By Benn Bathgate
Tuesday 1st February 2011 1 Comment
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KiwiSaver compulsion is unnecessary at the present time as many of the gains from compulsion can be achieved by other means, according to the Savings Working Group report.
The report highlights the lack of savings as one of the major long-term economic issues facing New Zealand and calls for "urgent action" to increase national savings by 2-3% and move the Government from deficit to surplus before 2016.
"The main saving issue for New Zealand is that since the early 1970s New Zealand has not had sufficient savings for its own investment purposes," the report said.
"Consequently, New Zealand has had to rely on foreign savings to build its capital stock."
The SWG report outlines a number of recommendations to address the problem, among them changes to KiwiSaver including auto-enrolment of all employees, reducing the starting age for membership to 16 and increasing the default contribution rate to 4%, with the ability to opt down to 2%.
The report also recommends spreading the kick-start payment over a five-year period with payments dependent on ongoing contributions.
Also recommended are changes to the default regime, including the creation of a single low-cost scheme to replace the current six default schemes, reducing costs, fees and expenses to increase returns.
"The SWG estimates that the economies of scale that could be achieved by aggregating the current six default schemes into one, together with that scheme making more use of Inland Revenue as a means of communicating with members, there is potential for the scheme's costs/fees to be closer to wholesale scheme rather than retail scheme levels," the report said.
"Those lower costs/fees would translate into a material increase in member returns over time (with the potential for default-member balances being up to 6% higher in 20 years.)"
The automatic enrolment of KiwiSavers into a default scheme is also highlighted as an area where reform is possible.
"The SWG is concerned that structuring the default aspect of KiwiSaver in this way is leaving untapped potential for members to be better off through accessing lower fees (and higher returns as a consequence), and providing them with investment exposures more likely to be better tailored to their individual circumstances."
Increased financial literacy can also be encouraged by requiring all superannuation fund providers, including KiwiSaver providers, to produce, "regular, clear and simple reports that show all fees and other charges, and the investment return to the individual after all costs."
The report also backs the development of an annuities market as, "most investors receiving large lump sums early in their retirement (as will increasingly be the case for members of KiwiSaver) will face investment decisions involving larger sums than they have ever seen in their lives."
While outlining a number of recommendations for changes to the KiwiSaver scheme, the SWG did recognise the scheme's benefits.
"KiwiSaver in its present form is a good mechanism for encouraging voluntary saving, instilling good savings habits, and potentially improving the quality of how people invest their savings."
Commenting on the report Finance Minister Bill English said the Government would consider the SWG's recommendations and any policy decisions would likely be included in the Budget later this year.
"Ministers will carefully look at the Working Group's report over coming weeks with a view to picking up practical ideas that can feed into the Government's economic programme in 2011."
He said that apart from changes to NZ Superannuation, broad taxation of capital gains or a land tax - measures previously ruled out by Government - "we are not ruling anything in or out at this stage."
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