David Hargreaves says with the 20th year anniversary of KiwiSaver coming up, it's time to take a long hard look at what the scheme is and what it could be - otherwise we risk spoiling it

Is it time we did a little more than simply ‘tweaking’ KiwiSaver?

This Michael Cullen-introduced scheme turns 20 in July 2027 and it would seem opportune to, as a lead-in and part of the 20th anniversary, have a proper root and branch look at what the scheme was, what it’s become and what it should be.

My ‘tweaking’ comment refers to the changes announced in the May Budget.

As I see it the Government wanted to save itself some money, so, did that by cutting the state contribution in half, while raising (on a graduated basis) the minimum contribution from both employees and employers to 4%.

Okay, so, a simple and cute bit of balancing economics that I would say is more about appearances than anything else. I mean, yes, it theoretically means more money will now be accumulated in KiwiSaver accounts, which is good.

The immediate problem  is that employees will be able to, for a 12 month period, drop their contribution from 4% to 3% - meaning that for this period the employers will only have to pay 3% as well. And while that’s just for a 12 month period, it can be renewed for further 12 month periods - with no limit on the number of renewals that I have seen.

Do we think some employers will ‘encourage’ employees to reduce the contribution to 3%?

Also, it’s estimated around 25% of employers currently include their contribution in the overall remuneration package. It’s a fair bit that in reaction to this initiative we will see more employers take this up.  So, potentially this could mean employees stand to receive less money now in order to get more later.

Between all this and the lower state contribution, could more people be discouraged from being in the scheme?

Reallocation of savings

According to the Regulatory Impact Statement (RIS) on the budget proposals from Inland Revenue  a New Zealand study from 2011 found that only a third of contributions to KiwiSaver accounts represented additional saving, while the other two thirds were reallocated from other savings vehicles. Another New Zealand study from 2014 found that KiwiSaver membership has not been associated with any increase in net wealth accumulation.

Perhaps I'm extending the logic from the above paragraph a bit far, but what guarantees do we have that an increased employee contribution rate (assuming people don't opt out of the increased rate) does end up as increased savings when retirement comes around? It all for me boils down to how integral/essential KiwiSaver is to a retirement saving plan. And should it be the primary focus for the population when it comes to providing for retirement? More on this point shortly.  

But first, just back on the Regulatory Impact Statement, it's worth noting that Inland Revenue and Treasury recommended removing the state contribution entirely, on the grounds of maximising fiscal savings, improving value for money ("given the lack of evidence that the [contribution] is materially impacting net household savings behaviour), and preventing administrative complexity that will arise for Inland Revenue in administering eligibility to the [contribution] based on income". The last bit refers to the decision that people earning over $180,000 a year will no longer get the state contribution.

On the proposed changes to contribution rates, the RIS said: "On the available information, it is unclear whether the benefits from the change to contribution rates will exceed the costs. Inland Revenue and the Treasury recommend deferring any decision to increase employer and employee contribution rates, given the change in contribution rates would increase short-term labour costs for employers. This increase would reduce profitability for many businesses, potentially diverting funds that could otherwise be used to support capital investment. This could risk undermining elements of the Government's growth agenda.

A wider review

"Deferring a decision would also allow any changes to contribution rates to be considered in the context of a wider review of retirement savings settings and include consultation with affected parties, including members, employers and KiwiSaver scheme providers. On this basis, officials recommend carrying out further stakeholder consultation and analysis with a broader scope."

Well, I certainly would agree with that last part and with the idea of "analysis with a broader scope".

To my mind KiwiSaver was never ideal. But it was pragmatic. With both KiwiSaver and the establishment of the New Zealand Superannuation Fund, Michael Cullen went as far as he could in getting something in place for the future, while fully acknowledging the intransigence of the New Zealand political environment on such matters. Both initiatives were a brilliant ‘bob each way’, without being the full quid. They’ve both taken us some way down the path to providing for an ageing population. But not far enough.

To come back to the point I made above, I think it is time to decide whether we go all in on KiwiSaver and make this the primary focus for retirement saving. If we were to do that, logic would suggest it would have to be compulsory and the contribution rates would need to be higher, even than 4%.

Of course that would raise huge questions, not the least being should we and can we keep making the employer tip in the same amount into the scheme as the employee even as the amounts involved get bigger?

Which is why I think it would be very timely to do a very major review of the scheme and look at every part of it and also look at just what we think it should be and what its role should be.

What is it for?

One aspect of the scheme that has been of constant concern to me has been the using of it to fund purchases of a house. And I note with interest that Federated Farmers has now launched a petition calling for young farmers to be able to access their KiwiSaver funds to "buy your first farm, flock, herd or home".

Again this all raises the question of what is the KiwiSaver scheme for? My biggest problem with accessing KiwiSaver funds to buy a house is not the dipping into the funds per se, but it's what this means for the strategy of the KiwiSaver member who decides to use the scheme for that purpose.

If someone's saving to buy a house they might have, say, a five-year timeframe. Now that means if they want to use KiwiSaver to buy a house they should base their strategy around a five year timeframe, which means by extension that they should follow a 'low risk' strategy for investment. But there's an opportunity cost in doing that. Low risk means low returns. It is five years of returns lower than they could be and that would have an ongoing impact.

Someone might be in KiwiSaver for over 45 years. And at the start of that period the 'right' strategy would absolutely be to take some risk. There could be high returns that would have a very virtuous impact later. If these higher risk investments did not far so well, there’s still plenty of time for catch-up.

Obvious contradiction

To put it as simply  as possible then, there's an obvious contradiction between the idea of a long term retirement saving scheme and a shorter term savings plan for a particular shorter term goal, IE buying a house.

There would be logic in allowing KiwiSaver members to 'split' their contributions between saving for a house and for saving for their retirement. Indeed would it be better to set up a specific house saving scheme, separate from KiwiSaver?

This is the sort of topic/issue that could be addressed with a full review and overhaul of KiwiSaver. 

And I really think we need a thorough review. The clock is ticking, literally, on our future retirement liability. 

I think the risk is if we go down the path of simply constant 'tweaking' of KiwiSaver -  and maybe governments giving into powerful lobby groups about what KiwiSaver should be used for, we run the risk of 'tweaking' it out of any real usefulness. And that would be a big lost opportunity.