KiwiSaver changes into lower gear

Retirement Commissioner Diana Crossan says the 2 per cent level may be a more affordable way for people to keep up the savings habit. Photo / Wairarapa Times-Age

KiwiSaver Mark IV starts on Wednesday for nearly one million people who face a raft of changes expected to make it easier for more people to join while opening up options for existing members.

The retirement savings scheme was altered dramatically before its launch in July 2007 and has been tweaked since going live.

From April 1 it will transform again with KiwiSavers able to start contributing at 2 per cent of their income, half the current minimum of 4 per cent.

At the same time those who have already joined will have the choice of reducing their contribution to 2 per cent.

It's a move which Retirement Commissioner Diana Crossan is hoping will help those who are struggling in the tough economic times.

"I think if people understand they can drop to 2 per cent they may tend to do that rather than taking a contribution holiday," she says.

Anybody who signs up to KiwiSaver can go on a payment holiday after they have been in the scheme for a year. The numbers taking a break have been increasing.

By July 31, 2008 - a year after the scheme began - only 4304 people put a hold on their contributions but that has since ballooned to 17,920 at the end of February.

Initially many stop contributing through their employer but continued to pay money directly to the Inland Revenue.

But now it seems likely more have been forced to stop contributing due to financial hardship.

Crossan says the 2 per cent level may be a more affordable way for people to keep up the savings habit.

"I think it is easier to keep contributing all the time rather than stopping and starting. If you take a holiday, when are you going to start contributing again? It's just too easy to keep putting it off."

But she says that for those who choose to drop down to 2 per cent, it is important the money gets earmarked to either boost emergency savings or reduce debt.

It's a philosophy which financial adviser Lisa Dudson is also adamant about. She says those with a big mortgage or debts may be best to consider dropping their contribution to 2 per cent and using the extra money to pay debts - but only if they are disciplined enough to use the money for this.

Dudson says many have good intentions but it can be easy to fritter away the extra money rather than using it for a specific purpose.

"If you are quite comfortable with 4 per cent or 8 per cent, just keep going," she says.

Both Dudson and Crossan are hopeful the lower joining rate will attract people to sign up to KiwiSaver but know the economic conditions may prove a challenge.

Realistically, Crossan believes new members are likely to come through the automatic enrolment process when a person changes jobs rather than people actively signing up.

"They may have thought in the past: '4 per cent I can't manage that, but 2 per cent, well I will do it.' But I can't see people saying, 'Now it is 2 per cent I think I will start up.' I don't think that will happen."

Dudson says that while the incentives have decreased since its launch, KiwiSaver is still a very attractive savings vehicle.

"I think if you can do it, it's mad not to do the 2 per cent."

But Retirement Policy and Research Centre co-director Michael Littlewood is not convinced that it will attract the numbers.

"If someone is struggling to pay their bills it's not going to matter whether the contribution rate is 2 per cent or 4 per cent, they just won't be able to join."

Littlewood, a longstanding critic of KiwiSaver, says the frustrating part is that those people who cannot afford to join KiwiSaver will still be paying for the scheme through their taxes.

He says that in principle it is a good idea to drop down to the 2 per cent contribution rate as it offers more flexibility.

The remaining 2 per cent could be put into a savings account to be accessed immediately if you run into financial difficulties or diverted to another superannuation scheme where the money won't be locked in until the member turns 65.

Littlewood says this makes sense as long as people continue to contribute enough to get the full Government contribution.

That means for those earning under $52,000 they will either need to keep contributing at 4 per cent or top up their contribution to $1043 a year to get the full amount.

"Two per cent is the most effective amount to attract the maximum tax concession and Government contribution."

As to whether that will be enough to live off in retirement, Littlewood says there was no proof before KiwiSaver was launched that New Zealanders were not saving enough for their retirement.

"But whether or not it is enough depends on what they own, what they want to achieve in retirement, what age they want to retire at and whether they might get an inheritance."

The good news for those who feel under pressure to drop down to the lower rate is that from April 1 employers have to increase their contribution from 1 per cent to 2 per cent where it will now stay.

