Milford KiwiSaver boss on what 'KiwiSaver 2.0' should look like

Saving / news

Is it time for a KiwiSaver review? Milford's Murray Harris says boosting contributions and incentivising saving is the way to go

25th Aug 23, 2:21pm by Rebecca Stevenson

A leading KiwiSaver manager says it's time to consider what “KiwiSaver 2.0” should look like, including raising how much people pay in, how those contributions are taxed and introducing compulsory employer contributions for low-income workers.

The National Party recently said it might allow people saving for retirement to split contributions across providers, and earlier announced KiwiSaver funds should be able to be used by renters to pay bonds.

The announcement to split fund providers has been criticised for potentially adding complexity and cost to the retirement scheme.

What KiwiSaver looks like in the future is very much up for discussion, the head of Milford Asset Management’s KiwiSaver business says.

Murray Harris said with KiwiSaver now well-established, the industry was already kicking about ideas on how it could be improved to give New Zealanders financial stability and freedom when they retire.

Harris said Governments and political parties should focus on how to make KiwiSaver better for everyone, rather than “headline grabbing” ideas such as using retirement funds for rental bonds or to start a small business.

“They are not going to help people save for their retirement.”

More savings in KiwiSaver

Harris said boosting contribution rates should be looked at, pointing to Australia where employers put in 11% of a worker’s earnings. In New Zealand, people can chose to put in 3%, 4%, 6%, 8% or 10%, with employers mandated to put in 3%.

Harris said when tax on contributions is then taken into account, “it’s not enough”.

In Harris' view, increasing contributions was the most important change that could be made to the scheme.

“We know in the most successful superannuation systems around the world, most people are contributing around 10% of their income over the working life.”

The taxation levelled against contributions could also be looked at, and changed to incentivise more saving and was potentially a key change, he said.

At present, KiwiSaver contributions from employers are taxed at the employee’s pay as you earn (PAYE) tax rate.

This employer-contribution tax could be repealed altogether, or capped at a flat rate such as 15%, Harris said.

Australia also has compulsory superannuation, which Harris said could be considered.

However, he said for some low-income people contributing is too much to ask with "tight household budgets".

He said employers could be made to contribute alone, and keep paying into KiwiSaver schemes when women and men take maternity and paternity leave.

Harris said if low-income earners had 1% of their income put into KiwiSaver by their employers that could add up to hundreds of thousands of dollars by the time they come to retire.

"There's lots of things that we could do. We wouldn't have to do all of them, but they might be three that we choose and go these are the next settings for KiwiSaver to evolve into KiwiSaver 2.0, which is all going to help fund people's retirement and mean that they'll have a better quality of retirement and reduce the strain on central government retirement in the future."

Online investment platform co-chief executive Leighton Roberts agreed, stating on social media that "we need to do much more".

"I'd really like to see a proper policy review of KiwiSaver that considers access, contributions, tax incentives, and compulsion."

Review please

The Financial Services Council (FSC), which represents fund managers and workplace savings schemes, has called for a full KiwiSaver review.

It said FSC research showed 59% of New Zealanders don’t feel prepared for retirement. It is calling for increased contributions, increased participation, and "a lift in financial capability".

FSC chief executive Richard Kilpin said there were "substantive and strategic issues around contribution levels, the age of retirement, the 25% gender retirement gap, and the fact that 53% of people aren’t able to access $5,000 in time of emergency".

“These require serious attention if we are to make KiwiSaver a best in class system globally."

In February last year, the then Commerce and Consumer Affairs Minister, David Clark, asked officials to undertake a "KiwiSaver enhancement review".

It is listed on the Council of Financial Regulators regulatory calendar, but there's no detail.

In response to questions about what is happening with a review, the Ministry of Business, Innovation and Employment (MBIE) said in an email that in late 2022, a cross-agency group of Inland Revenue, MBIE, and the Ministry of Social Development provided advice to ministers regarding potential enhancements to KiwiSaver design and settings.

