KEY POINTS:
If you were meandering through your local mall and saw a $10 note lying on the ground, would you pick it up? What if it were a $100 note? Or a bundle of $100 notes?
In the latter case you might well suspect that a television camera was spying on you from somewhere or that someone had just robbed a bank. But you're unlikely to just leave the cash sitting there. Yet for the past few months, most New Zealanders have been doing just that - deliberately ignoring free money lying in their path.
Ever since Finance Minister Michael Cullen dropped his Budget bombshell that he had decided to spend billions of dollars subsidising the KiwiSaver retirement savings scheme, and would be forcing employers to chip in as well, the decision whether to join became a bit of a no-brainer.
Four months into the new KiwiSaver era, the Government claims to be delighted that more than 212,000 people - an unknown number of whom might still be in nappies - have already signed up. Yet curiously, as each week goes by, hundreds of thousands more are passing up the opportunity to bank an extra $20 a week tax-free, not to mention the extra $1000 you'll get as a one-off sweetener for being so quick off the mark.
So far, that's at least $360 of free money that non-KiwiSavers have missed out on (contrary to popular belief, the $1040 annual subsidy is paid for each week of membership, not as an annual lump sum). So what can be holding them back?
The answer, according to financial writer Mary Holm, whose book KiwiSaver: How to make it work for you has already sold a remarkable 25,000 copies, is that there is still widespread misunderstanding and bewilderment about the scheme.
During the past few months, Holm has held numerous seminars about KiwiSaver and has received an unprecedented number of letters and emails on the subject. Many people, she says, still don't seem to understand the basics.
In case you're wondering, Holm has indeed put her money where her mouth is. Even though she is in her mid-50s, she has already joined a high-risk scheme because that's what she believes is appropriate in her particular case. That's not necessarily, she hastens to add, what other people her age should do.
But for all her enthusiasm about KiwiSaver, Holm admits she doesn't believe the Government has made the right decision committing so much taxpayer money to the scheme.
"I just think the Government is spending a lot of money to get quite a lot of people to do what they are doing anyway, although there are obviously a lot of people who are saving that didn't before. But I just wonder if the thousands of dollars I'm going to be getting for investing in KiwiSaver should have been spent on better breakfasts for children in South Auckland or something."
She has other reservations too. KiwiSaver will undoubtedly discourage people from other types of saving, such as investing in property, she believes. And she is not sure that the funds management industry has done much to deserve the golden goose the Government has given it.
As co-director of Auckland University's Retirement Policy and Research Centre, Michael Littlewood couldn't agree more.
Littlewood's opposition to tax incentives is well known but, like Holm, he believes that if you can't beat KiwiSaver, you should at least join it. For a start, the money lying on the floor of the mall is actually not free at all, he points out. It's highly likely that it was your money in the first place, taken in taxes. Why should everyone else get it back but you?
Personally, Littlewood would rather have seen the money spent on areas such as education, and goes so far as to suggest that the Government has deliberately dropped it as an election bribe.
Certainly, he is prepared to say what many officials will only admit privately - that the scheme is being rushed in far too quickly, and the only possible explanation for such indecent haste is that the Government wants to ensure voters see the fruits of their first year's investing before the next election.
Littlewood notes that Britain is considering changes to its retirement scheme but has given itself four years to get the details sorted out.
"It seems to be that Labour is embarrassed by the size of the surplus but feels as though the economy would be damaged if it simply released it through tax breaks - at least this year, because for some reason next year seems to be okay - so KiwiSaver has got political. Super didn't used to be political and, for nearly 20 years, it wasn't and I think it's a great shame that we've gone back to politicising this issue."
Littlewood is also concerned that whenever significant tax breaks are built into such schemes, significant cushions are also built in to guard against poor returns. "It also means there are significant cushions built in for providers to charge high fees, because someone is less sensitive to fees if there are incentives to joining."
Yet Littlewood, too, has already signed up. As has been frequently pointed out, someone putting in just over $1000 in the first year alone is likely to end up with at least $3000 in their account. Few, if any, other forms of investment come close to providing those kinds of returns. Even if global financial markets plummet, KiwiSavers are unlikely to get back any less than they actually contributed in the first place.
"So long as they end with more than they start with, they can be a bit sanguine about it and I think that's a fundamental design problem with the regime that we have," he says.
