What are the merits of allowing pension withdrawals for home ownership, how do you optimise member engagement, and do you really need tax incentives to encourage people to save for retirement? Find out in our discussion with Susan St John, Honorary Associate Professor, and Claire Dale, Research Fellow, both from University of Auckland.
Sangita Chawla: Hello. I'm Sangita Chawla, Chief Marketing Officer at Standard Life. Today I'm excited to have with me two guest speakers, Susan St John and Claire Dale. Susan is an Honorary Associate Professor at the University of Auckland, and Claire is a Research Fellow at the University of Auckland's Retirement Policy and Research Centre. Today, Susan, Claire and I are going to discuss what the UK can learn from New Zealand about auto-enrolment. New Zealand's pension scheme, KiwiSaver, has been operating since July 2007.
Susan and Claire, as two leading experts on KiwiSaver, hello and welcome to Thinking Forward.
Susan St John: Greetings.
Claire Dale: Hi.
Sangita Chawla: Lovely to have you both here. Well, as you both know, in the UK, auto-enrolment has been hailed as a hugely successful initiative, and it was introduced in 2012, so we're much younger than you. It's brilliant to have you here on board to learn about all the things that you have experienced over in New Zealand. One of the things that we have noticed is a real increase in participation rates. Before auto-enrolment came on board, only 47% of people were contributing to a workplace pension. Now that figure is over 80%, which represents over 12.5 million people, which I think is a fabulous position to start from.
Obviously, there is so much more to do, and in the UK, we have constant conversations about whether this is enough, whether people should be contributing more, whether the scheme is inclusive enough. All these different things are top of mind at the moment. Before we get into any real detail on that, Claire, can I hand over to you, and perhaps you can give us a bit of history about the New Zealand KiwiSaver scheme, and how it's evolved over the last 15-odd years?
Claire Dale: Okay, thanks, Sangita Chawla. We're quite proud, well, I certainly am proud of KiwiSaver. It was the world's first auto-enrolment opt-out national savings scheme. Interestingly, announced in 2005 and introduced only two years later in 2007. It was supposedly a solution to lack of household savings and poor economic performance as a result of the lack of savings. It does sit alongside a quite different pension scheme that we have in New Zealand to what you have in the UK. New Zealand's superannuation is universal, it's not means-tested, and it's a pay-as-you-go age pension taxed as income.
KiwiSaver is administered by the Inland Revenue Department, working along the same lines as the pay-as-you-earn tax system, so collecting employer and employee contributions, which makes it very easy for employers. That's been a real advantage. KiwiSaver's members can only have one provider at any time, although they can easily change provider and investment mix.
The thing we'll talk about later is that the design allows access for a first-home deposit, so it's not exclusively for retirement saving, and very few people are excluded from becoming KiwiSavers. You don't have to be employed to join KiwiSaver. Initially, the government offered subsidies, including a $1,000 kickstart even for the children to new members, and just before the KiwiSaver was launched in 2007, the surprise was that there was going to be a compulsory employer contribution, only at 1% starting in 2008. That was the surprise announcement. However, four years after KiwiSaver was introduced, membership had reached 44% of the eligible population under age 65, and 65% of those members had chosen to opt in. A little bit of background. We'll cover off more of that, but that's the starting point.
Sangita Chawla: Excellent. It seems like the participation rates have been similar to what we're seeing then in the UK over that similar timeline, and of course, obviously, you've been going for so much longer. I guess if I was to think around, what do you think has made it so successful? We obviously, as I mentioned, have a few views of our own of why we think it's been successful here in the UK for our auto-enrolment scheme, but in New Zealand, what do you think has made it a success?
Perhaps, Susan, if I invite you in at this stage.
