? Which was worse Rutherford's work, or Black-Scholes with nil regulation of derivatives?

Re. earnings, I meant at national, firm and individual level. Fix the tax system to remove bias toward unproductive investment (property) and fix our broken monetary policy and earnings will flow, and there'll be enough to save. 

Cheers, Les.

Any attempt to 'encourage' people to invest more than a proportion of their retirement  capital in NZ is almost certainly doomed to failure. The various large scale funds all invest offshore for very good reason. Even if capital markets were expanded, the NZ business investment risk profile, dividend yield and corporate capital appreciation prospects were improved significantly, plus tax incentives ratcheted up, you'd still place a majority of your equities investments offshore.

There is already the attractive ( well for individual taxpayers anyway) tax credit imputation incentive to invest in NZ but despite this many private investors like me still regard it as prudent to limit their share investments in NZ to under 40%. 

It'd require a serious improvement in dividend or capital gain return premium and/or tax advantage,  to offset the risk of a volatile NZ$ currency and the exposures from NZ's much more shallowly diversified corporate scene. 

If you aren't a DIYer you would have over the last 10 years ( including the GFC) still achieved average gross double digit returns by simply plonking your cash into some of the sounder Aussie specialist equities investment companies. You'd struggle to have consistently made that in NZ , even after allowing for imputation credit differences.    

JK is going to have to show me some pretty solid incentives to take on the significantly increased risk of placing more of my eggs in the NZ inc basket.             

http://www.swissstyle.com/swiss-pensions

 I recommend this link for professional in this matter. I could lead into an interesting debate.

WK

" The NZ government has to present a less dictatorial message, incentivize its policies, and demonstrate to the NZ public the ongoing benefits by way of example.".....good point anon...for such a change to occur demands the govt get some training....I can see the Caucus now...all at their little wooden desks in Tolley's class on "selling policies" ....accept for Gerry who needs to sit at teacher's table...

Wow. Fantastic discussion. When I have time later today I'll jump in and chat on some of these issues. cheers

Bernard

Les Rudd - cheers, and you are quite right.

I'm concerned that those who think of investment in traditional terms, don't/won't get what has to be done in time.

At the bottom of that, is the issue that while you swallow the 'growth can be had forever' mantra, you have an excuse not to see the immediacy of the need. By the time they learn via 'market signals' (presumably empty tanks via $20/litre) it will be too late to get set up, given that the energy had to be used to do so.

Paulus, Rommel, Auchinleck, Montgomery, all faced similar logistical conundrums - none as I recall, left it to market forces.

There are other ways: Post WW11, one of the Channel Islands wanted a community hall. No funds. Materials and labour were acknowledged with a number of attendance tickets. Which were destroyed on redemption.

No growth, no profit, no dividend infrastructure.

I suspect we will end up with something like that. Still takes energy though!

Maybe I'm being naive, but I don't resent for a minute the super I amassed in Australia whilst working there for 5 years.  For what it's worth, I have no intention of transferring it to my KiwiSaver account once it becomes possible to do so as I like the idea of having a foot in both camps and I can access my Aussie Super at age 55.  Sure, I'm no longer contributing to it, but it's still 10's of 1000's of AUD that I never would've saved if left to my own devices (certainly not at that stage in my life anyway). 

As for my NZ KiwiSaver, it's 4% of my salary that I don't miss.  In a very short time I've already got approx $10k (my contributions, plus employer's, plus kickstart & tax credits etc).  Yes, perhaps I could be chanelling that 4% into my mortgage instead but the way I see it my employer's 2% on top of my 4% is like a 50% bonus and I'd be crazy to forsake that (on top of the govt boosts).  Dollar Cost Averaging comes into its own with regular contributions and I completely accept that markets go up and down.  Perhaps if I was prepared to sit down and devote a lot of time to the exercise I could get a better return elsewhere, but for the sake of ease and simplicity I rather like KiwiSaver.  The account is in MY name and that makes me feel a bit less nervous about the Govt plundering it.  Again, maybe I'm being naive.

I do believe for the average Kiwi, if they can afford just 2% of their salary, it's a good way to save and for most of them it's savings that they probably wouldn't have the discipline and/or nouse to amass otherwise. 

Woops, that was me.

What will your electronic numbers be 'worth in light of this?

http://kunstler.com/blog/2010/08/skidding-toward-fall.html

He's a bit 'hypey' usually for me, but this one is on the ...............money?

Regardless , the compulsory savings/ super (whatever they choose to name it) is needed.

We need to save, those who can and have may kick up their heals with " I want to manage my own" bottom line the majority of the NZ population, cant save , cant manage or just dont care.

If we need to save for retirement, our savings get taxed each yr, then when we retire and draw on that savings get taxed again...makes it damn near not worthwhile doing.