"Ministers decided to progress one option which will help to reduce the retirement savings gap for women. This option involves the Government providing a co-contribution to the KiwiSaver accounts of people who contribute to their KiwiSaver from their paid parental leave. (This is what employers currently do now from wages). This was introduced through omnibus tax legislation on Budget night and is being progressed by Inland Revenue."

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

34 Comments

by WellingtonInvestor | 25th Aug 23, 2:34pm 1692930887

Yes there need to be changes, but a big one IMO needs to be reducing % based fees, as over time eats a huge chunk of peoples retirement income. For example Vanguards fees for EFTs are tiny in comparison to many kiwisaver providers. Over time kiwisaver providers will make more and more as peoples balances increase.

They also need to decouple Kiwisaver withdrawal age from the super entitlement age, so people can retire with kiwisaver at 65. It looks very likely most people under 50 won't be able to withdraw kiwisaver until 67, due to National increasing the super eligibility age to 67 for most under 50.

by morepork | 25th Aug 23, 4:06pm 1692936365

There are providers with fees under 0.5% pa, not as good as Vanguard where you might get under 0.1% for a similar fund, but NZ schemes are much smaller than Vanguard. Plenty of people stick to expensive schemes so there's little incentive for large players to reduce fees.

by WellingtonInvestor | 25th Aug 23, 4:13pm 1692936792

Yes what is why IMO fees should be regulated, because it is often these that aren't that knowledgeble that are in more expensive schemes and will likely end up with less in retirement. Often they will also be the ones without any other form of retirement savings or passive income or property to sell in retirement..

by DaveB1978 | 26th Aug 23, 8:23am 1692995028

You should look at the returns before deciding whether or not the fees are reasonable. A fund with no fees and no returns isn’t a good result

by mfd | 25th Aug 23, 4:16pm 1692936976

Simplicity are down to 0.29% and falling as they increase scale. They are not-for-profit so savings are passed on as reduced fees.

Plus, 15% of the fees go to charity so they only really take in ~0.25%.

by kiwimm | 25th Aug 23, 9:41pm 1692956491

I have a Vanguard pension in the UK. When you add the fees for administering it to the pension rules it works out at 0.25%. Simplicity in NZ is close to this.

by LASSET | 26th Aug 23, 10:43am 1693003421

I've been happy with the returns as well. 7.04% per annum over the past 5 years in the Growth fund. Still behind Milford, but they can't keep up those numbers with that 1.05% min fee

Overall a good balance to the 555% return per annum on my BTC.

by Oats | 25th Aug 23, 2:40pm 1692931205

The scheme needs to incentivize saving & investing through tax relief on employee & employer contributions. It doesn't make sense locking additional money above employer match without it

by dumbthoughts | 25th Aug 23, 3:05pm 1692932757

Allow a certain level of tax free (or contributed from pre-tax income) contribution.

I'm self-employed so I just put in the bare minimum as my boss isn't very generous with his top-up, but I'd do more if I could contribute say 5% of pre-tax income to Kiwisaver.

by J.C. | 25th Aug 23, 2:44pm 1692931454

Incentivising. Or more accurately, how do you convince and influence the behavior of the young cats to pay prices for the financial assets that the old farts have been promised.

by malamah | 25th Aug 23, 2:46pm 1692931583

No need to contribute 10% when there's a magical pot of gold at the end of the 65 mile long rainbow. The gift that keeps on taking.

I'd consider increasing kiwisaver contributions if it meant I could have more control over my investments, and manage my own money. Until then I'm better off doing my own money management.

by WellingtonInvestor | 25th Aug 23, 4:15pm 1692936952

67 mile, or potentially older for most of us.