Under Labour Government plans it would have risen to 3 per cent next April and 4 per cent by April 2011 but that has now been scrapped by National until the economy improves.

From Wednesday employers will also have to pay for the contribution out of their own pockets rather than receiving the money back in a tax credit and any amount they contribute above the 2 per cent will be taxed.

David Ireland, chairman of the Association of Superannuation Funds of New Zealand - the voice of workplace super schemes - believes the loss of Government subsidy to employers will be felt the hardest by those who went straight to a 4 per cent contribution.

"For a number of those the cost would have been justified [at the time]. Some of them would have been caught out by the tax credit going."

It was unlikely employers would have the ability to reduce it to 2 per cent without having the approval of all staff members, he said. But employers have gained through the reintroduction of total remuneration where they can build a person's KiwiSaver contribution into their total salary package.

"It gives employers certainty and they can build it into their costs."

That is seen as a welcome move at a time when businesses are under pressure to keep costs down but is expected to be mainly taken up by those at the executive level and small employers with staff on high salaries.

Ireland says the changes have altered the dynamics of KiwiSaver.

"Previously when it was launched it was like KiwiSaver on speed. Now it's more like a mild upper. But the main incentives are still there."

Investment Savings and Insurance Association chief executive Vance Arkinstall says providers' response to the changes has been muted.

"The industry has some mixed feelings that the drop in contribution rate is a mix of both good and bad."

There is the potential for less money to come in and there was no expectation of an instant jump in new people signing up.

But over time Arkinstall believes that it will help numbers to continue to increase.

"It's difficult to predict what the response will be. We don't expect a huge influx from day one but think it will flow through over time."

However he believes the changes will see the industry consolidate faster.

"There are too many funds and too many providers. We are starting to see a movement towards possible consolidation."

A number of smaller providers who had struggled to get critical mass were already talking to larger ones about passing over their members.

But Arkinstall says one of the important messages to get across to the public is that the consolidation will not put savers' money at risk.

"Even if a product provider does decide to exit the KiwiSaver market, their funds will be safe."

What the industry doesn't need is more upheaval, he says.

"We need to settle KiwiSaver down and not make any changes because change always unsettles people."

THE CHANGES
* $40 fee subsidy is being dropped.
* You can sign up and contribute just 2 per cent.
* You can drop your contribution from 4 per cent to 2 per cent by telling your employer.
* Compulsory employer contributions rise to 2 per cent but are capped there.
* Employer contributions above 2 per cent are now taxable.
* Employers can use total remuneration.
* Employers will no longer receive a tax credit for their contribution.

UNSUBSIDISED FEES WILL WHITTLE DOWN NEST EGGS FOR KIDS

One group of savers who will face a negative consequence of the KiwiSaver changes is children.

From April 1 there will no longer be a $40 subsidy from the Government to cover the fees charged on KiwiSaver accounts.

While the change will affect everyone, those who are not contributing regularly, such as many of the 148,553 under-18-year-olds who have been signed up, are likely to have their savings affected more.

Many people signed up their children to get the $1000 kick-start and this is still available but the fees may have the effect of whittling down the savings.

Retirement Commissioner Diana Crossan says one option is for parents to put in extra money to cover the cost of the fees.

Crossan believes it is still useful to set children up with KiwiSaver accounts to teach them about saving.

"I think it is also about children getting into the habit and showing children money growth that is locked away so they can't get at it."

Financial adviser Lisa Dudson says the fee is a reality parents have to face and they are still getting the $1000 for nothing. Over time it was possible the interest earned on the investment would cover the fee.

Another consequence of the changes is workers younger than 18 whose employers contribute to their KiwiSaver accounts will now be taxed on the contribution.

THE NUMBERS
2007 KiwiSaver launched in July
961,460 Total members
17,920 On a contribution holiday
$1.5b Money invested (from July 1 to February 28)

WHERE THE MONEY COMES FROM
$224.7m Employer contributions
$597m Employee contributions
$4.1m Voluntary contributions
$320m Govt matched contribution:
$334.8m $1000 kickstart
$23m $40 fee subsidy
$8.2m Interest paid by IRD
Source: Inland Revenue Department. Figures as of February 28.