Like back with the Douglas super scheme in the 70s (which Muldoon scraped as a bribe to get the treasury benches by giving back contributions+ employer contributions +interest)  These contributions need to be tax deductible and interest on savings tax free.....This will then give some incentive to save by those who dont, and some relief to those who cant afford to.

At the moment we are still in a time of 'flux'...

Reducing debit, reestablishing good credit to asset ratios, on assets that have dropped in value and in effect raised the credit ratio (which in effect has to be written off for now). Or put simply getting back to owning at least 30% of what we possess....Dropping compulsory super too early into this time of flux would simply screw things up even worse...Its about timing. By the time all the chat is over, legislation gone thru..and it will, the timing will be about right

John123 - this from the Kiwisaver website:

If you're a KiwiSaver member making contributions from your pay, your employer also has to put money in. This is equal to 2% of your pay.

Your employer does not have to make compulsory contributions to your KiwiSaver scheme if:

  • they are already paying into another eligible registered superannuation scheme for you (if your existing scheme meets certain criteria)
  • you are under 18 years of age
  • you are over 65 years of age, or have been a member of KiwiSaver for five years, whichever date is later
  •  you are not contributing (for example on a contributions holiday or on leave without pay).

So, the way I read that is - yes, your employer does have to contribute 2%.

All your other points are valid, but I believe that you would be in the minority of Kiwis (though perhaps not on this site as folks posting on here are probably somewhat more finacially literate than the average Kiwi) who could successfully save for their retirement in their own way.  I'm pretty sure a lot couldn't, just wouldn't have the discipline or the know how.  I'm not going to totally rely on Kiwisaver to fund my retirement, I also have business interests but again, I would be in the minority compared to the average Kiwi.  I am involved in the Retirement Fund industry so am fairly aware of what's required and also the importance of not putting all my eggs in one basket.  Sadly some don't have the choice due to low wages and stretched family budgets. 

Gotcha John123, I understand what you're saying now.

Do you think this happens in Australia where the employer has to pay 9% into the employee's Super Scheme?  If this is the case then we are WAAAAAAY underpaid in this country!  Aussies are paid more than us anyway, PLUS they get a 9% bonus on top!  Nice.

".. I agree we need to save but why make it compulsory?"

I agree with you. I see this as yet another example of increasing govt interference / control in our lives. You are also right to mention personal responsibilty, in that we need to be held accountable for our own decisions otherwise we as a society simply don't learn.  The pendulum has swung way too far and we are seriously out of balance.

As an example I have a number of friends who are foreigners working here, who not eligible for an unemplyment benefit ..  they have to work or they can't pay the rent or put food on the table. They generally are much more motivated and entreprenturial when it comes to making money because they understand the consequences of not working.  They are also much harder working than the average kiwi and remark to me how lazy and generally poorly educated we are. (Who needs enemies when you have friends like this hey?).   

Anyway IMO, the answer is to simply phase out the state pension over time and lower taxes accordingly. I'd also put a time limit on welfare [safety net only and not a lifestyle choice] and abolish WFF by the way.  People would have to fund their own retirement, as the consequences of not doing so would provide sufficient motivation.

Matt S, your last paragraph is indeed a viable alternative to compulsory savings, but I would bet almost any money that a good chunk of Kiwis would NOT save their tax cuts, even if they knew there was not going to be any Govt Super in their retirement.  So many people simply live for today and either don't care about "later" or assume if things get bad enough the Govt will step in to assist them.  They will either spend their tax cuts on consumer "crap" or use it to get themselves out of the debt-ridden situation they've found themselves in. 

It's a good idea though, I would go for it personally and save the tax cuts, but how many other Kiwis would, really? 

VeeDub, in the short term that sort of change would be a hard pill to swallow for some, and as you say there would always be those that for whatever reason did not save enough. 

But  I do believe even the vast majority those people would still be OK.. For example many cultures live in extended family units that work very well, and have more caring and supportive communities out of neccesity. And that for me is a good thing.  

We don't actually need a government for much at all, but over time we have grown to rely on 'them' for almost everything in our lives (or from another point of view they have managed to make us overly reliant on them).  Time to kick central control into touch ....

How do people feel about the idea of varying individual contributions to a comp. super scheme as a way of controlling inflation?

Just asking, don't bite m' head off. The little Libertarian in me isn't keen and I'll say why later, but this idea is a possible logical progression and I'm keen to get other perspectives.

Cheers, Les.

www.mea.org.nz

http://www.swissstyle.com/swiss-pensions

 I placed that link earlier. I think reading through it could lead into some interesting debates, resulting in new ideas among “Kiwisafer- Professionals” - among you guys.

Seems like campaigning for Election 2011 has started already....at least from National.

It will  be criminal to rob Peter to pay Paul and that is what this compulsory Kiwisaver is all about. The money will all vanish in course of time and individuals with no financial knowledge or skills will be signing away their hard-earned money in the name of reviving a morbid stock exchange. Watch out for one more episode of huge destruction of wealth down the line.