Another member of the if-you-can't-beat-'em-join-'em brigade is economist Gareth Morgan. These days a household name, thanks partly to his clever son Sam, Morgan has been a caustic critic of the managed funds industry. If online forums are any guide, he has won the trust of thousands of fans who will be happy for him to invest their money in his own KiwiSaver fund, modestly called Gareth Morgan KiwiSaver.
At the time this article went to press, Morgan was making his way across Libya on yet another two-wheeled adventure. But he found time to fire off a long email on why potential investors are right to be wary.
As he sees it, there are three main problems with KiwiSaver: the possibility that it might eventually be scrapped or substantially changed, the previous performance of managed funds, and the potential for employers to act in their own interests rather than their employees'.
New Zealand has "an atrocious history" of governments introducing national retirement saving schemes that do not last, he notes.
"To those of us who don't see a dearth of national savings as the problem, this will come as no surprise - savings master plans are more a populist distraction from the New Zealand economy's real ills than anything else. So they have a natural life cycle before a politician comes in and ends the futility."
And as for providers, most of them are bastards, he contends. "In short, there is no real mystery as to why the returns from unit trusts have lagged relevant market indexes - it is due to high fees, where an investor is lucky to receive 40 per cent of the return actually made on their invested funds and abuse of discretions by actuaries to shift ownership of savings from investors to the company."
Employees also need to be wary of employers who decide to nominate a specific provider on their behalf, he says, as it is possible they may nominate someone who offers a good deal for the employer, rather than the employee.
Morgan believes life insurance companies have had undue influence over the political process.
"Such is the benefit of having a well-funded life insurance lobby in Wellington. The consumer, on the other hand, has no well-funded advocate in the legislative process and the quality of the KiwiSaver legislation, as it currently stands, spells that out in capitals. It has to be fixed."
However, fund managers are not yet rubbing their hands together in anticipation of handsome fees, thanks to the money and time they're having to spend on new systems to handle the scheme. Instead, it is the usual suspects - employment and tax lawyers - who are already planning exotic holidays.
Many people do not seem to realise it but KiwiSaver Mark II - despite having already collected millions of dollars - has not yet been approved by Parliament. A draft bill that will force employers to contribute to the scheme is currently being scrutinised by the finance and expenditure select committee. The committee is scheduled to report back in a fortnight and is widely expected to recommend that MPs iron out several wrinkles that have already been identified.
Some of those wrinkles are so large that nothing less than a massive dose of Botox will be needed, according to some lawyers.
While most employers are still grumbling at the Government's lack of consultation over the latest changes, those who feel most aggrieved are employers who have existing super schemes. At last count that was about 320 companies. While the number is way down from the 2000 or so that ran schemes before tax incentives were scrapped in the late 1980s, many are large corporates, so nearly 300,000 employees are affected.
Bruce Kerr, executive director of the Association of Superannuation Funds, believes most employees in existing schemes are likely to demand that their employers add a KiwiSaver-compliant section to their fund or allow them to lower their payments to their existing fund and divert some to KiwiSaver to enable them to maximise the tax incentives. If only it were that simple.
A significant issue that has yet to be clarified is whether employees will be able to double dip - receive employer contributions to KiwiSaver and to existing workplace schemes. What is particularly confusing, says Kerr, is what might happen with employees who join a firm's collective agreement after April next year where there is an existing company scheme.
"The basic issue for employers with existing schemes is they have continued to partner with their staff for retirement savings for a very long period, through times when compliance costs were just going up and up and up," he says. "Many employers persevered and saw workplace retirement savings as a valuable benefit in the tight labour market, so we just want to see the intent delivered."
IRD's initial analysis shows that in the first three months, almost half those joining KiwiSaver were younger than 45, although less than 10 per cent were under 20. Slightly more women joined than men.
Kerr is keen to see more detailed analysis, which shows whether people are simply diverting existing savings to take advantage of the subsidies and incentives on offer or whether new saving is actually taking place.
Minter Ellison Rudd Watts employment lawyers Jennifer Mills and Aaron Lloyd acknowledge that in some ways KiwiSaver is a godsend for small and medium-sized businesses because it will enable many to compete for the first time with bigger organisations when it comes to offering employee benefits. But for larger companies with existing schemes, it is proving a nightmare, they say.
"For employers with an existing super scheme, what do they do?" asks Lloyd. "Do they close it down, do they offer KiwiSaver only, do they offer it alongside KiwiSaver, do they turn it into a KiwiSaver scheme either completely or in part? A lot of employers aren't sure where to go. And we're finding that's a very large part of the inertia."
