To help understand how auto-enrolment may evolve in the UK, here are some insights into New Zealand’s KiwiSaver – the world’s first auto-enrolment opt-out national savings scheme.
Auto-enrolment in the UK has been a success since its introduction in 2012. But more must be done to help people save for a financially secure and fulfilling retirement. Inequalities and challenges persist that need to be addressed in the next 10 years.
To help understand how auto-enrolment may evolve in the UK, Standard Life spoke to two leading experts on KiwiSaver: Susan St John, Honorary Associate Professor at the University of Auckland; and Dr. Claire Dale, Research Fellow at the University of Auckland’s Pensions and Intergenerational Hub, Economic Policy Centre.
In 2005, a lack of household savings and poor economic performance was seen as a problem in New Zealand. The Prime Minister and Finance Minister drove the speedy introduction of KiwiSaver by 2007.
KiwiSaver members now number 3.25 million (from a total population of a slightly over five million), with a total fund value of $93.7 billion (as of 31 March 2023).
Below is a summary of some of KiwiSaver’s key features and the factors behind its success.
Strong and simple framework
KiwiSaver’s main strength lies in its framework. KiwiSaver works alongside the pay-as-you-earn tax system. The Inland Revenue Department (IRD) acts as the clearinghouse and receives employer and employee contributions along with PAYE tax from employers, which makes management of the system easy for employers.
The IRD then sends these contributions to the individual’s chosen KiwiSaver provider.
This system means that when someone changes job, their KiwiSaver pot goes with them. The concept of lost pension pots is therefore not a problem in New Zealand.
In addition, the Financial Markets Authority (FMA) acts as an oversight agency – encouraging lower fees and managing the mergers and exits of the providers.
KiwiSaver members can only have one provider at a time, although they can change provider and investment mix. You don’t have to be employed to join KiwiSaver, so very few people are excluded from the scheme.
Opting out has been made difficult: any time a person changes jobs, they’re opted in again.
Another factor in KiwiSaver’s success is the branding. New Zealanders are used to KiwiBank and KiwiRail, and so it was easy to identify with KiwiSaver.
Just before KiwiSaver was launched in 2007, there was a surprise announcement that there would be a compulsory employer contribution, starting at 1% in 2008.
Cleverly, the government offset this change by introducing an employer tax credit and a member tax credit. Employers had already been relieved of the potential nightmare of administration by knowing that the scheme would be managed by the IRD.
Initially, KiwiSaver was generous to members but expensive for the government, because it offered subsidies – including a $1,000 kickstart to new members, even for children.
Over the next years, however, the government gradually withdrew these subsidies, while continuing promotion and public education around KiwiSaver and retirement saving. By 2015, even the $1,000 kickstart had been removed.
Today, only the first $20 per week of KiwiSaver contribution is subsidised (by 50%). This treatment aligns with the very different tax treatment of pension superannuation compared to the UK. In New Zealand, contribution is out of after-taxed money, and the earnings in the fund are fully taxed, but the capital sum is not taxed at the other end.
However, the danger of subsidising only the first $20 contribution a week is that some people may think this is enough to provide a comfortable income in retirement.
Another downside is that rental housing income remains favourably treated for tax purposes compared to saving. Sadly, New Zealand has had a very damaging housing boom. With no capital gains tax payable, rental properties are often seen as the best way to secure a steady income pre- and post-retirement. But, of course, compared to KiwiSaver, a rental property may become much more complex to manage as a person ages.
An incentive may make a difference to some. Kickstart was a good way of getting people into KiwiSaver, and it's a shame it's been abolished.
Education and engagement
Another factor in KiwiSaver’s success has been a focus on financial education. The Retirement Commission was established in 1993. Nowadays, its role is seen as primarily leading the National Strategy for Financial Capability.
For example, the Retirement Commission celebrates Money Month nationally. During this month, financial organisations – budget advisors, financial advisors, banks and so on – promote ways to get people talking and thinking more about financial management and literacy.
Money Month has also grown within schools. For example, the National Strategy for Financial Capability Partners this year produced a card game, called Money Mission, which is promoted in schools.
