Piggy puts Nats in a stew

With half a million members and close to $1 billion in accounts, KiwiSaver's early success is leaving National with a policy headache

Fairfax

PIGGY BANK: With half a million members and close to $1 billion in accounts, KiwiSaver's early success is leaving National with a policy headache.

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It's an offer Kiwis are finding hard to refuse. You put aside four cents in every dollar from your before-tax pay and the Government matches it with a tax break to a maximum of $20 a week.

For a worker on $26,000 a year, that means saving $20 a week and getting the same from the Government - a guaranteed 100 per cent return.

Throw in the fact that the Government also hands over $1000 to kickstart savings, and employers start making contributions from April 1, and it is hardly surprising KiwiSaver has proved more popular than even Finance Minister Michael Cullen dared predict.

When the scheme went live on July 1, it was estimated only 276,000 people would enrol in the first year as Kiwi workers - not the world's greatest savers, programmed to put their money into houses and used to a relatively generous state pension - took time to warm to the idea of saving for retirement.

Eight months later, those predictions have been blown out of the water with confirmed enrolments expected to top 500,000 within days. So far, nearly $1 billion is held in KiwiSaver accounts - a figure that will rise exponentially as employer contributions move toward 4 per cent by 2011 and interest builds.

Even more surprising is the uptake among young people, with one in four of those in the scheme under 25. Of those, more than 75,000 are workers aged 18 to 25.

A survey out this month also indicates that, after an initial surge of well-heeled enrolments, Kiwisaver is spreading across income groups, helped by new members now mostly coming from automatic enrolments. That has been aided by a much lower than expected level of opt-outs - about half, instead of the estimated 83 per cent.

Though those in the scheme are still more likely to earn more than those who are not, an indicative survey shows 18 per cent of members have household incomes below $30,000 and 28 per cent have incomes of $30,000 to $50,000.

Given that the average wage is about $45,000, that suggests predictions that only those on the highest salaries would embrace the scheme have failed to eventuate, though affordability is easily the most common reason cited for opting out.

With such an unexpectedly successful start, then, the heat is coming on National to say whether it will keep KiwiSaver in its present form, tinker around the edges or return to the original version, which had the $1000 kickstart but not the weekly tax breaks and only optional employer contributions.

National has always said it supported KiwiSaver "Mark I" (though it voted against the legislation), and finance spokesman Bill English finally revealed last week that it would keep some government subsidy. But he will not say whether that means keeping the maximum $20 a week tax credits (paid at the end of each year) or just the $1000 kickstart. National is also yet to decide on the all-important issue of employer contributions and whether they will remain compulsory.

The question was on the lips of investment advisers, superannuation fund managers and others at a retirement savings conference in Wellington last week, but Mr English insisted National would not be pressured into revealing its plans before it was ready.

Rather, the party was looking to slot KiwiSaver into its broader economic policy, seeing where it fitted with plans around taxation and investment.

"If you've got a scheme that's successful, that's not a problem, that's a good thing - but we're looking at it and seeing how it's worked and we'll announce our policy closer to the election.

"We're looking at all aspects of it to see where it can be improved to make it work better," he said. He told the conference that National's main objective with KiwiSaver, however, would be to ensure it was well designed and operating in an investor-friendly environment, a factor highlighted by recent turmoil in world markets.

"I've always had a strong view that having a savings scheme without a decent investment environment is like having a car with no petrol ... events of the last couple of months have reminded us all about risk after perhaps seven or eight years where we all decided it had gone away and we were in some kind of new era."

National was also sceptical about whether the initial sign-up would be sustained as members faced resetting mortgages at 1 per cent or 2 per cent higher than now. That could see many take contribution holidays.

There was also an issue about the level of understanding of members - who may jump at the free money from the Government without fully realising their hard-earned cash is being invested in an environment where it can be lost as quickly as made.

"There's absolutely no doubt as to why so many New Zealanders have signed up to KiwiSaver, because the returns [from the Government] are absolutely magnificent. You put in $2000 and have $5000 at the end of the year - it's pretty hard to beat 250 per cent ..."

It is likely the amount of Government cash going into KiwiSaver is a major factor in National's thinking as it prepares to promise big tax cuts.

The extra numbers already in KiwiSaver are likely to be costing $4.5 million a week more than expected - not including the $20 a week tax credits to cover employer contributions, which start from April 1 - though over time the cost will align with initial projections.

