KiwiSaver still the best long term savings option for most

KiwiSaver still the best long term savings option for most

The Investment Savings and Insurance Association (ISI) says that while the KiwiSaver changes announced in the Budget will see employees contributing more towards their own retirement savings, it will continue to be the best long term savings vehicle for most Kiwis.

As expected the KiwiSaver changes signalled by the Government include halving the Government paid Member Tax Credit from 1 July 2011, making employer contributions subject to Employer Superannuation Contribution Tax (“ESCT) from 1 April 2012, and increasing minimum contribution levels from 2% to 3% for both employees and employers from 1 April 2013. The Government™s initial $1,000 kick-start for new members has been retained and participation in the scheme will continue to be voluntary.

The ISI, representing fund managers that collectively manage over 90% of the money invested in KiwiSaver funds, says some changes to KiwiSaver were probably unavoidable given the difficulties the country faces following the Christchurch earthquakes, but that it remains the best long term savings vehicle for most New Zealanders.

Analysis carried out by the ISI shows that for a 25 year old New Zealander earning the median income of $48,000, the overall impact of the Government changes would see their pot of savings at retirement increase by $35,000 (in current dollar terms) if invested in a typical default fund. The combined effect of the reduction of the Members Tax Credit and the ESCT would take $40,000 out of their final account but the increase in the contribution level to 3% by both themselves and their employer adds back another $75,000. In this scenario, the impact of raising the employee contribution from 2% to 3% would see the employee™s contributions increase by $9.20 a week.

ISI Chief Executive Peter Neilson says that increasing minimum employer and employee contributions from 2% to 3% will create a more sustainable savings platform, and increase the level of capital required to invest in raising national productivity while reducing the dependence on foreign capital over time.

Mr Neilson says the ISI is pleased the Government has also signalled its long term commitment to KiwiSaver by announcing its intention to carry out further work on several of the Savings Working Group™s recommendations, particularly around automatic enrolment (with a voluntary opt out after enrolment) and changes to improve the tax treatment of savings.

But the Association also believes the Government needs to commit to raising the level of savings over time so that eventually overall contribution rates are at similar levels to Australia. “The Government could do this by introducing a defined series of small but predictable annual increases over an extended period, says Mr Neilson. “This would allow employers and employees to plan for the changes with confidence and allow New Zealanders to increase their level of savings as the economy improves and real incomes increase.

“We believe that Kiwis would be happy to do this if it was signalled well in advance and introduced on a gradual basis. Australia has adopted this strategy since their scheme was launched in 1992 so, when they recently announced they would increase the contribution rate from 9% to 12% by 2020, it hardly raised a mention in the media. This demonstrates just how much Australian™s now appreciate the value of saving for their retirement.

Just as the superannuation industry plays a vital role in supporting the Australian economy with $1.4 trillion in funds under management, KiwiSaver will also become increasingly important to the national economy over time, says Mr Neilson. “The Government are predicting that KiwiSaver will grow into a $60 billion industry over the next ten years, making it a major contributor to the future success of our country. By creating a significant local pool of funds for investment in business and infrastructure projects, the country will become less dependent on foreign capital.

But, says Mr Neilson, given the significant contribution that KiwiSaver is likely to make to the economy in the years ahead, it is vital that KiwiSaver becomes predictable and sustainable so that New Zealanders can invest for their retirement with confidence. “This will require all political parties to come together to agree on the future structure and direction of KiwiSaver. Over the next year it is important that we have that debate.

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