The Retirement Commission also reports to the Minister of Commerce every three years on retirement income policies and recommends improvements to the government. Sometimes it seems no notice is taken of the report. Nevertheless, this report enables the Retirement Commissioner to call attention to important issues relating to retirement and older age groups.
For example, in New Zealand, like in the UK, the saving contribution rates are insufficient to generate enough income at retirement for most people to live the lifestyle they would like. In New Zealand, the contribution rates are: 3% employee, 3% employer.
The Retirement Commissioner’s recommendation, in one report, that people be allowed to opt for a higher rate of 4%, 6%, 8%, or 10%, was adopted. It didn't require the employer to match these rates, but this optional higher employee contribution rate still introduced more flexibility into the scheme. So far, the take-up of these higher rates is not great. But, in time, it's something that's bound to be quite important for many savers.
In addition to Money Month, in June the FMA runs an annual campaign to encourage KiwiSaver members to check their statements to see if they're happy with the amount they're projected to have at age 65. Members are also encouraged to consider whether they can afford to contribute more, whether they're getting good value from their provider, or perhaps need to look at a different fund. This statement is sent to every KiwiSaver member and is a valuable wake-up call.
In KiwiSaver, you've got the flexibility to use the money for housing purposes, or hardship. After contributing to KiwiSaver for at least three years you can access all your pension pot, apart from $1,000, for a first-home purchase. You might also be eligible for a first-home grant from the government.
In the 2022–2023 financial year, $1.2 billion was withdrawn from KiwiSaver accounts for housing, while the government contributed $26 million in first-home grants. Over the same period, only $100 million was withdrawn for financial hardship.
While home deposit withdrawal is depleting KiwiSaver accounts, home ownership is an important part of most people’s retirement package in New Zealand.
A growing concern is the increasing number of people who are retiring in New Zealand without their own home. So this flexibility in KiwiSaver makes sense. It also makes the scheme more attractive to young people, who may otherwise feel that they’re tying up their money for a very long time.
That said, there is a danger that KiwiSaver could be seen as a honeypot for whenever a politician wants to announce some eye-catching policy.
For example, recently the Opposition came up with a pre-election policy that would allow some people trying to get into the rental market to draw down their KiwiSaver to pay the bond required to rent a property. This is an expense, not an investment. It's been quite widely criticised as the thin end of the wedge.
Room for improvement
Despite its success, KiwiSaver could still be improved. It is based on paid employment, which fundamentally doesn't work as well for many women whose incomes, on average, are much lower than men's. Māori and Pasifika also lag behind, because they're disproportionately represented in the low-income groups.
There’s a lot that could be done to help these groups. For example, when somebody goes on a savings suspension because they can't afford the 3% KiwiSaver contribution, the employer could still be required to contribute 3%. Otherwise, that person effectively loses 3% of their wage.
And New Zealand has completely dropped the ball with what happens at retirement.
KiwiSaver is a lump-sum scheme. Although there are drawdown products, there are no annuity options. There is not a strong tradition of annuities in New Zealand, and when the tax arrangements were changed, the remaining private annuities soon disappeared completely.
But this problem of money and income management in retirement doesn't go away. There is insufficient longevity protection, particularly for middle-income people who come into retirement with, say, $100,000, or $200,000. They have to manage that money for what might be a very uncertain length of time in retirement, plus they have the possibility of very expensive residential-age-care at the end of life.
Ideally, more attention would be paid to possible solutions to longevity risk. For example, there could be a tax-sweetened, inflation-adjusted, modest-level Kiwi annuity. It couldn’t be compulsory, but if it was fair and appealing in some ways, and underpinned by the state, it could prove to be very attractive.
Advice for the UK
When asked to provide any final advice to the UK, Susan St John and Claire Dale said, “Ultimately, our advice to the UK would be to try and make its auto-enrolment scheme as inclusive as possible. Talk about it. Reduce any barriers to bringing people in, and make pension schemes relevant, not just for today, but also for all the various future workforce patterns that we're likely to see.”
For discussion on how the UK pensions system may change evolve:
- Listen to our podcast on What the UK can learn about auto-enrolment from New Zealand
- Or listen to our podcast on What the Australian pensions system tells us about future reform in the UK
- Or watch our video on Challenges facing the UK pension system: is it time for a new review?