Susan St John: Private pensions for the lucky few

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An annuity, based on the private incomes of old, would help the young stretch their KiwiSaver into old age.

What really matters for most people contemplating a healthy and happy retirement is good health and financial security.

A few fortunate New Zealanders retire without a care in the world, and these Kiwis tend to be drawing pensions for life or with substantial investments. With regular income arriving each month to add to the basic NZ Superannuation, they are able to engage in ways they see fit, continuing to work in a paid job, supporting the tourist industry, looking after grandchildren and older relatives, indulging in other productive unpaid activities, and contributing to the creative and cultural environment.

Today, one in 10 retired people have an additional income stream from an occupational pension. There are around 22,000 company scheme pensions and 46,000 pensions paid to retired civil servants. While many of these private pensions are small, they can make a real difference.

However, by the time today's 48-year-old arrives at retirement, the number getting any private pension at all will be very few, let alone pensions that are inflation-protected. Mainly, the few large pensions left will be paid to civil servants in the old Government Superannuation Fund that was closed to new entrants in 1991. Many of our politicians will have such pensions, or be otherwise protected and may not appreciate how life is for others.

The beauty of such an income stream, otherwise known as an annuity, is that it goes on for as long as the person lives. It is helpful for those who need expensive long-term care at the end of life and, while there is a transfer from those who die young to those who live the longest, this kind of sharing is needed to reduce the pressure of paying for the old away from the young.

In the past, employer pensions were either paid by the firm, or employees were required to use their accumulated saving from their super scheme to buy an annuity from an insurance company. These annuities were fixed in dollar terms and lost value over time.

Those in the Government Superannuation Fund could take up to a quarter of their superannuation as a lump sum, with the rest as an inflation-adjusted annuity. While capital had to be given up to buy an income stream, it was better than worrying about the future, scrimping and saving, and then maybe dying early, leaving unintended bequests.

Those days have long gone for Generation-X. What will today's 48-year-old do with her KiwiSaver when she reaches retirement in 2031? How will she make her nest egg last?

There are real problems with expecting the private sector to come up with credible annuity products. Not least is the almost total unfamiliarity of New Zealanders with the concept of annuities, and a deep suspicion of the financial sector.

Other countries have a greater tradition of turning retirement savings into income for life. Nevertheless, all is not well in these countries. A recent UK report was very critical of the kind of annuities that people have been forced to buy with their tax-subsidised retirement savings.

It is time we listened, learned and debated these issues.

With KiwiSaver, New Zealand has done two things right that put us potentially well ahead. First, the individual is in control of his or her KiwiSaver saving, not the employer. We have also cleared the way to have a much fairer system.

Instead of subsidising the build-up of funds, we could have a well-designed subsidy for those who turn their savings pots into a modest additional income stream. Let's call this annuity "KiwiSpend". It might be offered by KiwiSaver providers, but would have certain characteristics. It could be inflation-proofed, with low fees, the same capital cost for women and men, inclusive of long-term care insurance and regulated by the Financial Markets Authority (FMA).

KiwiSpend would need to be carefully underwritten by the State with subsidies to make it attractive enough to achieve the social objectives intended. It won't make the costs of the coming tsunami of the old any less, but it could provide more security for Generation X and begin to share the costs more fairly.

Associate Professor Susan St John is co-director of the University of Auckland Business School's Retirement Policy and Research Centre.