Susan St John: Yes, well, it has been successful, and one of the things was, as Claire mentioned, it was introduced very swiftly. We didn't muck around as they have in Ireland for a decade. We are pretty young still, at 16 years, so it's not fully mature yet, but when I think about the structure of it, the framework of KiwiSaver, that's where its strength lies. The individual KiwiSaver is at the heart of it. They have their own KiwiSaver, and we have the advantage that isn't enjoyed in the UK so much in having the inland revenue as the clearinghouse. The employer contributions all go off to the clearinghouse, the IRD, who sends them off to the individual's chosen provider, and the individual can deal directly with their own provider as well.
The advantage of this framework is that when the KiwiSaver changes job or leaves work and goes and does something else and comes back later, their pot goes with them. The concept of having missing pots is not one that we have to worry about in New Zealand. We also have the Financial Markets Authority, who act as an oversight agency, and operate to encourage lowering of fees and understanding of the schemes and manage the mergers and the exits of the providers. That's all part of a very good framework.
There's another aspect that I'd like to mention as well, and that is the branding. Calling it KiwiSaver was pretty clever right from the beginning. We're all used to KiwiBank and KiwiRail in New Zealand, and so it was easy to identify with it. KiwiSaver is quite generic. I think that's been part of its acceptance, wide acceptance. As Claire's mentioned, we have very wide coverage of our population, not everyone is contributing, but it's something that people know about, they're proud of, they talk about more. It's a very simple framework that allows for growing financial literacy. Although our average KiwiSaver balances are low, it's still something that we are building on, and over time, I'm sure will grow and be even more successful.
Sangita Chawla: Thank you, Susan.
We have a much more complicated regulatory framework, as I'm sure you know as well. It sounds like you've got something simpler. Then third of all, you've got a very simple naming convention, KiwiSaver. It's one name, everybody identifies with that. It feels like there's quite a lot of heritage and sort of warm feeling around that because it's called Kiwi. Of course, we don't have anything like that in the UK. We have the word pension, and then we have all sorts of different things that work around it, and numbers of acronyms. We make it a lot harder than you've come up with in New Zealand. I think that's obviously one for us to think around.
Claire, can I invite you into, have you got any thoughts as well from your perspective?
Claire Dale: Some of the other areas around it, around the introduction of KiwiSaver, have been a focus on financial education for the public. Talk out of order a wee bit here, but financial capability, financial literacy. It's even taken into Money Month as very much a big thing in schools as well.
For example, the National Strategy for Financial Capability Partners have come up with a card game that's being promoted in schools called Money Mission. It's very, very engaging and community widespread focus on financial literacy, which is quite extraordinary for a country that doesn't talk about money. That's been major, and driving that has been the Retirement Commission. The responsibilities, the initial aim of the Retirement Commission was to improve the financial futures of New Zealanders toward better retirement. Established initially in '93, but the role has grown over that time. Focus was initially on around retirement villages, getting some legislation and protection around retirement villages.
Now the role is seen as primarily leading and coordinating the National Strategy for Financial Capability to improve the financial capability of New Zealanders. To that end, also reviewing and reporting to the Minister of Commerce every three years on retirement income policies implemented by government. Sometimes it seems no notice is taken of the report, but that critical report is produced every three years, and then around retirement villages legislation. The fact is that a Retirement Commissioner can call attention to the issues around retirement and what is happening with older ages, and validate that attention with research. It's a valuable role.
Sangita Chawla: It sounds like the Retirement Commissioner plays a valuable role, like you're saying.
Claire Dale: Indeed.
Sangita Chawla: It's not something that we have in the UK. Susan, is there anything, from your perspective, that you've enjoyed or at least been welcomed from the Retirement Commissioner's perspective?