One of the main problems, says Mills, is that the law as drafted is far from clear. "It's almost impossible to understand. We've got four tax partners in our firm and, between them, they don't even have the same interpretation and that's just one law firm. It's hideous to understand and I would expect some tweaking, whether it be National or Labour."
As for what are known as bolt-on schemes, where employers add a KiwiSaver option to existing schemes, the mechanics of how these will work are still "incredibly complex", says Mills, and few companies have yet committed to this option. In any case, they are not proving hugely popular with employees who prefer the flexibility of not having their money locked away until they reach NZ Superannuation age.
Even the fund managers who will run such schemes are still grappling with the details, she says. "They still don't understand, in our view, the issues they'll face and the reason is because it's just so complex. I know Mercer have flown a fellow over from Australia to deal with it because they've had so many difficulties with their private scheme."
Many employers are also worried that KiwiSaver will create two classes of employees - those who will get extra retirement benefits and those who won't, says Mills.
In some cases, she and Lloyd have been advising companies to offer all their employees an extra 4 per cent and let the employees choose what they want to do with the money: put it in KiwiSaver, put it in a private scheme or take the cash. Under such a scenario, the employee opting for cash will still be worse off than those who join KiwiSaver because the cash will be taxed, but at least it makes employers feel they are treating everyone fairly, she says.
"The problem is, we actually don't know whether these set-off arrangements are going to work - whether they're going to be lawful."
Mills says several employers are also waiting for the outcome of legal action by Hewlett-Packard staff. The case, in which 30 current and long-serving employees are suing the firm for supposedly winding up their existing super scheme without properly compensating them, is due to be heard in the Employment Court later this month.
The lawyer representing the Hewlett-Packard workers, Stephen Langton, likens the situation to an employee being given a company car, then being told it's being taken away because the lease company has gone bust. That's not the employee's fault and they should be compensated, he says.
Nevertheless, Langton does not seem especially keen to exaggerate the case's significance. It goes without saying that other employers who are keen to scrap their existing schemes will need to look carefully at what their contracts with their employees say, he says. But it will also come down to what the employees were told when they were interviewed, or in their salary reviews, or what the policy manual might say.
Meanwhile, contrary to what Morgan may think, employers remain nervous about setting up employer-preferred schemes because they're terrified of an employee backlash if the provider they select doesn't end up performing particularly well, says Mills.
Most of her clients are simply choosing a well-known provider and hoping that it will be reasonably safe. "You can imagine the issues. It's a real minefield."
By the same token, she says, some employees are wary of putting any of their hard-earned money into any kind of managed fund, even the most conservative ones, because none of the schemes will carry a government guarantee. And many are telling their bosses they simply can't afford to put aside 4 per cent of their pre-tax incomes, fuelling speculation that the minimum contribution could yet be dropped to 2 per cent as the union movement originally requested.
Chapman Tripp partner Mike Woodbury is especially keen to see the Government clarify its policy on what is known as total remuneration. "I do think where a person is remunerated on an hourly wage or a cash-plus-benefits approach, it follows that those contributions to KiwiSaver are additional - they're on top. But there's a little bit of an issue as to whether it's going to be permissible to tell a person and have them agree that they're worth $100k or $200k and have the super contributions payable come off the total remuneration. That debate has yet to be settled. There's really no policy on it."
The issue is already proving contentious. In August, the 15,000-member Public Service Association told the finance and expenditure select committee that total remuneration packages had created "significant resentment" in many of its members' workplaces because it appeared employers were trying to cut back in other areas, such as bonuses. It also criticised employers for promoting the "salary sacrifice" option which allows employees to fund an employer contribution as well, in order to pay less tax.
According to Woodbury, other issues that need to be addressed include whether schemes could be made potentially invalid because of perceived problems with a trustee's independence, how a scheme discloses its responsible investing policy, and how a person will be paid back if it turns out they have invalidly enrolled in a scheme.
One change he is confident of seeing is allowing existing workplace schemes to calculate contributions according to base salary, rather than total taxable pay, as required by KiwiSaver. Existing schemes use gross base salary almost without exception and it will hugely complicate payroll and scheme administration to change that, he argues.
"I was one of the six-member working group charged with designing KiwiSaver and one of the key principles that we've risked offending again and again is that KiwiSaver is intended to complement, not supplant, existing schemes. So it's really important that existing schemes be continued and readily adapted to the KiwiSaver environment without over-precise legislation or just making it too complex or expensive."
