Changes rattle KiwiSaver but fans say scheme still a goer

Mark Farrelly believes that the scheme is no longer the one he signed up for. Photo / Paul Estcourt

Shortly after gaining his residency last year and becoming a Kiwi, Irishman Mark Farrelly decided to become a KiwiSaver as well, drawn by the $1000 kick-start and the ongoing $1043-a-year Government input.

But with Prime Minister John Key this week confirming that subsidy will be reduced in Thursday's Budget and savers and their bosses will have to pay more in a move to make the scheme more affordable over the long term, Mr Farrelly isn't happy.

KiwiSaver, he says, is no longer the scheme he signed up for.

He believes the changes, which will be detailed in next week's Budget, amount to a breach of the agreement he struck with the Government when he signed up.

Mr Farrelly, a sales team leader for a telecommunications company, is aware he could stop paying into the scheme via the contributions holiday, which Mr Key suggested as an option for those who were unable or unwilling to pay more, "but that's not really good enough".

"I feel we should be able to opt out of this if they keep moving the goal posts," Mr Farrelly says.

"I'll definitely be applying for the contributions holiday ... I'll probably do my own thing."

Mr Farrelly's comments illustrate the risk the Government is running with its second set of changes to the schemes since it took office in 2008.

Frequent alterations, including reductions in incentives, may undermine the 1.7 million members' confidence in the scheme, which is still widely regarded as an effective tool to address one of the biggest economic problems facing the country, our dearth of private-sector savings, or to put it another way, our debt problem.

Encouraging better savings habits among New Zealanders is about behaviour and psychology, says Council of Trade Unions economist Bill Rosenberg.

"The more Government plays around with details ... if it becomes a political plaything that changes every two or three years, the less people are going to be willing to make that change in their behaviour."

At the very least, the KiwiSaver changes bring issues around national and retirement savings to the fore as the country heads towards the election.

Labour and the Greens this week argued that any increase in the minimum payment by savers could prove unaffordable for lower and middle income New Zealanders already under pressure from rising costs, and they would either choose not to enter the scheme or would take contributions holidays, reducing the amount they accumulated for retirement.

While the Government has characterised Thursday's Budget as a "savings and investment" one, based on what's been revealed around KiwiSaver, Labour's finance spokesman David Cunliffe is sceptical it will deliver much to meaningfully tackle the central problems.

"I'm surprised that a policy area that the Government said would be the centrepiece of its Budget appears to be boiling down to two things, scrimping on the incentive payment which will reduce the amount people kick into the scheme and reversing their own change of a year or so ago to reduce the default contribution rate from 4 per cent to 2 per cent.

"If that is leadership on one of the pre-eminent structural problems in our economy then I'm a monkey's uncle."

Labour is waiting to see the Budget before saying what it would do, but Mr Cunliffe promises "a credible programme" which is mindful of the Government's own rising debt levels.

"It will be systematic, it will be structural and it will be bold and it will be big ... and will make what the Government is doing look like tinkering.

"The public will be able to judge by election day who's got the best policy."

Mr Key has suggested that the scheme as it stands does little to lift overall national savings because as much as half of the $8 billion in savings accumulated to date has been kicked in by the Government, which is now borrowing to fund it.

But one of the few surveys on the subject indicated that just under 40 per cent of the contributions made by KiwiSaver members was money that would not otherwise have been saved.

That figure was quoted in the final report from the Savings Working Group which was set up to look at ways to tackle the savings issue.

Mr Key has said the Government is aiming for no new operational spending in next week's Budget, and that would be a move towards one of the group's key recommendations: curbing Government spending enough to return to a surplus earlier than the projected date of 2016, and maintaining a surplus over the medium term.

Given what the PM said this week about the expected savings from the planned reduction in the KiwiSaver member tax credit, back-of-the-envelope calculations suggest a cut in the order of 50 per cent, dropping the contribution to $10 a week for most savers or about $520 a year.

At current membership levels, that would save the Government about $440 million a year.

Act leader Don Brash - who in a letter to Mr Key this week described the KiwiSaver subsidies as "exorbitant" - welcomed the reduction in the member tax credit, "which will on the face of it help reduce the deficit". However, the saving was "a start, no more than that".

Dr Brash also questioned whether the increase in private-sector savings KiwiSaver generated was enough to offset the Government's spending on the scheme or whether it may in fact be reducing national savings.