Susan St John: Well, thinking about the three yearly review where quite a number of recommendations are made, and as Claire has said, sometimes, of course, they're ignored completely, I just thought it might be interesting to have one example. Because we know that in New Zealand, just as you know in the UK, that the contribution rates, in our case, 3% employee, 3% employer, are not sufficient to generate sufficient capital on retirement for most people. The Retirement Commissioner, in one of her reports, recommended that the KiwiSaver be allowed to opt for a higher rate, 4%, 6%, 8%, 10%. It didn't require that the employer had to match that. Nevertheless, it's something that's introduced a bit more flexibility into the scheme. While it looks like the take-up of higher rates is not tremendous yet, as time goes on with financial education, it's something that's bound to be quite important.
Sangita Chawla: Yes, and contribution rates is very topical in the UK as well. I think we are sympathetic, saying the same, that essentially, we have 5% employee, 3% employer, but that total, 8%, is also still not enough. We are looking at how we can maybe get people towards the 12% rate, but, of course, with cost of living and all the macroeconomic environment, that's not really a very palatable conversation to be having right now.
We don't have, really, a Retirement Commissioner per se. We don't have that sort of role in the UK. Has there always been that role in New Zealand, or is that something that's been introduced more recently?
Susan St John: No, no, it's been ongoing. The legislation was initially passed in 1993.
Sangita Chawla: Oh, so it's been a long time, right? That's something longer than the KiwiSaver.
Susan St John: Yes, we had an accord on superannuation policy between our warring political parties. We had peace in our time for some years under that accord. Arising out of that, we have the Retirement Commissioner's role and the independent reviews.
Sangita Chawla: Excellent, excellent. You mentioned Money Month, and I think we do something quite similar. We have Pension Awareness Week, and then we have a month that sounds around that in September, October time. We do pension awareness campaigning as an industry. That's certainly something that we saw last year gain a lot of traction. I don't think we've not gone as far as involving schools to the same extent, I don't believe, as you have. Although there is much more conversation around, when should we get people actually interested and educated on this whole subject of finances, and whether you bring it into the schooling curriculum. I'd love to, at some point, explore that further to see how you feel that's the successes.
Moving on into something slightly different, I'm aware, and it's, again, very topical subject in the UK, the role of housing versus pension. It's a debate that we constantly have in the UK, should you save into a pension, should you just focus on your house, and does your house become part of your ability to deliver income in your retirement. Interest rates are high, as you would know, in the UK, and mortgage rates are staggering here. This is a topic that is very close to people's hearts. I know in KiwiSaver, you've got the flexibility to actually use the money for housing purposes. Can you just talk a bit about that, Claire?
Claire Dale: Okay. Well, as well as housing withdrawals, people can also withdraw for hardship, which happened particularly during COVID, as you can imagine, but to a minimal extent. After contributing to KiwiSaver for at least three years, as well as possibly being eligible for a first-time grant from the government, that's a grant, a gift, you can access all of your KiwiSaver, apart from $1,000. That's a huge withdrawal. For example, in the 2022-'23 financial year, $1.2 billion was withdrawn from KiwiSaver accounts for first home purchase. Only $0.1 billion for financial hardship over the same period, and the government only contributed $26 million in first home grants. While certainly housing is part of your retirement package, but it's certainly depleting your KiwiSaver account.
Sangita Chawla: Susan, from your perspective, good or bad, this flexibility?
Susan St John: Yes, I think everybody would agree that to have a home, particularly a mortgage-free home on retirement, is a very important part of the retirement package. Certainly, we're very concerned in New Zealand to see the rising numbers who are coming into retirement without their own home in a rental situation. It does make a core of sense. It also makes the scheme more attractive to young people who maybe feel retirement is a long way away, and a long time to tie their money up.
However, having said all that, it does impact probably more unfairly on women, who are probably going to find it much more difficult to make up that lost money when they get back into the workforce if they've taken time out, for example. Another danger that we're seeing a little bit emerge now, is that it could be seen as a bit of a honeypot for whatever aspiring politician wants to make some marvelous policy, just an ad hoc sort of a thing. We're seeing this come up in election year.
