(March-2004) Moving mountains: Kiwi’s face tall order in retirement

The introduction late last year of a new subsidised State Sector Retirement Savings Scheme is the latest in a series of initiatives the New Zealand Labour Government is implementing to try to encourage employees to save for their own retirement. In New Zealand, unlike Australia, personal retirement savings are optional and, as such, the issue of how the country will cope when the first baby-boomers reach retirement age at the end of the decade is a pressing one.

Back to the future

In 2001, the New Zealand Superannuation Fund was set up to help build a pool of money to assist the Government to smooth the burgeoning costs of New Zealand’s state funded superannuation payments, which are neither means nor asset tested. The new Scheme (which comes three years after the launch of the New Zealand Superannuation Fund), is another landmark for superannuation in New Zealand, as the government attempts to tackle the impending problem. A plan of attack has been in motion for some time now, reversing the impact of some major changes to superannuation provision in New Zealand 10 to 15 years ago, which:

n removed tax incentives, so that superannuation savings received the same tax treatment as other financial products; and

n closed the Government Superannuation Fund, the savings vehicle encouraging government employees to save for their retirement, to new members in 1992.

The new State Sector Retirement Savings Scheme, which commences on July 1, 2004, follows the successful introduction of the Teachers Retirement Savings Scheme (TRSS) in 2002. Over 7500 of the country’s 24,000 primary school teachers have joined the TRSS, despite the fact that the level of employer support is initially only 1 per cent of members’ salaries, and then only if the teacher contributes a matching amount her/himself.

The TRSS is managed by the Global Retirement Trust (GRT) in association with Mercer. The GRT is a not-for-profit entity established by the State Services Commission in 1992, with the specific aim of encouraging state sector employees to save for their own retirement.

The GRT also has a role with the new State Sector Retirement Savings Scheme. An interesting feature of the new Scheme is that it will actually comprise four separate master trust schemes to which members can direct contributions. Offering four separate schemes is not only to provide choice to employees, but to encourage the four scheme providers to offer excellent value for money as they compete against each other. The Government hopes that a further 40,000 public sector employees will join the State Sector Retirement Savings Scheme and take advantage of the matching employer superannuation contributions (initially at 1.5 per cent of salary, plus tax, increasing to 3 per cent plus tax).

This substantial increase in Government-subsidised workplace-based superannuation is representative of the direction that the superannuation industry in New Zealand is taking. Workplace savings schemes in general are at last on the rise after 10 years of decline. Many companies now offer employees the chance to save via master trusts, increasingly at the expense of the traditional stand-alone company schemes. Master trusts are currently experiencing approximately double- digit growth per year.

In addition, technology is having a major impact on the extent and quality of services offered to members of workplace schemes. All these developments have one common goal — to ensure that New Zealand can provide for the financial security of all its residents in retirement.

Compounding this issue is the fact that New Zealanders are traditionally poor savers. It is with this challenge in mind that the Government is not only re-introducing state sector superannuation, but reducing some of the current disincentives to save for retirement.

Aiding the Government in its efforts is the Periodic Report Group 2003, which in late 2003 submitted a comprehensive review of the system of provision for retirement in New Zealand. In its report, the Group emphasised the fact that there is a window of opportunity in which to implement an effective strategy for public provision before the baby-boomers begin to claim New Zealand Superannuation in increasing numbers. As a result, we still have time to avert a potential problem — but only if the issue is handled appropriately.

The path forward

So how can New Zealand prepare itself for this impending increase in pressure on its fiscal resources?

Currently New Zealand has a two-tier system of retirement income provision — Tier One is New Zealand Super, a universal public pension funded from general taxation, which only provides retirees with enough money for the bare essentials. If the goal of a comfortable lifestyle for everyone is to be achieved, some form of voluntary savings — Tier Two — must also be embraced by the general population.

The ability of the master trust to effectively protect the needs of many employees is a central factor in this tier. Master trusts have rapidly gained popularity in the workplace in response to calls from members for more control over how their money is invested. This is largely a result of the fact that they enable members to select their own investment strategy from a variety of cost-effective options.

Recent advances in technology have added to the appeal of these trusts, many of which now offer sophisticated services to enhance the member experience. For example, Mercer in New Zealand has been able to leverage directly off the successful Mercer Super Trust in Australia and as such, is able to offer members similar technological services thanks to advanced administration systems.

Encouragingly, we have seen several large multinational employers re-establish superannuation savings vehicles in New Zealand in the last two years. If enough New Zealanders take advantage of both the government schemes and/or master trusts and growth continues, these schemes have the potential to go a long way to assist in relieving the imminent pressure on the country’s economy.

These schemes, however, will only achieve their objective if they are used. The idea of incentives for retirement savings has predictably proved popular with the public, with 63 per cent of people in a recent survey in favour of such incentives.

New Zealand’s current tax system does not intentionally offer incentives to any particular form of savings, but it does contain some disincentives for certain methods. These include inequities for some savers in superannuation funds and inequities for some savers with regard to employer contributions to super schemes.

The Periodic Report Group 2003 is in favour of removing any such disparities, but falls short of recommending a system including incentives, which they say may actually cause distorted savings and see the costs of such incentives outweighing the benefits. Generally, they say, tax incentives are not equitable and favour the better off, who do not really need them to start with.

Despite this, the Group recognises that such incentives could be used to signal the Government’s commitment to private provision and as such, suggests that if incentives were to be introduced, they should be confined to new savings and neutral products. They should also be designed to ensure that they are accessible to low and middle income savers and are closely monitored and reviewed regularly. At this time, the debate continues, with the major focus on removing disincentives.

Many people ask why New Zealand does not simply adopt the Australian approach to retirement income and make retirement savings compulsory. The idea of enforcing compulsory savings has been floated in New Zealand and a referendum was held in 1997 in which 80.3 per cent of eligible voters participated. A resounding 91.8 per cent voted against the idea, perhaps in part because a “yes” vote would not be supported by the major political parties. As a result, many people now believe that despite any advantages that compulsory super may offer New Zealanders, its overwhelming public condemnation means that it cannot be seen as a having a serious chance of being implemented in the near future.

The Periodic Report Group also looked at the idea of compulsory superannuation but rejected it, instead supporting the maintenance of the current voluntary regime.

It is clear that unless New Zealanders commence saving for their retirement in greater numbers and at a greater rate, many retirees will see a fall in their living standards in retirement.

The introduction of the new State Sector Retirement Scheme for state sector employees and the increasing popularity of workplace schemes, have great potential to help alleviate problems, especially as New Zealand still has several years before the full impact of the ageing population is felt. The schemes will only be of use, however, if people embrace them and assume responsibility for initiating their own additional retirement savings.

The possibility that the tax regime may be overhauled and some of the current disincentives to save are removed could also encourage more people to save.

Thus far, it is clear that the government is taking steps to attempt to intercept a potential problem. It is essentially now up to public and private sector employees to take action.

— Tim Jenkins is head of Mercer New Zealand