Mixed results in KiwiSaver review

Monday 18th October 2010 1 Comment

KiwiSaver is growing and one in six people in the scheme say they would not be saving for retirement, but it remains unclear whether total retirement savings is growing as a result of the three year-old scheme.

The Inland Revenue Department’s annual KiwiSaver review, published today, finds only that “early and indicative results suggest that KiwiSaver has generated some level of new savings”, but “there also seems to have been level of substitution between KiwiSaver and other savings vehicles”.

“Approximately one-third of households consider that they would be unlikely to save for retirement if they were not members of KiwiSaver”, and an estimated one-third say they would have spent their KiwiSaver contributions on daily expenses if they had not joined.

An example of substitution savings is where households put money into KiwiSaver rather than into reducing their mortgage.

“However… it is not yet possible to determine KiwiSaver’s impact on savings levels or retirement incomes” and work will start in 2012 to try and assess that, once the scheme has been running for five years.

There was also little evidence yet that KiwiSaver members were any more likely to have calculated how much retirement income they thought they needed than people outside the scheme, with only a quarter of members contributing at a rate different from the level they opted for at enrolment.

Some one-third of all members were automatically enrolled in the scheme when they were offered a job, of whom nearly half said they would probably not be saving for retirement if that hadn’t happened. A further 15% said they had only stayed in the scheme because immediately opting out is not an option. A two to eight week “cooling off” period operates before new members can opt out.

However, it was unclear yet whether the lock-in provisions in the scheme, making it difficult to touch savings until turning 65, was more of a drawcard than a turn-off for would-be KiwiSaver members.

The review also found a spike in members switching KiwiSaver provider in May, which is thought to reflect reactions to fund updates which are posted in April.

Some 38% of all people eligible to join KiwiSaver have done so far, although its uptake among people entering the workforce for the first time is higher, at 50%. While affordability, fear that the scheme won’t last, and alternative financial priorities are factors in people not joining, “not getting round to it” is also a major reason.

The report also notes that KiwiSaver remains, at around 9%, a relatively small part of the managed funds industry, and that the costs of fund administration are relatively high because of the large number of accounts with small balances.

While KiwiSaver funds are more heavily invested in New Zealand equities than other superannuation schemes, its “small absolute size means it is yet to have significant impact on New Zealand’s capital markets,” the review concludes.

Businesswire.co.nz

Comments from our readers

On 19 October 2010 at 9:44 am albert k said:

In my view, the concept of Kiwisaver is an excellent idea, however, the structure is wrong. If the govt wants to encourage savings, there must be incentives. Where are the incentives in this current structure when the deduction is after-tax, investment taxable, cannot use for home repayment/deposit and contributions not guaranteed. The dollar for dollar contribution from the govt up to $1040 per year may not necessarily offset the disadvantages, unless one is in his/her 50s. There is definately a far better way if the govt were to think a bit outside the box, just a bit.