As for the Savings Working Group's other recommendations about KiwiSaver, Mr Key this week suggested the panel was likely to be disappointed, saying the Government would have wanted to endorse more of the recommendations, "if we'd had the money to do so".

"Unfortunately this is a very tight Budget and we simply don't."

But Mr Cunliffe allows for the possibility that the Government, having got the bad news on KiwiSaver out of the way early, may have something to sweeten the mix next week.

"That could be, for example, some other form of tax subsidy for savings."

Compared with many other Western countries, New Zealand's tax treatment of savings is not particularly encouraging to savers - another area where the Savings Working Group had several recommendations.

But Mr Cunliffe points out tax breaks for savings tend to be expensive and complex. Labour would look at them, though.

Financial columnist and Savings Working Group member Mary Holm suspects the Government will next week announce a rise in minimum contributions for employees and their bosses, first to 3 per cent and then 4 later. Given many employees and employers were contributing at 4 per cent anyway, the adjustment would be relatively painless.

"In some ways it's fairer to make people put more of their money into their own accounts and the Government put less."

That's because given the scheme's incentives are ultimately funded by taxpayers, they can be seen as a transfer of wealth from those who aren't in the scheme to those who are.

But Ms Holm said keeping the $1000 kick-start meant there was still a strong incentive to join the scheme.

"That's such a nice incentive people would be mad not to ... Whether people want to continue contributing after a year is when it gets a bit more interesting."

If the Government did what Ms Holm thought it would, it would still make sense to keep making contributions beyond the first year, "but it's a little bit [more] marginal than it used to be".

Ms Holm said feedback she'd received from her audience convinced her that people generally liked KiwiSaver and the scheme had contributed to the development of a savings culture.

She believed KiwiSaver had been a positive influence on overall national savings, and although that was hard to quantify, she doubted the changes she expected would have much effect on that.

Meanwhile, although employers and much of the savings industry say they are comfortable with the changes indicated by the Government, the Herald understands many business people are unhappy that the KiwiSaver goal posts keep moving.

John Body is the managing director of ANZ's wealth management operation which includes its KiwiSaver business OnePath - the largest single KiwiSaver provider, with 400,000 customers and $2 billion under management.

Mr Body said the savings industry would prefer consistency over the long term, "but we can't live in an economic vacuum, we've got to recognise that as the economic environment changes from time to time the scheme will change but as long as the broad context of the scheme remains the same, we're comfortable".

The changes indicated by Mr Key were not going to fundamentally change the way investors thought about KiwiSaver.

"It's still going to be an incentive-based scheme, and it's still going to fundamentally be the best vehicle for long-term growth in savings.

"I think the majority of people are going to be better off long term if they continue within the scheme."

Even Dr Brash, who is not convinced the scheme is a good use of Government cash or that it adds to national savings, said anyone who was under 65 who didn't belong to it didn't understand it.

"It's a no-brainer for people to sign up for it ... It's free money."

Ms Holm said she could see how savers might view the changes as a breach of trust but they should not be surprised.

"I've always said there's no way anyone can guarantee it won't be changed in the future and you should just get in now while the going's good."

Budgeting for retirement - What Bill English could do next:

If the Government halves its $1043 member tax credit to KiwiSaver accounts it would save $440 million a year based on current membership levels.

- Thursday's Budget will see minimum employee and employer contributions rise, with financial experts picking an increase from 2 per cent of earnings to 3 per cent. Further incremental increases may also be announced next week.

- The Budget may also contain sweeteners for savers to make up for the reduction in government subsidies. Tax breaks on investment returns earned by KiwiSaver and other retirement funds would boost savings over time and bring New Zealand into line with most other countries, but may be deemed too expensive.

- The Government could introduce other KiwiSaver changes recommended by the Savings Working Group such as automatically enrolling all working New Zealanders who are not already in the scheme while preserving their right to opt out.

- Prime Minister John Key has ruled out any increase in the age of eligibility for NZ superannuation which many believe would ensure New Zealand's flagship retirement income scheme is affordable over the long term. The Retirement Commission believes that the age of eligibility for NZ Super should rise from 65, albeit gradually - by two months a year starting in 2020 until it reaches 67.

- Act leader Don Brash agrees, but Labour says the eligibility age should remain unchanged.

- The Council of Trade Unions says there needs to be careful consideration of the issue given that many manual workers are physically unable to continue working into their 60s.