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Not all compulsion ideas for KiwiSaver succeeded

Thursday 30th June 2011

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The Government earlier this year rejected a Treasury suggestion that it stage a one-off auto-enrolment of workers who had not already joined the KiwiSaver savings programme.

It also rejected the idea of making contributions compulsory for workers -- which Treasury noted would allow the removal of all subsidies -- as means of increasing national savings.

Treasury noted in a January 28 report from financial markets manager Joanna Gordon that fiscal costs of compulsion could be significant if subsidies were not axed, and that there was likely to be a "negative impact" on poor people, "who would be better off not saving or saving outside of a long-term savings vehicle".

But officials also recommended that the $1000 kick-start subside be kept and other subsidies be reduced to save about $500m a year -- ideas picked up in the Government's cost-cutting approach to the scheme in the May 19 budget.

The cuts made by the Government to annual taxpayer subsidies -- slashing member tax credits from $1042.86 to $521.43 -- start tomorrow.

Tax will also be introduced on the full minimum 2 percent employer contributions starting April 1 next year. Currently, tax only applies to employer contributions over 2 percent.

On April 1, 2013, workers and employers will be required to lift their minimum contributions from 2 to 3 percent.

Finance Minister Bill English said during his budget at the time that there was no move to make the scheme compulsory -- employees could still opt out -- but consultation was planned on an exercise to get more people to join.

English said KiwiSaver had been more successful than Treasury predicted and this had increased its cost to government to $1 billion a year.

The budget changes were first signalled in July last year, when Treasury produced a preliminary assessment of KiwiSaver options, including lifting the minimum contribution level to 4 percent, and requiring employers to match it. Ideas which Treasury thought at that stage were most likely to be useful included removing the tax exemption on employer superannuation contributions for amounts over $1000, or removing it completely. It also suggested reducing the member tax credits for high income earners, or requiring them to make a higher contribution to get the full credits.

Earlier this month, a big KiwiSaver provider, Tower Investments, said the budget changes to the scheme had been "disconcerting" for potential members, because government changes chipped away at certainty around retirement planning.

Net membership of the scheme rose 1.5 percent during May to break through the 1.73 million mark, but Tower Investments chief executive Sam Stubbs said that the budget changed "may make KiwiSaver a bit less attractive for people to join in the short run".

"We probably won’t know for a few months yet whether the growth rate of sign-ups to KiwiSaver has been seriously impacted by the budget," Stubbs said.

In the January paper, Treasury advised English that it was worth considering whether the fees and investment strategy of KiwiSaver funds were optimal.

"In the absence of compulsion, we would recommend doing this at the time of the re-tendering for default schemes in 2014 to avoid the costs of breaking contracts with existing providers," Gordon said.


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