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'Three-tier' approach finds favour

Friday 1st June 2001

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By Peter V O'Brien

A "three-tier"approach has been suggested by the Investment Savings and Insurance Association (ISI), an organisation with a strong interest in superannuation and general retirement income. It comprises the major life insurance and fund management companies, with the exception of Tower.

ISI members have more than $25 billion of funds of all types under management. Total retail investment funds under management were $16.97 billion at June 30. There was $1 billion in group investment funds, $2.08 million in insurance bonds and $7.09 billion in superannuation funds.

In its submission on the superannuation bill, ISI said it was concerned New Zealand was no closer to having an integrated policy for public and private provision of retirement income. It said this should be made in the context of an agreed framework, with New Zealand Superannuation as the first tier of a three-tier system as suggested by the World Bank:

  • a mandatory publicly managed pillar, funded by taxation;
  • a mandatory privately managed pillar, fully funded and private managed; and
  • a voluntary pillar, either occupational or personal savings plans.

ISI's second-tier - compulsory retirement - may include some or all of the following features:

  • contributions at a rate sufficient to produce a total retirement income, including New Zealand Superannuation, of an agreed level. Contributions would be deducted by the employer from pre-tax income and paid into individual accounts with an approved provider;
  • a maximum annual contribution per person;
  • tax-free accumulation of investment earnings;
  • no facility for withdrawals until employment has substantially ceased;
  • withdrawals to be principally in the form of an income stream; and
  • income stream to be taxable at the drawer's marginal tax rate.

ISI chief Vance Arkinstall was asked whether there would be subsidies from employers under the tier two proposal. He said subsidies coupled with a tax benefit for the employer would make the scheme more attractive. The ISI was working out the effect on taxes for individuals and the fiscal effects on government financing.

Tier three would be additional voluntary private savings from those who were able and would also provide a deferred income facility for people without access to a scheme through an employer.

In recognition of those savings as deferred income, taxation should be deferred until receipt on condition that savings were drawn down principally as an income stream. Such private savings would need to be with an approved provider and would need to have the same essential features as tier two savings.

The ISI said it recognised the criticism that encouragement for specific forms of savings may divert funds from other areas rather than increasing the total sum of national savings.

If that was found to be true, there would still be an advantage to the country in encouraging the growth of savings in a form that lent itself to the provision of a regular income in retirement.

The association supported the concept of pre-funding, which would serve to increase the level of public confidence that the state was committed to providing a certain level retirement income as of right.

It should also have the side effect of making it clear there was a substantial cost involved in providing New Zealand Superannuation and that consequently it could not be provided at more than safety-net level.

The ISI had some concerns that pre-funding under the bill would at best only partially cover the future costs of New Zealand Superannuation.

Pre-funding was dependent on future governments continuing to achieve surpluses, or to support the continuance of pre-funding during a period when other costs (such as public health care) were also expected to be increasing.

It could therefore only be regarded as a partial solution to the issue of ensuring future retirees had an adequate income.

Mr Arkinstall said the association was quite clear about the situation. "We currently have a voluntary savings option. There is no evidence it is working. The savings level has not gone up and we have a demographic time bomb ahead of us. It is not clear any future government can fund a universal benefit at current levels."

There was an interesting recommendation regarding individuals selecting a particular age of qualification for New Zealand Superannuation. It said increasing lifespans would give people the opportunity of a longer and healthier period following retirement and would increase the need for flexible employment arrangements.

Asking individuals to defer receipt and thereby qualify for a higher rate at a later age might be an option. That had potential advantages for the economy in greater output to be shared, a wider tax base and increased ability for more people to provide themselves a higher standard of living in retirement.

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