It is interesting that there actually has been no discussion anywhere in the media about the age being raised with Nationals planned changes, even though by default it will be if the super age is increased to 67. Kiwisaver operators will likely be for this change because it means an extra 2 years of fees.

by stefanblaise | 25th Aug 23, 2:54pm 1692932089

There's a big difference between giving people a tax break on their Kiwisaver contributions, and expecting the government (i.e. tax payers) or employers to contribute to other peoples retirement. Whatever happened to the concept of individual responsibility? NZ is a panhandlers paradise.

by WellingtonInvestor | 25th Aug 23, 3:53pm 1692935635

For the same reason we have free healthcare or free roads or education etc for the bettermentof the country. Everyone pays for it in their taxes. Taxes won't magically decrease if they are no longer provided and we then end up with people in bad situations. Rich people may feel good when they donate to charities and get credited for helping but we shouldn't be looking at increasing the need for more and more charities. IMO we shouldn't have the need for any charities in NZ the system was working properly

by interesting1234 | 25th Aug 23, 8:12pm 1692951151

IMO we shouldn't have the need for any charities in NZ the system was working properly

A little off topic, but this summarises why tipping is such an insidious practice .

by Beanie | 25th Aug 23, 11:00pm 1692961253

I used to think that until I traveled in merica...the service there is simply fantastic.

by KH | 25th Aug 23, 2:58pm 1692932293

Kiwisaver is a social instrument, not a classic investment. It exists to ensure folk have enough in their old age, and importantly not be a burden on others. It could replace super in time.

As such why would the government be involved in the dollars and why tax it at all ?

Zero tax on earnings and at exit. No tax, nil.

And of course compulsory, with much bigger contributions.

It's time our gutless govenments got some courage and did this.

by J.C. | 25th Aug 23, 3:14pm 1692933286

Kiwisaver is a social instrument, not a classic investment. It exists to ensure folk have enough in their old age, and importantly not be a burden on others. It could replace super in time.

How do you know that KS doesn't diminish the value of people's labour and income? People should not accept that the finance industry is working for them. You are just one stakeholder. There are many others who will rely on your contributions. Always best to cut out the middleman if you can.

by KH | 25th Aug 23, 4:47pm 1692938855

I don't follow your post at all J.C.

by J.C. | 25th Aug 23, 5:34pm 1692941640

I don't follow your post at all J.C.

Let me simplify it for you. The finance industry itself needs to make money from your investments. There are many different relationships that want a 'cut' from your investment. It's a behemoth with many eating from the same pie.

by KH | 25th Aug 23, 5:52pm 1692942775

Let me guess, your solution is crypto ?

by Pa1nter | 26th Aug 23, 6:52am 1692989558

If everyone just invested a little bit in crypto for their retirement

JC might actually make a return on his. Here, he made you a video about it

https://youtu.be/lC5lsemxaJo?si=3Sjf6pT-7ajcWmP5

by J.C. | 26th Aug 23, 9:21am 1692998491

Let me guess, your solution is crypto ?

Not my solution chief. Eventually there will be institutional offers of the likes of BTC that you will be able to expose yourself to. Maybe you will switch from a 60/40 to a 60/39/1. Entirely your decision.

by Pa1nter | 26th Aug 23, 9:51am 1693000303

Not my solution chief

Someone else made it up first, but it certainly seems to be your recipe for not making money.

Did you ever make that chart showing the relationship between date of entry into the scheme and lack of returns?

by unaha-closp | 25th Aug 23, 3:36pm 1692934588

He wants the government to force people to give him more money to manage and impose more "equitable regulations allowing him to charge more fees to comply with the increased regulation?

by rjn1 | 25th Aug 23, 3:42pm 1692934973

I don't understand the discussion. I have my KiwiSaver with InvestNow, split between various providers, including Milford. What problem are National trying to solve here?

by WellingtonInvestor | 25th Aug 23, 4:20pm 1692937223

It means you can split it between different actual Kiwisaver providers administering it.

by kiwi_overseas | 25th Aug 23, 4:07pm 1692936444

The key objective of the review should be to stop fund managers gouging their clients.