Recently, for example, the opposition have come up with a policy which would allow people who are trying to get into the rental market to draw down their KiwiSavers to pay for the rental bond. It's been quite widely criticised as the thin end of the wedge. Where does it all stop once you allow KiwiSaver access for all these different sorts of things? We already have very good hardship provisions, very stringent hardship provisions, and they're probably quite sufficient without imposing another kind of policy over on top.
Sangita Chawla: Yes, it's almost the sort of jam today versus jam tomorrow, kind of.
Susan St John: Yes.
Sangita Chawla: Most people, actually, in my experience, really prioritise today, don't they?
Susan St John: Yes.
Sangita Chawla: It's the present-day bias of most that you value because you feel it, don't you?
Susan St John: Yes, and of course it's very difficult in the difficult circumstances following the pandemic, following, in our case, many natural disasters, and now, of course, quite a severe recession.
Sangita Chawla: Yes, exactly. I do think, actually, though, your point around younger people is a really valid one because, you're absolutely right, they don't value retirement, it's a long, long way away, and actually it's a way of engaging them early because housing is probably more on top of mind, so you're almost using it as an engagement mechanism as well. We certainly see the same in the UK. Fascinating. It's not something that we've introduced here in the UK, but I wonder if at some point we end up in a similar position.
I'm just going to go back to the start, actually, when you launched KiwiSaver back in 2007. I read that actually there was quite a lot of big changes that were introduced just on the day before, which sounds staggering. I can't quite believe that that could be possible.
Claire, can you just expand on that, please?
Claire Dale: The main change, of course, was the compulsory employer contribution. Cleverly, the government offset that change by introducing an employer tax credit and a member tax credit. The compulsory employer contributions were at least partially offset by government funding. That was a clever move. Already, employers had been relieved of the potential nightmare of administration by knowing that the IRD were handling the administration. The IRD handles income tax, handles all of that already. Employers are familiar with the IRD, so could trust that they would manage that whole process of collection and distribution of KiwiSaver contributions.
Then, interestingly, over the next few years, government steadily withdrew the cost. Initially, there'd been a significant cost to government with the $1,000, for example, kickstart, and with other tax breaks and so on that they'd introduced. Over the next years, they withdrew, they gradually withdrew all those contributions. The cost to government was significantly reduced over time, but at the same time, all the promotion, all the public education was going on. It was quite cleverly done.
By 2015, that kickstart had been removed entirely. However, despite these changes, after 15 years of KiwiSaver, members numbered 3.1 million, although certainly 1.2 million were not contributing, but the total fund value had grown to $90 billion, this from nothing in 15 years. I mean, it's impressive.
Sangita Chawla: Essentially, all these changes didn't hinder any success in the KiwiSaver, is how I hear that. Susan, would you agree?
Susan St John: Well, yes. We essentially bribed people to join, and once we got them in, we took those sweeteners away. Today, it's only the first $20 per week that is subsidised. This treatment is actually in line with our very different tax treatment of pension superannuation compared to the UK. We have a history of treating saving for retirement the same way as you would treat saving in a bank account. You contribute out of after-taxed money, the earnings in the fund are fully taxed, but you get a capital sum not taxed at the other end. I think we have to ask the question in New Zealand, have we been a bit too clever with KiwiSaver? Because the danger of only subsidising the first $20 contribution a week is that people get the idea that that's enough, that in some ways, those people who maybe aren't in work, for example, don't understand that it's nowhere near enough.
Maybe we have been pretty clever, but there's still a question mark there. Another really important aspect to all of this is that unlike in the UK, where you have at least had 47% of the workforce in existing schemes, we introduced KiwiSaver partly in response to the fact that the coverage under traditional schemes was very low. Why was it so low? Well, since the early 1990s, when we took away all the tax incentives, the participation in those schemes had shrunk. One of the advantages that we now face is that we've introduced KiwiSaver into that environment where the traditional schemes are very few. Essentially, KiwiSaver is supplanting those schemes. When we look to the future, it's going to be KiwiSaver plus the state pension.