Like others in the industry, Woodbury admits to being somewhat frustrated that National has not yet said what changes, if any, it would make to KiwiSaver.
He has some sympathy for Bill English's argument that New Zealand might now be overproviding for retirees, especially given that recent research has concluded that our scheme is now significantly more generous than Australia's. He therefore wouldn't be surprised if National opted to drop some of the incentives, such as the $40-a-year fee subsidy, in exchange for tax cuts.
Arguably, one of the key missing ingredients of KiwiSaver is the ability to withdraw funds for early or partial retirement, he notes. And long term, he wouldn't be surprised to see means testing mooted for NZ Superannuation - or, more likely, pushing out the age of entitlement.
For his part, Littlewood wouldn't be surprised if National waits until after the election to disclose its plans. While the debate continues to rage over whether we are in fact as bad at saving as some insist, you've got to give Cullen some credit, says Littlewood.
"He's done it very, very cleverly. He's boxed National into a corner on it in a way. I'm no political commentator but it seems to me that Labour has sprung a tax cut that can't be spent but which at the same time puts National into a corner in terms of offering something better or more immediate."
However, some issues may be beyond the next Government's control, such as what happens in international financial markets.
Mark Brighouse, managing director of Brook Asset Management, concedes that the state of the world economy makes it possible that the first few years of KiwiSaver could be a rocky ride. Yet Brighouse's own analysis shows this might not be such a bad thing.
It might appear counter-intuitive, but because KiwiSavers are investing so little at the beginning, and because their contributions are drip fed, the risks are quite different than the usual scenario involving lump sums, he notes.
"The worst thing that can happen is a bear market towards the end, because that's when you're putting more money in."
However, there is a danger that inexperienced investors might decide to pull out after a few years of disappointing returns, he acknowledges. As with any investment, that's exactly the wrong thing to do, as it cements any losses, rather than waiting for the inevitable cyclical upswing.
"If we're trying to get more people to save and make provision for their retirement and people haven't done much investing before, then it is quite important that we educate them about that ... The key thing that's going to determine the success of this is the degree to which they stick with it."
Of course, KiwiSavers wouldn't be able to abandon their investments if they weren't allowed to take contribution holidays. Initially, say lawyers, IRD gave the impression it intended to allow contribution holidays only under strict conditions, but officials have recently hinted at a much more relaxed attitude.
In fact, contribution holidays are likely to be scrapped only if the scheme itself is made compulsory, some believe. In that case, as Holm has frequently pointed out, you'll have to save anyway, so there is no advantage in delaying the inevitable.
Another issue that seems to be worrying some potential savers is the historically dismal performance of managed funds. As a three-year study by the Consumers Institute has pointed out, most large balanced funds have delivered consistently poor returns to New Zealand investors over the past 10 years. In many cases, investors would have been better off leaving their money in the bank.
To the end of July this year, the average annual 10-year return for the 13 managed funds Consumer selected was only 3.66 per cent after fees and taxes. While fund managers point to two disastrous years in the financial markets, in 2001 and 2002, Consumer notes that such volatility is hardly unusual over such a period. The real problem, it suggests, is high fees.
Brighouse is understandably defensive on the subject. As far as fees are concerned, the Government Actuary "has exerted quite a bit of downward pressure on providers", he maintains. In any case, the Government is subsidising fees. And as for taxes, the playing field is now tilted slightly in favour of managed funds, rather than against them, with the introduction of Portfolio Investment Entities.
Nevertheless, it will still be important for investors to do their homework, he says, such as finding out whether they will have to pay extra for the expertise of an international equity manager, and whether certain fees are capped.
Brighouse is not as upbeat as NZX boss Mark Weldon about the potential of KiwiSaver to boost the local equity markets, noting fund managers will not be doing investors any favours by supporting companies just because they are local. On the other hand, research clearly shows that Australia has benefited enormously from its compulsory super scheme. Brighouse worries that New Zealand will not get similar benefits if people stick to the default providers, who will mostly invest in debt, rather than equities.
New Zealand's sharemarket is a conspicuous laggard in terms of its depth and liquidity, he says. "It's a big issue - we could actually end up with a bit of an improvement in our savings rate but not the real pay-offs we expect to get."
