It is widely recognised that New Zealand for many years has reported the lowest personal savings rates as measured by the OECD. Of the personal savings that does occur, much is directed into housing – creating problems that the governor of the Reserve Bank has recently been struggling to remedy.
Since 1990, the number of registered superannuation schemes has plummeted from 2863 to 590 as many medium and small employers questioned their value given the lack of any political interest or recognition. Generally, large employers have maintained faith.
From 1 July, this picture is about to change with the launch of KiwiSaver – the most significant initiative to encourage personal savings for 20 years.
The savings industry has always recognised work-based savings plans as the most efficient and effective way to stimulate savings habit. KiwiSaver will make saving easier for New Zealanders.
The KiwiSaver Act provides that employers are responsible to ensure that new employees aged between 18-65 are automatically enrolled. New employees have six-week period (from the end of the second week until week eight) to “opt out” if they decide not to take part.
The success of the plan rests on the inertia of many new employees who, once enrolled, will not seek to activate the opt-out provisions. As their savings grow they will be encouraged to continue and even increase their contributions.
Contributions, which may be selected as four or eight percent, are deducted from gross (before tax) wages or salary by the employer and paid to the IRD along with PAYE payments. The IRD then remits the contributions to the appropriate KiwiSaver provider. We expect many employees to select the four percent option.
The plan offers choice of product supplier. Employers may select particular KiwiSaver scheme for their employees and all new employees will be enrolled in that scheme. Alternatively, employers may prefer to allow new employees to choose their own KiwiSaver scheme. If the employer or the employee do not make choice then new employees will be enrolled in one of six “default” schemes selected by Government.
Existing employees also have the option of choosing to opt-in to KiwiSaver scheme. In time and as the reputation of KiwiSaver grows, it is expected that increasing numbers of existing employees will choose to “opt-in”.
Employees who join KiwiSaver will receive $1000 kick start from Government. They will also receive government subsidy towards fees – though details of this have yet to be announced. Savings are locked in until the employee reaches the age of eligibility for NZ Superannuation (currently 65) or five years after the first contribution (whichever is later).
After being member for 12 months, employees may take contribution holiday for minimum of three months or up to five years, which provides good degree of flexibility to cope with changes in personal circumstances.
Many employers will welcome Kiwi-Saver and encourage staff to join as simple way to accumulate wealth.
NZ Superannuation already provides an excellent safety net with benefit of approximately $13,000pa for an individual or $20,000pa for married couple but this will not provide luxuries in retirement. KiwiSaver will help New Zealanders to accumulate additional wealth that can be called on to maintain the lifestyle they choose in older age.
Detailed instructions will be sent by IRD to all employers. Large employers have already received packs, smaller employers will receive their packs in May 2007. Employers will also receive information packs for issue to new employees who qualify for automatic enrolment.
For those employers with existing schemes there are number of choices that for space reasons can’t be covered here. I recommend you take advice before making decision. If you email me at [email protected] I will be happy to direct you to someone who can help.
The introduction of KiwiSaver does create increased responsibilities for employers but the scheme has been successfully designed to minimise any extra workload.
Overall, we expect KiwiSaver to be winner that will be welcomed by employers who are concerned for and who value their staff.
Vance Arkinstall is chief executive of the Investment Savings & Insurance Association. [email protected]