With cash available for tax cuts already tight, National will be carefully weighing what people are getting from the Government through KiwiSaver and what it can replace with tax cuts if it tinkers with subsidies.

One factor in its favour is that only about a quarter of the workforce is in KiwiSaver - but its hand could be forced if present enrolment rates continue and closer to one million are in by election day.

SAVING FOR A FUTURE

What is Kiwisaver?

A government-subsidised scheme to encourage retirement savings, but can also be used to buy a first home.

Workers can choose their own scheme, one offered by their company or one of several government "default" schemes.

The Government provides a one-off $1000 kickstart and, for members over 18, dollar-for-dollar tax credits worth up to $20 a week.

Members in work must put aside either 4 per cent or 8 per cent of their pay and, from April 1, employers must contribute a further 1 per cent, rising to 4 per cent by 2011. Employers get a government subsidy of up to $20 a week to cover their contributions.

Workers who struggle to put aside the minimum 4 per cent of their salary can ask their employer to help stage their contributions.

This means each pays 2 per cent till March 31, 2010, rising to 3 per cent then 4 per cent each by 2011.

Members are normally tied into KiwiSaver till they reach retirement age (65) unless they are automatically enrolled and use the opt-out provisions (see below). Members who find it difficult to pay contributions because of changed circumstances can apply for a contributions holiday after a year in the scheme or sooner in cases of financial hardship.

Who can join?

Any New Zealand citizen, or permanent resident, who normally resides in New Zealand and is under the age of 65.

How do you join?

Since July 1 last year, every person who changed jobs or entered or re-entered the workforce has been automatically enrolled in KiwiSaver.

People enrolled in this way must stay in the scheme for at least the first two weeks then have till the end of their eighth week to opt out, at which point the cash they have paid in - but not the government subsidies or employer contributions - is returned.

Anyone else can join KiwiSaver at any time.

What can the money be used for and when is it available?

The main focus of KiwiSaver is to encourage people to put aside money toward their retirement, meaning it cannot be drawn till the age of 65, in most cases.

Members can also withdraw some or all of their contributions and those from their employer (but not the government kickstart and tax credits) to buy their first home once they have been in the scheme for three years.

Members buying a first home could also be eligible for a deposit grant of up to $5000, subject to meeting income provisions and if they are buying a lower-priced home ($400,000 for more expensive areas such as Auckland and $300,000 elsewhere).

Members may also be able to split their contributions so that half the amount they put in (but not the employer contributions or tax credits) goes toward repaying their mortgage (mortgage diversion).

Diverted contributions do not qualify for tax credits, and not all scheme providers offer it.

HOW IT WORKS

The basics

Tyson and partner Alisha are both 26 and each earn $45,000. They each need a lump sum of $188,808 when they retire to ensure an income of 70 per cent of their earnings once the couple's rate of National Superannuation is taken into account. They decide to join KiwiSaver and put aside the minimum 4 per cent of their gross pay. If they do not take a contribution holiday because of hardship, or divert payments to a future mortgage, each will have $342,184 by retirement age (currently 65) including government subsidies and employer contributions.

Buying a first home

Five years after joining KiwiSaver, Tyson and Alisha want to buy their first home, but struggle to save a deposit so decide to use some of their savings. They can withdraw all of their contributions plus those from their employers (but not the government subsidies and tax credits) toward their deposit. As they have a combined income of less than $100,000 and are buying a home within the allowable range, they also qualify for a deposit subsidy, worth $1000 a person a year for a maximum of five years. Thus they receive $10,000 toward their deposit.

Mortgage diversion

Three years after moving into their home, Tyson and Alisha reset their mortgage and find that higher interest rates mean their repayments increase by $40 a week. They decide to use the mortgage diversion provisions of KiwiSaver to channel half their contributions (but not the tax credits or employer contributions) to their mortgage. As they are each paying $35 a week into KiwiSaver, this allows them to divert $17.50 a week each.

Contribution holiday

A few months later, they are still struggling to make ends meet, so apply for a contribution holiday. This allows them to suspend their KiwiSaver payments for between three months and five years, but also means their employers stop paying for that period and they lose tax credits. After two years, they are back on their feet and resume contributions (as do the government and employers).

Sources: The Government's KiwiSaver website (kiwisaver.govt.nz) and the Retirement Commission (sorted.co.nz). Case studies do not assume pay rises, which would increase contributions.

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