KiwiSaver: a model scheme?

AuthorO'Connell, Alison
PositionReport

Abstract

KiwiSaver is the world's first national auto-enrolment savings scheme. So far only one other country--the United Kingdom--has committed to auto-enrolment on a national scale. Both schemes aim to increase the number of people saving for retirement, and they share many design features. However, there are significant differences in the way the schemes are delivered, with implications for the levels of choice, risk and cost for savers and government. The United Kingdom's personal accounts scheme, sizeable though it is, is only part of a complicated private savings landscape, whereas KiwiSaver is fast becoming the predominant vehicle for retirement saving in New Zealand. It offers a working model for countries seeking to create a simple and unified national scheme for lifetime saving.

INTRODUCTION

KiwiSaver has transformed savings in New Zealand. It started on l July 2007, and at the end of June 2009 had over 1.1 million members (Inland Revenue 2009b). Membership is expected to plateau in 2012 at 1.4 million (Inland Revenue 2009a).

KiwiSaver contains several innovative features, the main one being auto-enrolment, sometimes called "soft compulsion". Workers are enrolled automatically into saving and can choose to opt out if they wish, but if they stay in the scheme the employer is compelled to contribute.

Auto-enrolment captures some learning from behavioural economics (see, for example, Madrian and Shea 2001): people have high inertia in relation to saving so are more likely to stay in a savings scheme into which they have been enrolled automatically than make the effort to join it themselves. Although auto-enrolment is used in some employer-based savings schemes in the United States, KiwiSaver is the world's first auto-enrolment scheme on a national scale. The United Kingdom (UK) has also committed to national auto-enrolment with compulsory employer contributions, and to a new scheme called personal accounts (PAs). The first UK proposals were made a year after KiwiSaver began to be discussed (Pensions Commission 2005), and the start date is planned to be in 2012.

This paper compares these two schemes. It begins with a discussion of the important points of policy context in both countries. It then explains the differences between KiwiSaver and auto-enrolment plans in the UK, in terms of the areas of the markets the schemes cover, and the delivery model used or planned. Next it discusses the policy choices made in each case on what have emerged as the important dimensions: level of investment and provider choice for the saver and levels of risk and cost for both government and saver. The two schemes have taken different positions on these aspects. This paper argues that KiwiSaver encourages more choice and is less risky, although the jury is out on whether it is higher cost. Finally, the paper considers whether KiwiSaver would be a good model for other countries.

Table 1 briefly compares some features of auto-enrolment in the two countries. This paper focuses on the different delivery models, and so there are many points of detail in both KiwiSaver and the UK schemes that are inevitably not covered here. Readers who wish to know more are referred to www.kiwisaver.govt.nz and the relevant UK government publications (Department for Work and Pensions 2006, 2007).

A word on terminology: KiwiSaver is a defined contribution retirement savings product. (2) Although money saved can be taken out before age 65 in specific circumstances, and can be taken out at age 65 by someone in work or not, the money saved is intended to be used primarily in retirement. This is the same as for PAs, although UK tax rules make saving for retirement liable to compulsory annuitisation. It is therefore natural to call PAs a pension scheme. This is one of many environmental differences between KiwiSaver and PAs, which should not distract from the overall comparison between the two.

RETIREMENT INCOME POLICY CONTEXT: UK AND NEW ZEALAND

The only two countries in the world--so far--to plan an auto-enrolment savings scheme both did so to extend the number of people saving for retirement. However, the policy developments were aimed at different perceptions of the problem (O'Connell 2006). In both countries active membership of workplace pension or superannuation schemes has been falling. But in 2006, before KiwiSaver, the proportion of working-age New Zealanders making some kind of retirement saving above the public pension (3) was around half the 40% achieved in the UK. (4) The rationale for KiwiSaver in New Zealand was part micro-economic--getting households into the habit of saving was good for the individuals concerned--and part macro-economic--national savings would improve and local capital markets would develop.

The UK already has huge and well-developed capital markets, and any possible macroeconomic benefit of a new savings product has not been part of the debate. The UK problem was seen to be that while some people are saving "enough", large numbers are saving nothing or not enough to make up for the poor public pensions. This was characterised as a problem of access to good savings schemes through the workplace, and so the new personal accounts scheme (PAs) is targeted at those workers whose employers do not already offer a pension scheme.

Following the first proposals by the Pensions Commission in 2005, the Pensions Act 2008 outlined the way in which auto-enrolment will work and formally gave the Personal Accounts Delivery Authority (PADA) executive powers to deliver PAs. So while the outline of the plan has been widely discussed, many details are still being worked on before launch in 2012.

We can already see the extraordinary progress of KiwiSaver. The Inland Revenue's Evaluation Services report (2008a) on KiwiSaver's first full year (5) showed that membership had reached 22% of the eligible population. This size of membership was previously forecast to be reached in 2011. By the end of June 2009 membership had grown further to reach around one-third of the eligible population (Inland Revenue 2009b).

A survey of employers with pre-existing workplace schemes found that most members stayed in those schemes on the introduction of KiwiSaver (Inland Revenue 2008a:34). This means that KiwiSaver members include many people who have not previously saved for their retirement in designated schemes. The total proportion of people saving for their retirement in New Zealand is therefore higher than the one-third of those eligible for KiwiSaver. This is high by international benchmarks. Consider the UK: membership of defined benefit schemes has been reducing fast, until they are now mainly limited to the public sector and very large private companies. The highly incentivised defined contribution market is well developed since major reforms two decades ago, but KiwiSaver has taken less than a year to exceed the proportion of working-age people currently in defined contribution pensions in the UK. (6)

months of the scheme starting said that incentives and design features played a part in choosing to join KiwiSaver (Inland Revenue 2008b:21). At that time, the incentives for members were more generous than those shown in Table 1, with an additional fee subsidy of $20 every six months (as well as other differences in minimum level of contribution and employer incentives). KiwiSaver incentives, generous compared to the previous lack of incentives for saving in New Zealand, were probably worth less for each saver than UK pension incentives at the time. (7) However, given the complexities of the UK's tax relief system, KiwiSaver's matching contributions may seem more tangible and easier to understand (and are less regressive).

Incentives do not appear to be the whole story, though. For over 60% of members in the six-month survey, "saving for retirement" was the main reason for joining (Inland Revenue 2008b:21). In other words, the availability of a simple retirement savings product, with lock-in to age 65, has proved attractive in its own right. Auto-enrolment is obviously proving effective at starting people saving, and generic KiwiSaver brand and provider-specific marketing must be helping. KiwiSaver provides a lesson in how attractive a simple and easily accessible private retirement savings product can be. That lesson has...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT