Commissioning a review - a KiwiSaver report card
Trish Oakley
June 2024
If it’s not broke don’t fix it. That old adage would seem to hold true with over three million Kiwis investing nearly $110 billion dollars in their retirement plans via KiwiSaver. So if it isn’t broken, why has a review by Te Ara Ahunga Ora Retirement Commission made 15 recommendations to the Government on ways to improve the scheme?
KiwiSaver is entering its 18th year. At the time of commencement in 2007, it was the world’s first auto-enrolment, opt-out, national, and portable retirement saving scheme. Large numbers of people rushed in to get their hands on some free money in the form of a $1,000 kick-start. This kick-start was removed in the budget of 2015 and there have been other tweaks over time - the removal of the fee subsidy and the reduction in level of the Government contribution to name two. The scheme was last evaluated 10 years ago, so it certainly seems timely to listen to what the Commissioner has researched and is recommending, if for no other reason than to drive ambition amongst Kiwis to join our friends across the ditch (Australians are arguably leading the way when it comes to retirement savings).
Key findings in the report show the Commission believes the process for joining KiwiSaver is working as intended. Participation is high (as shown by the overall membership number above) and there is good adoption amongst younger demographic groups. This is pleasing and, in my opinion, it helps pave the way for generational change around financial literacy.
Currently, 80% of those in paid employment are contributing, and while self-employed people don’t enjoy the same incentives, when you look at all eligible paid employees it increases to 90%.
One in three employees are contributing more than 3%. That may be the result of an aging population and pending retirement. Yet one million members earn less than $20,000 (this includes children) making the realities of contribution challenging and likely leading to the some people choosing to pause their contributions at some point.
On the surface, it looks like we are doing a good job of getting people to join and contribute. So what’s the need for review all about if you are not self-employed (a group commonly called out)? Some other things worth noting are:
1. Greater than 50% of employers have a total remuneration approach for some or all employees and only one in ten members have an employer contributing more than the mandatory 3%.
2. If you are over 65 or under 18 and working, then you are missing out and if you are taking time out to raise a family and can’t afford to contribute (understandable) then you miss out too!
But the material point and well made by the Commission, is we simply are not saving enough.
Earlier data the Commission shared in 2023 showed that 38% of members have a balance of less than $10,000. It is easy to assume that this is all young people just starting out, but while two thirds are under 35, one in five is aged 51-65.
Meanwhile Australia has $3.7 trillion saved compared to our nearly $110 billion. Australia is the fourth largest nation in terms of superannuation fund assets. Yes they have more people than us and they started much earlier but quite simply, our current default rate of 3% employee contribution is not going to get the vast majority of New Zealanders to the retirement they want.
The Commission, in conjunction with actuary Melville Jessup Weaver, did some nifty maths to build a ‘retirement adequacy’ calculator model. The model (projecting the balance for someone saving from age 25-65) assumes NZ Super continues and contributes to the income we have in retirement.
The model shows that for a median income earner with a goal of having 70% of the income in retirement that they had when working:
- Contributing at the existing 3% default rate, with a 3% employer match, could see KiwiSaver funds last for approximately 15 years for men, and 25 years for women
- Increasing the rate to 4% with a 4% employer match could see funds potentially lasting 20 years for men, and about 30 years for women.
- A 6% contribution rate with a 6% employer match would further extend this period with funds potentially lasting 30 years for men and 55 years for women.
And for a high-income earner with a goal of having 70% of the income in retirement that they had when working:
- A 3% contribution rate with a 3% employer match would see funds on average last 20 years for men, and about 30 years for women.
- Increasing the rate to 4% with a 4% employer match extends this period to 25 years for men, and 40 years for women.
- A 6% contribution rate with a 6% employer match would further extend this period with funds potentially lasting 40 years for men and 70 years for women.
Other scenarios and the detail surrounding the calculation are included in the full report which can be read here. The Commission rightly describes it as ‘stylised analysis and generic in nature’ but it is compelling none the less. The clear message that contributing only at the default rate will not be enough for most people is a message we continually hear and I am encouraged that a third of us are already embracing it and contributing more.
With the Commission’s report in, the question naturally turns to what next. The Commission is not a lone voice and the industry has also been calling for change. We are all interested to see what direction Minister Bayly wants to take and how we might make some ground and reduce the gap that exists with our friends and family living and retiring in Australia.
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