Sangita Chawla: Yes. Actually, that just shows how it's really important to almost have some form of tax incentivisation to actually help people and encourage people want to save for the long term. Otherwise, why would they do it?
Susan St John: Well, yes, although you do it because you want to have income in retirement. New Zealand would also be quite proud of its neutral savings incentives position for superannuation because the former arrangements under the traditional schemes saw the benefit of the tax incentives going to high-income career male employees in company schemes.
Sangita Chawla: Right, exactly. In fact, it wasn't broad, it wasn't inclusive, essentially.
Susan St John: It wasn't inclusive.
Sangita Chawla: Yes, fascinating. One of the things that you talk around, why is it that people want to save for the long term. I think, absolutely, people should save for the long term, but it's almost not valued. That's why I think tax can play an important part just to provide a level of value for individuals, but only if it's inclusive, otherwise it defeats the object.
Susan St John: Yes. There's a balance. I think particularly for low-income countries like New Zealand, it's huge. It makes a huge difference if there's some sort of incentive, some sort of tax incentive to facilitate saving.
Sangita Chawla: Yes.
Susan St John: We used to have, for example, a kickstart, I think Claire mentioned that, $1,000. That was actually a really good way of getting people into KiwiSaver, and it's a shame that it's been abolished, so that the first joiners of KiwiSaver had the best of it.
Sangita Chawla: Yes. Incentives are a good thing in that way, actually. You've got to be obviously very careful around the rules of incentives, but yes, a sweetener of some description, just to help people hook in.
One of the things that in the UK we talk around is why is auto-enrolment so successful. I sort of alluded to some of the things you've been talking around as well, that people are actually pretty inert. In the UK, you make a decision, you go in, and then people don't review things again. Actually, we're quite stable. We don't review and revisit any sort of decision making, which is one of the reasons why I think in the UK, auto-enrolment has been so successful. It's compulsory enrolment, but people enrol at a minimum contribution rate, and then they don't review it at any stage. They don't look at whether they should be contributing more. They don't look at necessarily opting out, which is why our opt-out rates are so low. They also don't really engage necessarily in what they ought to be doing and whether they're on track. It has good points, and it also leads to a lot of potential downsides as well. Certainly, I see that in people's decision making, because they haven't been used to making decisions. They've been compulsorised in, and they just don't almost notice what's going on with their pension.
Are these sorts of things, do you feel that's happening in New Zealand as well, or do you have a very different experience of member behaviour? Perhaps if I go to you, Claire, first.
Claire Dale: We do make opting out more difficult, and we have got the trick working where if a person changes jobs, they're opted in again. It's difficult for them to get away entirely. We do have, as I said, the Money Months campaign running via the Retirement Commissioner, but in addition, in June, the Financial Markets Authority, the regulator, runs an annual campaign to encourage KiwiSaver members to check their statements, to check if they're happy with the amount they're projected to have at age 65, and now, KiwiSaver statements have to include that figure. If they stay on the same saving trajectory, what they will have accumulated by age 65, and to consider whether or not they can afford to contribute more, and if they think they're getting good value from their provider, or perhaps need to look at a different sort of fund. That's sent to every KiwiSaver member, which is a really valuable wake-up call that's going out to members.
As I've already said, there's the issue around KiwiSaver participation being simple for employers, so there's no resistance from employers to KiwiSavers being members.
Sangita Chawla: Right. Fascinating that is then. Actually, you're seeing similar and yet different things happening in New Zealand. Are you done in KiwiSaver with all the things that you want to do, or do you think there's still room for improvement, Susan?
