6 September 2021
How many Kiwis has KiwiSaver Saved?
As published at Stuff.co.nz 05/09/2021
What do we need to do to make our good retirement scheme great?
The answer to the headline is obviously none of our feathered friends, but there are plenty of the human variety who have reason to be thankful. And, with some fine-tuning, we could improve KiwiSaver so it can help many more Kiwis save for a better retirement.
A few years back I had a regular slot on Radio Live (now Magic Talk) with renowned broadcaster Karen Hay. It was a live show where listeners could ring in and ask their money questions; it was called “Your Money” and I just loved it. As you can imagine we got some pretty interesting questions!
One night a young chap rang up and said he was a first-time caller, long-time listener, which should have made me suspicious from the getgo. He went on to ask, in a very dulcet tone: “How many Kiwis has KiwiSaver saved?” I thanked the caller for his question, knowing the voice (but more on that later) and replied: “I’m not sure, but I suspect quite a few Kiwis are better off financially.” We kept him on the phone a bit more asking about his KiwiSaver, what fund he was in and finally let him off the hook shortly after. Clearly getting a little more than he bargained for.
I’m a big fan of KiwiSaver and I bet more than three million KiwiSaver members, to some degree or another, think the same thing. A number of commentators have said KiwiSaver is not a good savings vehicle but, simply put, they are wrong. Many overseas countries have looked at our system and endeavoured to try to replicate it in some way or another over the past few years. I know for a fact Ireland are interested in how it works.
Like life though, it’s not perfect, and there have been a lot of changes to KiwiSaver over its 14 year life. As it heads into the terrible teens, while it has had some strong parenting to date, it needs some clear boundaries or it might lose its way. However, with a little support and advice it could grow up to be exactly what it was designed for in the first place and help Kiwis improve their overall financial wellbeing in their retirement years.
What are the stand-out benefits of KiwiSaver today?
- Inland Revenue centralised the system to collect contributions, which has mitigated a significant amount of cost and confusion for members and providers.
- Wherever you go in your working career, your KiwiSaver account and provider will follow you. Essentially it is like a truck and trailer: when you move employers it will follow you, so no need to worry about losing track of where your hard-earned savings are.
- If you put 3% of your salary or wages in, your employer, in most circumstances (more to come on this) have to match that. No ifs or buts. If they do not, they are breaking the law.
- The Government will give you an extra $521 dollars a year every year (until you reach retirement age) if you put in a minimum of $20 dollars a week. Think of it as a 50% return on those contributions every year!
- You are not stuck with one KiwiSaver provider. At any time, you can switch providers by just signing up with the new scheme and they will do all the rest for you.
- You do not have to contribute if your circumstances change. At any time, you can go on a contribution suspension of between one and five years.
- For those who are first homebuyers you can use your KiwiSaver funds (excluding the $1,000 kick start if you were lucky to get that at the time) to go towards your first home. It is one of the quickest ways you can build up a deposit because it is not only your contributions but your matching employer and government contributions that can be used to get there quicker.
- The government has recently reviewed KiwiSaver default providers and we have got one of the lowest range of investment management fees in the world. This is even more remarkable given we only have around $62 billion of funds compared to say Australia that has $3 trillion of funds under management and their fees are higher than ours. So big tick there.
So with all that in place why does it need any help? Well, on the surface, it looks great however, like anything, if you dig a little deeper there are some questions that need to be answered and suggested improvements made. If we don’t get them addressed, then KiwiSaver won’t deliver what it was designed to be, which could have significant ramifications for future governments, the sustainability of our National Superannuation and impact generations of people’s retirement outcomes.
What are the challenges?
- Of the 3 million KiwiSaver members there are 1.2 million deemed to be noncontributing members (in last years FMA KiwiSaver report),
- On top of that, there are another 580,000 members who are not getting their maximum government Member Tax Credit.
- A number of investors are probably not in the right fund for their personal circumstances. This means they will not get an appropriate return over the long term on their investment savings to keep ahead of inflation and enjoy a comfortable retirement. Thankfully, the 380,000-odd default members will be transitioned to balanced funds at the end of this year, thanks to changes to the default rules. But I’m sure there are thousands still not in the right type of fund and don’t even know it.
- There are hundreds and thousands of workers who cannot access KiwiSaver primarily because of their low wages and or personal circumstances.
- At the other end of the scale, 3% contributions are not going to get you to a great place in retirement. Most Kiwis need to be saving more.
How do we make KiwiSaver great?
There are a number of things that could be done however, I have bunched my thoughts into three simple actions:
1. Find out why we have so many Kiwis in KiwiSaver but not contributing
As mentioned earlier I believe that there are a number of reasons for this including because they are:
- retired or,
- on contribution suspensions or using hardship withdrawals caused by genuine affordability issues.
However, I don’t believe this accounts for all of the 1.2 million. I think many employees are being impacted by the way they have been employed and in, many cases, employers may not be meeting their KiwiSaver obligations. The legislation states that employer contributions have to be on top of salary and wages unless, in good faith, the employer has negotiated with the employee to include it in their total income. I think a sizeable number of people are not making KiwiSaver contributions because of the way they are being employed. By that I mean staff are being put on contracts rather than wages or salary thus sidestepping the employer contributions. It is just a theory but, anecdotally, I think this is an issue.
2. Increase slowly both employer and employee contribution rates.
In Australia the employer contribution rate is currently 9.5% and moving to 12% from 1 July 2025. By comparison, ours is only 6% (if you include employer contributions) and no sign of increases in the future. If we look to propose small annual increases over a long time, so employers can build these in to their total employment costs, this will help Kiwis to slowly improve their savings rate. Even a 0.25% increase each year will make a significant difference over time and can’t be under estimated.
3. Develop a Sidecar Emergency Savings account for low (and not so low) income earners
Think of this as the first step to long term savings by dealing with the short-term emergencies that life throw at us from time-to-time. Loss of job, car breaking down, and house repairs: you know the big ticket items you hope will never happen. Having this fund set up as your first savings bucket (with employee contributions going into it while employer and government contributions go into your KiwiSaver account) will quickly get you that first line of defence, so you won’t need to access high toxic debt like payday lenders, high interest rate finance companies and credit cards. It will also mitigate the incredible cost that KiwiSaver providers have while managing hardship and take the personal stress away for members of having to go through a time-consuming process to get their money
Simply put, if New Zealanders who need to be saving for their retirement are not for all or some of the reasons above, we need to help them do so or else their retirement years may be at risk.
As we have seen recently, when market corrections occur some KiwiSaver members have realised losses by switching to options that are more conservative. Access to good advice will also be an important contributor to KiwiSaver member outcomes, and hopefully help not only getting Kiwis into the right funds, but keeping them there through the good and not so good market outcomes.
Then there is that old chestnut compulsion, but let’s look at this once we have better insights on what is causing some of the issues I’ve highlighted above.
Given we are generally living a lot longer than previous generations, we need a way to ensure our income lives as long as we do and these changes I believe will be a great start.
By the way the young lad who asked me that funny KiwiSaver questions was Connor, a very good friend of my son James, and I can safely say he is still saving for himself and unlikely to ring the radio again in a hurry.
If you want to learn more and know how to get more Mint in your KiwiSaver click here.
Disclaimer: David Boyle is Head of Sales and Marketing at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.
Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.