Law changes aim to encourage more workplace super schemes

By PAULA OLIVER

Law changes passing through Parliament will not cause a surge in workplace retirement savings schemes because many employers do not see saving as their problem.

That's the opinion of observers who have watched the number of workplace savings schemes fall dramatically over the past decade.

Retirement Commission figures show that just 13.6 per cent of the workforce participates in employer-based schemes, down from 20 per cent in the late 1990s.

Commissioner Diana Crossan called the figures concerning.

The Government wants to encourage New Zealanders to save for their retirement and employer-based schemes are widely seen as the best way to save.

Money can be taken directly from a pay-packet and the theory is that an employee will not miss it if he or she never had it.

But the Government will find it hard to reverse the freefall trend in employer-based schemes.

Why do we have so few schemes?

Typically, employers cite as reasons compliance costs, a more mobile workforce, and a lack of incentives.

There has also been a growing feeling that it is up to employees to decide what to do with their pay.

Employees in turn are finding that after spending on housing, education and general expenses, they either cannot or do not want to tuck any more away for a grey-haired day. Everyone has their own priorities, and some choose to pay off debt first.

To counter the lack of employer-based schemes, the Government has launched a series of initiatives. This month it unveiled a new retirement scheme for nearly 100,000 public servants in the hope the private sector will follow suit.

Changes are also being made to two of the most often-cited "barriers" to employer involvement.

One is the 1998 requirement for an employer-based scheme to have a prospectus.

Business NZ points to the often expensive prospectus requirement as materially contributing to the wind-ups of many small employer-based schemes, and several larger ones.

Since 1998, it claims, the number of employment-based schemes has nearly halved.

The prospectus problem is being addressed by the Business Law Reform Bill, now before a parliamentary select committee.

It would exempt employee superannuation schemes (as defined in the bill), regardless of their size.

The second problem being addressed is an anomaly under which employer super contributions are taxed at a flat 33 per cent regardless of the employee's income.

If an employee earned under $38,000, his or her normal tax rate would have been 21 per cent, not 33 per cent, so they were losing on contributions.

A bill put forward by Finance Minister Dr Michael Cullen, and passed last week, will remedy this.

The Government's changes have been applauded by employer representatives and those in favour of retirement saving - but they have also warned that the changes alone will not suddenly boost the number of employer schemes.

"By themselves, the changes will not make employers or employees rush to join," Business NZ executive director Anne Knowles said.

"It needs to be part of a wider package. As far as employees are concerned, all it does is remove an anomaly. That's not an incentive."

What more employers might do was offer staff the chance to go into master schemes, she said.

Master trusts are seen as the solution to the overwhelming percentage of small and medium-sized businesses which struggle to afford to run an employer-based scheme.

Master trusts pool employers and take on the administration of the scheme. All the employer usually has to do is take cash from a pay packet.

But many employers seem reluctant to offer even that easy option.

The annual report of the Government Actuary for the year to June 30, 2003, shows the number of employers involved in master schemes fell from 3900 last year to 2322. Overall savings schemes were also on the wane.

Knowles noted that it could cost an employer time and money just deducting money to put into a scheme if the employee changed his or her mind, if the amount changed, or the employer had to pay bank fees.

"Employers are getting out of employer-sponsored superannuation mostly because they don't think it's important," Michael Littlewood, a member of the 1992 Todd Taskforce on retirement, said. "Whether you agree or disagree with that, that's what employers are saying."

Littlewood said that the removal of tax breaks in 1990 forced employers to ask themselves why they were involved in schemes.

He does not buy the argument that schemes are a way of retaining staff.

"I think that what employers are effectively saying is that 'this isn't a major business issue for us'. I'm a great fan of employer-related financial information and making it as easy as possible. If an employer thinks that it's in its business interests it can go further."

Retirement Commissioner Diana Crossan thinks the Government needs to make it easier for businesses, and businesses need to commit to helping their staff, if there is to be a turnaround in the prevalence of employer schemes.

"One of the tricky things is that the world of work has changed, and in some ways the products haven't kept up," she said.

"You can get a scheme, but it might only relate to one workplace. There are portable ones, but they tend to be available privately rather than at the workplace. So you've got the schemes that work well, but they're not in the right place."

People had also been scared off by bad investment returns on their savings.

Crossan said the law changes going through now needed to be part of a wider package.

The Government is re-examining the idea of modest tax incentives to save, and it is likely to make a decision on that after the Periodic Reporting Group, which is looking at various aspects of retirement savings, reports in December.

Arguments over tax incentives have raged for years. Many believe they have little effect on the overall level of savings and fail to capture low-income earners.

Others believe that incentives would encourage people to get involved.

"The first question I would have for the Government is 'where is the evidence, from anywhere, that incentives actually increase saving?' The answer is, nowhere," Littlewood said.

CTU president Ross Wilson hopes the number of workplace-based schemes can be raised.

Before the 1990s he helped establish an industry-wide scheme which still exists. The meat, harbour and waterfront industries each have their own schemes, which are portable between employers.

Wilson said that during the 1990s retirement savings were considered an employee's business. He hopes that has changed.

"I think everyone, at least in theory, acknowledges that it's a necessary thing to provide for employment-based savings," he said.

But many question whether we should worry about the plunge in savings schemes.

Littlewood said people were simply not using savings in the traditional way, and that did not necessarily spell disaster.

Knowles pointed to a survey showing most elderly people were happy living only on New Zealand Superannuation.

AMP Financial Services' national manager of corporate solutions, Ian Miller, said his organisation was seeing more interest in master trusts, which could suggest the Government's savings message was getting through.

For now, though, Knowles and others are focused on removing impediments to save.

She wants people to realise that if they want more than a basic income in their retirement they need to act sooner rather than later.

"Employers can only go so far."

* In tomorrow's Dialogue, Business NZ and the Retirement Commissioner discuss our lack of workplace saving schemes.