Friday, 09 Jan 2009

Lifting lid on alluring box of trinkets

By KRIS HALL - The Dominion Post | Sunday, 30 March 2008
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Come Tuesday, the "box of trinkets" offered to New Zealanders to entice them into the Government-subsidised KiwiSaver gets heavier.

On top of the $1000 kick-start payment and weekly tax breaks of up to $20, employers must start contributing. The top tax rate for most funds, meanwhile, drops from 33 to 30 per cent.

Employer contributions start at 1 per cent of pay, rising to 4 per cent from April 2011. For workers worried about affordability there is the "two-plus-two" regime, in which employers and employees meet half way to make up the minimum employee contribution of 4 per cent.

Add to this mortgage diversions and first-home subsidies schemes and "it's no wonder people are signing up in their thousands", says ING chief executive Marc Lieberman.

But KiwiSaver has not been without its challenges. Some experts say the system is undermined by complexity and a lack of transparency over fees.

"What we need is transparent and accurate fee data, simple consumer and tax information, and a standard industry approach.

"Without these, consumers are at a risk of receiving information and advice that's inappropriate and blatantly incorrect," says Mercer New Zealand head Bernie O'Brien.

Tales of woe about the failure of Inland Revenue - the processing house for contributions - to transfer money to scheme providers have also triggered debate.

For people to have confidence in KiwiSaver as a viable retirement savings scheme, Inland Revenue "needs to prove it can perform its functions accurately", says Association of Superannuation Funds of New Zealand executive director Bruce Kerr.

Employers & Manufacturers Association (Northern) chief executive Alasdair Thompson has highlighted confusion over matters such as compliance dates, automatic staff enrolments and income tax credits - the latter corrected by the Government on Thursday.

Experts, however, insist that given the time constraints and legislative tweaking by the Government, Inland Revenue has "performed miracles".

"Starting up KiwiSaver has been the equivalent of setting up a major retail bank in New Zealand," says Tower Investments chief executive Sam Stubbs.

"If you started a business from zero and in eight months' time you had 500,000 customers you'd expect there to be teething problems."

Fisher Funds managing director Carmel Fisher says: "Administrative inefficiencies have encouraged savers to focus on the wrong aspects of KiwiSaver. Money disappearing from accounts, for example, is always unsettling for people, particularly when the markets started to be a bit jittery. People like to know exactly where their dollars are."

The timing of KiwiSaver's launch, too, has come under scrutiny as consumers nervously watch global markets nose-dive.

But Mr Lieberman says: "What's going on today should play a relatively little role in the ultimate value of a KiwiSaver account years down the road. If anything it reinforces the need for people to be well diversified."

AMP Capital Investors head of investment strategy Leo Krippner toasts recent market failures as the "silver lining on the KiwiSaver cloud".

"People are not losing money. If they look at the return on their own contribution they're already well ahead simply because they got a $1000 kick-start.

"They'll shortly start receiving employer contributions and tax credits. They're well ahead regardless of what sharemarkets have done."

A more worrying byproduct of KiwiSaver, economists at Waikato University Management School say, will be widening social inequality.

Research headed by Professor John Gibson suggests generous tax incentives are weighted in favour of higher earners because tax exemptions on employer contributions are not capped in dollar terms.

He also says member contributions are funded by "reshuffling saving and debt rather than by reducing consumption spending".

"Excessive" consumer choice has come in for criticism; 50 registered funds are available.

But Mr Lieberman says: "If you look at the published numbers in terms of dollars in plans, as of December 31 we were No 1 at around $61 million. By the time you got to No 10 you were down to $1 million and change.

"There will be a natural attrition over the next two or three years. You'll see a lot of providers, who got into KiwiSaver because it seemed like the thing to do, realise it's not going to be a core business for them."

This is good news for consumers, he says. It signals a move toward retaining members with more polished and ultimately cheaper products.

Brook Asset Management managing director Mark Brighouse is excited by the next phase of KiwiSaver, as a streamlined industry focuses more on investment strategy.

"Up till now it's been about membership, but as balances grow things will get much more interesting."

Nearly $600 million of Kiwis' cash had successfully flowed through to KiwiSaver schemes by the end of February. Finance Minister Michael Cullen puts the amount closer to $1 billion.

"That comes through with a three-month lag," says Mr Krippner. "It wouldn't be a surprise to see a flow into the industry for the first year of about $1.5 billion."

An excellent start to a savings scheme that began from scratch last July. But does that make KiwiSaver a milestone for changing the savings behaviour of New Zealanders?

A quick look at the alternative, New Zealand's superannuation industry - worth $18.2 billion according to the government actuary - shows a rapid downturn in employer-based schemes.

"It's safe to say the [retirement savings] landscape prior to KiwiSaver was pretty bleak," Mr Kerr says.

"KiwiSaver is a positive move towards improving retirement savings for most New Zealanders. Sure, it's very much a tax-saver's retirement savings approach but that should not detract from the success."

Retirement Commissioner Diana Crossan says: "It's not for everybody, it's just another product, but it's a big [product] and it's got a lot of incentives and that's important if you're trying to encourage saving."

Mr Stubbs is more zealous. "It's the greatest thing that's happened to savings alternatives for New Zealanders in my lifetime."

It remains to be seen whether National agrees.

ADDING UP:

- KiwiSaver membership breached 500,000 this week, far outstripping Government estimates of 494,000 by the end of June.

- More than 110,000 people aged under 25 have signed up.

- There are 50 registered KiwiSaver funds.

- Businesses with fewer than 100 staff account for 95 per cent of KiwiSaver members, according to Inland Revenue.

- New Zealand superannuation industry is worth about $18.2 billion with $11.5 billion in employer-sponsored schemes and $6.7 billion in retail schemes, according to government actuary.

- Average amount of assets in employer-based schemes is $37,594 and $20,126 for retail.

- Number of employer-based schemes fell from 2863 in 1990 to 590 at the end of 2005.  


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