Is KiwiSaver our saviour?

Dr Cullen announced new changes to scheme on Thursday. Picture / Mark Mitchell

The government will be relying on the apathy of New Zealand workers to ensure its KiwiSaver work superannuation scheme succeeds, say critics.

More details emerged last week about Finance Minister Michael Cullen's brainchild, including an important amendment that the 4 per cent minimum contribution could be a split between the employee's contribution and the employer's.

"By allowing an employer contribution to count towards the minimum contribution, we are also making it easier for workers, who may struggle to contribute 4 per cent, to join KiwiSaver," Dr Cullen said on Thursday.

Another significant change he announced is that employer contributions to KiwiSaver schemes will be tax exempt. However there are no tax concessions for the employee's contributions.

And home owners will be able to divert half of their KiwiSaver contributions into paying off their mortgage.

With the fund management industry and the IRD rushing to get procedures in place, the implementation of the scheme has been held back three months until July 1 next year.

Most New Zealanders have not yet bothered to read the work-based scheme's fine print. However they would be well advised to keep abreast of what is happening. If they ignore it, they might just find after next July that 4 per cent of their paypacket starts disappearing into a superannuation fund and that they will have to work hard to extract themselves.

For someone on a $30,000 a year salary, for example, that will mean around $100 a month, a not insubstantial amount. Compounded over 40 years this will give them a $200,000 lump sum when they retire at 65.

Essentially what the government is trying to do is lead people to water and hope like hell that they will drink.

Projections are that by 2014, 25 per cent of employees will be participating in the scheme.

New Zealand fund managers, who have put forward applications to act as the government's default providers, are fervently hoping New Zealand will follow Australia in making the scheme mandatory in coming years. This will then give them economies of scale. The players likely to end up as providers or playing some role include Tower, AMP, ASB, AXA, ING, Mercers and Westpac (via Bankers Trust). All these companies are putting their hands up for KiwiSaver.

They are welcoming the new tax incentive. However, the more cynical among them say canny investors who already have savings are the ones most likely to take advantage of the tax breaks, rather than virgin savers. This is what has happened in the UK.

"I think that you will still get some apathy [on KiwiSaver], but with the tax concessions people are not stupid,"says Tony Hildyard, CEO of Tower Investments. "If they think they are getting a break, for anyone paying 39c tax on the dollar, it will make a difference.

"I think it's a big step. The earlier proposal had a lot more hurdles. This has improved their chances of success and it has made the conversion from other superannuation funds to KiwiSaver a much more viable proposition."

However Hildyard still looks wistfully at the Australian superannuation example.

"Look at what has happened there. People have got nest eggs, people are saving massive amounts of money, it's a A$1 trillion dollar business.

"It might take a change in government before more tax incentives or a compulsory order comes out," Hildyard says.

National finance spokesman John Key is not a KiwiSaver fan. "The finance industry are terrified that they are going to be caught with their pants down," he says. He laughs at the large number of fund managers rushing forward to offer their services in the hope they will one day make money out of KiwiSaver.

"The fund industry would definitely like to trash it, but it is terrified that it will change for the better after a few years and miss out on the business," says Key.

For now, in the state it is being proposed, Key says KiwiSaver is "doomed to fail. The scheme will produce an awful lot of dormant accounts and it won't have any effect on people's savings habits."

He describes KiwiSaver as "a glorified first-home mortgage grant". (The Government is offering a first home deposit of up to $5000 after three years of saving with KiwiSaver.)

However, if National wins the next election, Key says he wouldn't necessarily kill KiwiSaver.

"We'll have a good look at various options. I think there are some things that we could do that might change the rules of the game," he says.

"We agree that it is highly desirable to have New Zealanders save more. I think that an element of this is behavioural. Once they start, they will continue."

He predicts it will be a very small group of New Zealanders who will initially opt in for KiwiSaver, as lower socio-economic groups will find the monthly 4 or 8 per cent contribution too much out of their disposable income and the middle class will already have their saving plans organised.

A KiwiSaver supporter is David Skilling, chief executive of the New Zealand Institute.

It will help the procrastinators, he believes. By making saving easy for average Kiwis, they will just fall into line.

Skilling sees KiwiSaver as being part of an investment portfolio.

"It's an 'and', not an 'or'," he says. The work superannuation fund would for many be part of a diversified portfolio.

The Retirement Commission sees KiwiSaver as an opportunity for working New Zealanders to review their personal finances. It is not necessarily recommending it, but it will help in educating people about it through its sorted.org.nz website.

"KiwiSaver is likely to suit some people more than others, and it's important that people consider their options carefully and make decisions that they can afford," says Retirement Commissioner Diana Crossan.

The parties in favour of KiwiSaver hope that the tight employment market might make employers more generous about contributing to the scheme.

Fletcher Building has been the first company to say it will make a contribution towards each worker's KiwiSaver scheme - in its case it is making a 2 per cent contribution for its 8000 staff.

Executive general manager for human resources Peter Merry says the company even dropped its own work superannuation initiative, which it was just about to launch when the Government announced its plans last year, and it's happy to spread the KiwiSaver word. "Our strategy is to wait to see what the Government comes up with before we finalise our own," Merry said.

Aware that knowledge about KiwiSaver is all but non-existent, the government is planning an extensive communications compaign. The IRD will be running a series of workshops on it.

But for now, KiwiSaver's critics outweigh its fans.

Tower's Hildyard says the employers he has spoken to since Thursday's announcement are still not giving KiwiSaver their full support.

Michael Littlewood, co-director of the Retirement Policy & Research Centre, says the announcement did not allay his fears. He says data shows Kiwis' standard of living is improving.

"Why are we doing this? It is quite clear that New Zealanders are behaving rationally. I think KiwiSaver is going to be a mess."

What Littlewood does not like about KiwiSaver is that it locks people's money up until they are 65. He cyncially advises people to join in order to collect the $1000 incentive and then to stop after 12 months, leave their money there until they are 65 and start investing in a more flexible product with a higher fee.

He is not surprised at the delay in launching the scheme.

"Gearing up to install this is a huge project. We are now nearly at September.

"It is going to be a huge rush and some things are going to be done very temporarily," says Littlewood.