Susan St John: Well, there's always room for improvement, and we have to be a bit worried, I think, because with COVID and all the natural disasters and things that have happened, low-income people have been very exposed, and it does seem that we will have a problem in the future of having people with enough money. In particular, when we think about the way in which KiwiSaver is based on paid work, fundamentally, we find that it doesn't work as well for many women whose balances, on average, are much lower than men's, and for Māori and Pasifika, they also lag behind, because they're disproportionately represented in the low-income group that have been so adversely affected.
There's a lot that maybe could be done to help these groups. One of the suggestions that Claire and I have made in our centre, is that when somebody has to go on a savings suspension because they can't afford the 3%, that it should be the employer has to still contribute their 3%, because if they don't, then the person that's not in KiwiSaver, not contributing in KiwiSaver, essentially misses out on 3% of their wage, and that's really bad for women. There are things that can still be done. Really critically, you would have to say that we have completely dropped the ball with regard to what happens at the point of retirement.
At the moment, KiwiSaver is a lump sum scheme, and while there are drawdown products, we do not have any annuity option. In part, that reflects our history, that we don't have a tradition of annuities in New Zealand, or not a very strong one, and when we changed the tax arrangements, the remaining annuities disappeared completely. The problem doesn't go away, and we would argue that there is insufficient longevity protection, particularly for middle-income people who come into retirement with $100,000, $200,000, and they've got to manage that for what might be a very uncertain length of time in retirement, plus the possibility of very expensive old-age care at some point.
It would be nice, in the case of KiwiSaver, for there to be more understanding of the longevity risk, and more attention to possible solutions. We've suggested, for example, you might look at a tax-subsidised, tax-sweetened, inflation-adjusted, modest-level Kiwi annuity, maybe call it Kiwi spend, to get buy-in. We can't make it compulsory, but if it was sweetened in some way, and that the state was willing to underpin it, it could be a very good way for us to go in the future.
Sangita Chawla: Yes, I hear you. That sort of need for a post-retirement solution is something that I think most countries are looking at, including our own here in the UK. We obviously do have a tradition of annuities, and we do have a lot of other products. It's a small number of people that take advice, but there's still a growing number of people that want to have advice or guidance around what they do on decision-making, because as you say, suddenly they receive a lump sum of money, and they're not used to making decisions around that, the financial decisions around that for the long term. It's one to watch out for, for you in New Zealand then, and I'm sure you alongside the government, they're working on ideas for what you may do.
I suppose drawing it to a conclusion for us, then, if there was one piece of advice you could give us in the UK about what to do or what not to do, what do you think that would be, Susan?
Susan St John: Would use a gender lens over your policies, and maybe look particularly at income thresholds and age limits, because they can't be good for women. Make sure that there's portability, so that you have one pension pot. Not sure how you could do that in the UK. Make sure that the outcome of the scheme is largely income, not lump sum.
Sangita Chawla: Yes, I'm with you on all of those. Claire, have you got anything to add?
Claire Dale: Investing in public education, and financial capability and literacy, and resolving the self-employment and contractor issues to facilitate, encourage, maybe set up some tax break to encourage self-employment contributions to a KiwiSaver scheme. Because more and more people, and as the economy changes, more and more people are self-employed. That's a big issue.
I guess I'd just like to say that even $10,000 in a retirement savings account is so much better than nothing.
Sangita Chawla: Totally agree with that. In fact, both of you are essentially saying make the UK scheme as inclusive as possible, I think with all of those comments. Reduce any barriers to bringing people in, and make them relevant, not just for today, but also for the future workforce pattern that we're likely to see.
Well, that brings us to the end of this episode. I'd just like to say a very special thank you to both of you, Susan and Claire, for joining me today on this fascinating discussion about what in the UK we can learn from New Zealand about auto-enrolment. If you enjoyed our discussion, you can find more interviews and podcasts on our website. Just search for Standard Life Thinking Forward. Hope you enjoyed it. I look forward to seeing you all soon again. Thanks to both you, Susan and Claire. Thank you again.
Susan St John: Thank you.
Claire Dale: It's been a pleasure. Thank you.