The right to charge admin fees should be removed and fund managers forced to take a percentage of the return the fund generates.

by RDee | 25th Aug 23, 8:03pm 1692950616

So, if we improve and make KiwiSaver 2.0 look a bit more like KiwiSaver 0.0, we'd be a bit better off ...

by Hitch22 | 25th Aug 23, 8:27pm 1692952050

Seems a lot of similar themes here but my few cents.

1 stop making childish tweaks its time to grow up and get serious with this.

2 stop member tax credit

3 stop taxing returns, ie make KS zero rated PIE, does not apply to side car funds

4 stop taxing employer contributions

5 reduce the number of contribution rates and adjust them up, eg 0.25%, annually

6 allow all kiwis returning from AU to simply switch their AU super to KS

7 Auto enrol every doctor, nurse, teacher, police officer, fire and emergency and military personnel with $25k opening balance and remove all other gov pension schemes.

8 provide an opt out to National Super (ie like the UK allows) and your apportionment is transferred from your PAYE to your KS...yes dangerous i know so only applies to real adults that can think and understand the impacts of their actions.. and who's PAYE is sufficiently high to justify it.

9 recognise that KS is special with effective member lock-in. Providers must sign a contract that as FUM grows fees drop, eg FUM grows by 10% this triggers a 10% reduction in fees or some similar recognised method, again does not apply to side car funds

10 write in stone and sign in blood upon entering the beehive...thou shall not fu(k with Kiwisaver unless it benefits ALL members and NEVER the provider, thou shall not turn KS into a cheap on call bank account and thou shall treat KS members with the respect and provider oversight they deserve.

by returnedtoNZ | 26th Aug 23, 8:32am 1692995553

Good set! I’m think 6 is already a thing.

by Hitch22 | 26th Aug 23, 2:39pm 1693017544

Good to hear, at least on this point common sense prevails!

by returnedtoNZ | 26th Aug 23, 8:30am 1692995406

We really should look at the Aus system. From providers (way lower fees needed) to tax concessions, however these need to be progressive as Aus super is become an estate planning vehicle and a tax reduction avenue for people with more than they need. The >$3m cap on tax was a little north of practical IMO. But generally it’s a very good system and mirrors the effect of a $1T sovereign wealth fund.

by firefly | 26th Aug 23, 11:02pm 1693047739

I agree on parts of the system e.g. the amount 11% this year raising to 11.5% next year and 12% year after.

I also agree on the fees, some index funds like host plus and rest have very low fees eg if you had 500000 you would be paying 378 and 548 yearly. spreadsheet and last year return if you are interested, i aren't sure any KiwiSaver fund can compete with those, at least my KiwiSaver isn't competing. (spreadsheet from ausfinance reddit forum maintained by SwaankyKoala) https://docs.google.com/spreadsheets/d/1sR0CyX8GswPiktOrfqRloNMY-fBlzFU…

I don't like that some employers like some in NZ do a total compensation package as opposed to a salary + super package which I think should be the default. As currently those on total compensation are paying their own super increases reducing their take-home pay as the super rate increases. Both countries should band this.

The concessional tax rate of 15% on earnings is very nice so makes the balance increase faster.

The concessional limit of $27500 and the ability to use this to lower income tax only benefits higher income people and more so if you are on the highest tax bracket. This isn't something that I think is fair or equitable as lower income people probably can't put extra into super but even if they did, they get far less back due to their lower tax rate. e,g I on the 37% tax rate put an extra 10K with after tax money into super I would get back 3700 as a tax refund, someone on 45K does the same they would get back 1900 back for the same 10K(note the 10K in super for both individuals gets tax at@15% in super) so in reality the person on 45k benefits only by 400 dollars and the person on a 37% tax rate benefits by 2200 dollars. how fair is this.