Capital Markets: Peter Neilson: Can compulsory KiwiSaver be a game changer

Peter Neilson, CEO of the Financial Services Council which represents KiwiSaver providers.. Photo / Ted Baghurst

Today's KiwiSaver balances barely reach $20 billion, whereas the NZX is worth about $90 billion and our love affair with residential real estate puts our investments there at more than $600 billion.

After this year's general election the growth trend for KiwiSaver is very likely to accelerate. Labour has confirmed its intention to make KiwiSaver universal (compulsory) for employees and steadily increase contributions to 9 per cent from the currently typical level of 6 per cent (3 per cent from the KiwiSaver and 3 per cent from the employer).

Seventy per cent of New Zealanders back making KiwiSaver compulsory for employees (Horizon Research, October 2013) with National's voters being even keener than Labour's. John Key won't want Labour stealing a march on him, so a pragmatic counterpunch on the election trail is possible.

Had the 1974 Kirk compulsory New Zealand Super Scheme continued we would be looking at a fund worth $278 billion, split 50-50 with $139 billion on the NZX, the New Zealand Stock Exchange and $139 billion in New Zealand bonds.

The Financial Services Council has outlined how we could lift retirement incomes so most New Zealand employees retire on a comfortable income. Most New Zealanders say they need about twice the amount of NZ Super to have a comfortable income. The current level of NZ Super for a couple is $564 after tax or $282 each. To be comfortable, most couples say they would need almost $900 a week.

On the current policy settings a member of KiwiSaver on the minimum wage of $28,200 would need to save 13.1 per cent of their pre-tax income to achieve a comfortable retirement if they have defaulted into a conservative fund. That is just not affordable for most low-to-middle income earners.

The Financial Services Council's advice, based on nearly $1 million investment in research and polling is:

• Keep NZ Super as it is in terms of the level, with the link to average wages and with no income or asset tests. Any reduction in the level of NZ Super makes it much harder to save to achieve a comfortable retirement.

• Move default KiwiSavers from conservative to balanced funds to enable those on the average wage to get another $300,000 in their retirement nest egg over 40 years.

• Look at offsetting the additional risks by having KiwiSavers pay for capital guarantees to ensure they are protected from a sharemarket meltdown such as in 1987 or 2008 close to buying their first home or when close to retirement.

• Level the tax playing field for KiwiSavers so they do not face effective tax rates of more than 50 per cent compared with people investing in rental housing who pay much lower effective tax rates. If we do this, someone on the average wage can fund a comfortable retirement by saving $8 a day along with their employer in KiwiSaver, rather than the $13.50 they would currently need.

Our research finds only 6 per cent are currently contributing 10 per cent or more to their KiwiSaver accounts and compulsion has 70 per cent voter support. Compulsory KiwiSaver and steadily stepping up contributions to 9 per cent split with their employer (4.5 per cent-4.5 per cent) is likely to be a game-changer for the KiwiSaver and funds management industry.

New Zealand has not had a current account surplus for 40 years, even with the best terms of trade in a generation we are currently enjoying.

For New Zealand the deepening of capital markets from expanding KiwiSaver will also help take some pressure off the exchange rate as we are less dependent on foreign capital. Foreign investors want to be paid more to overcome their natural home country investment bias. It should also boost the early equity capital available for fast-growing New Zealand companies to help increase our employment levels and incomes.

An Infometrics study commissioned by the FSC finds a compulsory KiwiSaver, with new members and their employers contributing a combined 1 per cent of income, rising to 10 per cent by 2024, would result in more than $700 billion in funds under management by 2066. This would inject an extra $52 billion into the stock market, compared to carrying on with the current level of KiwiSaver contributions and coverage.

This election looks like being more important than most for the growth and deepening of capital markets. Compulsory KiwiSaver could be the game-changer.

• Peter Neilson, CEO of the Financial Services Council which represents KiwiSaver providers and the personal risk insurance market (life and income protection insurance). He was Minister of Revenue and Associate Minister of Finance and SOEs in the 1984 to 1990 Labour Government.