Gabrielle Donnell, a senior investment analyst with FundSource, agrees. Technically she is an employee of NZX, as it now owns FundSource. However the company has been analysing managed funds for two decades and is well regarded as an independent voice. Donnell is so excited about KiwiSaver she uses the word "exciting" in every second or third sentence.
While she is reluctant to comment on FundSource's future plans, she agrees that scrutiny of the industry will only get tougher. However she admits there is still much work to do to educate the public.
"If you talk to people on the street in Australia, they're much more familiar with managed funds. They watch them, they get excited about what's happening with them and they get really interested."
Like Brighouse, Donnell is concerned that younger people may choose funds that are too conservative, missing out on potentially larger returns. "If they're going for default funds per se I think that's quite dangerous. They might be in their early 20s and they could end up in some fund that's got 60 to 70 per cent in fixed interest. That's not appropriate at all really."
The good thing about KiwiSaver, she says, is that although the money is locked in for the long term, people can easily switch providers. Even though past performance is no indication of future performance, the increased scrutiny is likely to prompt fierce competition, she believes.
Even Holm, who has also previously criticised managed funds for their poor performance, is now prepared to give them the benefit of the doubt.
"A lot of the big fund managers have been doing better in recent years," she concedes. "I think they've realised that some of the super schemes that people got into 20 years ago were just rip-offs."
It almost chokes her to say it but, in any case, high fees should not be a deterrent for investors.
"In a way, the Government has made it possible for the funds to do very well even if they do charge higher fees because they compare so well with alternatives just because of all the Government extras."
Holm can certainly understand why employers are furious at the Government for what Business New Zealand has described as the "worst political ambush seen in 20 years". But for investors KiwiSaver is the best thing since sliced bread, she insists.
She has compiled a list of the top 10 excuses made by people as to why KiwiSaver might not be a good idea and has an answer for every one of them. So what if future governments change it, or contributions holidays are scrapped, or funds perform poorly, it's still a damn good deal, she insists.
And after all, the sooner you start slicing, the more bread you're going to get.
Getting maximum returns from KiwiSaver
It is a truism that whenever the Government offers "free money", clever lawyers and accountants will conceive cunning plans to get as much of it as possible, in ways that probably weren't intended. KiwiSaver is unlikely to be any different. It is not known whether the IRD is lobbying for any perceived "loopholes" to be closed but, in the meantime, there are several strategies already being promoted to make the most of the scheme. They include:
1 Put off by the fact that you won't be able to touch your KiwiSaver money until you reach NZ Superannuation age? There is a way you can withdraw some of your contributions early. Pick a scheme that allows you to divert part of your contributions to your mortgage. Then withdraw the money from your mortgage. But bear in mind that the money you divert into your mortgage in the first place will not attract tax credits.
2 Another strategy, expected to be hugely popular among those who don't want to commit at least 4 per cent of their incomes, is to go on a contribution holiday after the first year, but continue to top up your account by $20 a week, which the Government will match dollar for dollar. At present, you can extend the holiday indefinitely.
3 In some cases, borrowing the money to contribute to KiwiSaver may make sense, even on your credit card. But you would need to be confident that the costs of the loan will be less than the KiwiSaver subsidies you will receive. This could be a handy option for those who are not too far away from retiring.
4 If you're a student, increasing your student loan (which is interest-free) and putting the money into KiwiSaver seems an obvious strategy. As with most people, the magic amount is $20 a week, as the Government will match this dollar for dollar. Even if your fund loses half its money, which is unlikely, you'll still have your original investment.
5 Ask your employer to reduce your salary by up to 4 per cent, then get them to contribute that amount to KiwiSaver. This is known as "salary sacrifice". The advantage is that you won't pay tax on the employer contribution, so you're effectively getting a portion of your pay tax-free. The disadvantage, of course, is that you won't be able to touch it until you retire (although there is also option 1 above). Unions are not happy about this arrangement as they fear employers will exploit it to get out of paying their compulsory contribution from next April.
6 If you own your own business, you can pay yourself (and perhaps your family members as well) a salary of $26,000 per annum, allowing you to contribute $1040 a year - which the Government will match. However, you will end up with a PAYE liability so you need to discuss this with an accountant first.
It goes without saying that anyone considering such strategies should get professional advice before committing themselves. KiwiSaver in its current form can be fairly complicated and, once the money is saved, it's going to be pretty hard to touch it until you hit New Zealand Superannuation age (now 65, but who knows what it will be in the future).
