Public submissions invited on workplace savings

The public and interested parties are invited to make submissions to the Government on savings schemes in the workplace.

This follows the presentation of a report prepared for Finance Minister Michael Cullen by the Savings Product Working Group, which the Government is yet to formally consider.

Dr Cullen established the Working Group in May under the leadership of economist Peter Harris.

He says the Group has delivered a generic design and a how-to-guide to get workers into saving for their retirement.

“It has come up with some practical options for one of the country’s most serious long-term economic problems - our poor levels of savings. The country’s private debt levels and low savings is a weakness in our economy that is recognised internationally. I am committed to a dialogue on how we can encourage workers to save."

The Working Group’s ‘generic scheme’ proposes that all new staff are automatically enrolled in a savings scheme which they can withdraw from if they choose. There is a range of options to determine employers who would be covered and timing for employees to opt out.

Employers would deduct employee’ savings using a special tax code – in the same way that tax and payments such as ACC are deducted now. The aim of the design is to minimise compliance costs for employers. The savings would be forwarded to IRD, which would then forward the funds, through a central administrator, to a designated provider.

Dr Cullen says “the Group has delivered a practical proposal for workplace savings and has tackled a number of difficult issues with a range of alternative answers.

“I am pleased to see the Group has looked at methods to encourage workers to join a savings plan and further commit to long term savings.

Dr Cullen invites interested individuals, organisations and companies to make a submission on the Working Group’s report between now and 31 October.

“I am committed to seeing progress made on workplace savings in my 2005 budget, Dr Cullen says.

To view the full Savings Product Working Group report: www.beehive.govt.nz/cullen

Report of the Savings Product Working Group

Summary and invitation to make submissions

Purpose of this summary

At the request of the government, the Savings Product Working Group has provided advice on available mechanisms to increase work-based savings. Its report describes increasing levels of possible intervention along a ‘pathway’ but leaves open the question of just how far along that pathway New Zealand travels. At each step on the pathway there are some design details that could be fine-tuned, in line with feedback received, during a discussion phase on the report’s findings.

This paper gives a broad outline of the Group’s advice and invites submissions on that advice. Submissions should be made to the Minister of Finance by 31 October 2004.

The context
Membership of occupational superannuation schemes declined from 22.6 percent of the employed workforce in 1990 to 13.9 percent in 2002. At the same time, household debt rose from 65 percent of annual disposable income to 130 percent. Offshore borrowing largely finances this debt. New Zealand’s net financing from offshore stands at about 90 percent of GDP – one of the highest ratios of any advanced economy.

Today younger generations tend to enter the workplace with student debt. They buy a first home later in life, have more restricted access to employer subsidised superannuation and run up credit card debt. There is a risk that compared with their parents and grandparents; they may enter retirement less well placed to sustain an acceptable lifestyle.

There are positive features associated with higher savings levels: both for individuals and for the stability of the wider economy.

The arguments for the government taking a more assertive and pro-active stance in stimulating higher saving are canvassed on pages 20 – 24 of the Group’s report. Should the government seek to change existing personal financial behaviours and if so how great is the need for intervention?

Why work-based savings are low

Evidence from New Zealand and overseas suggests workers are disinclined to save because:

• they lack confidence about their knowledge of financial matters, are confused by choice and postpone decisions
• the tax system disadvantages them if they save through conventional superannuation funds or unit trusts
• the legislation governing registered superannuation schemes locks their money into schemes while they can retain access to funds by investing in more conventional ‘retail’ savings products
• the status quo has a strong influence on what people do: saving or not saving is a habit.

These disadvantages are such that despite education, communications and economies of scale available through the workplace most saving is through retail products or direct investments. This tends to be the preserve of the better off:

Employers are disinclined to promote work-based savings because:

• there are negative perceptions of the compliance costs associated with developing schemes with providers, (who also face high up-front costs in meeting the disclosure requirements of the regulatory regime)
• they fear they face potential civil and criminal liabilities if they are deemed to have breached the ‘promoter’ or ‘investment advisor’ provisions of relevant legislation.

Overseas experience is that neither tax concessions nor more education, nor access to a scheme will make a significant difference to savings. The Group’s reports suggests a different and more fundamental response to the issue of workplace saving.

The Group’s advice to Government
The Group has developed a ‘pathway’ of escalating levels of intervention. Whether this path should be followed and how far to travel along this path is a matter for Government decision, after public input and debate. There are five steps on the pathway:

• an education and information campaign attacking the lack of knowledge - lack of confidence problem
• tax reform to remove the disincentives that work-based savings face [A separate review of taxation of investment funds is underway. The recommendations of the Group will need to be revisited in the light of the conclusions of the Stobo Review.]
• a streamlined and more unified regulatory regime to:
  1. remove some compliance costs and rigidities; and
  2. ensure effective protection for employers from both real and perceived risk of exposure to potential promoter and investor advisor liabilities.
• a simple, cost effective, generic system to collect employee contributions and distribute them to the chosen provider of savings products
• funding ‘sweeteners’ provided by the Government to encourage participation in a savings regime, which can be designed to have strong equity impacts.

The Group’s advice on a regulatory upgrade is outlined on pages 41 – 45 of the Group’s report. Would such reforms reflect a suitable balance between reducing compliance costs and providing effective protection to savers? If not, where, and in what way, should the balance be altered?

The new generic regime
Should the Government choose to adopt a new ‘generic’ savings regime a simple mechanism would:

• assign a special tax code to all new employees that they could choose to opt out of (options for opt out are in the report)
• collect a savings element in the same way tax and payments such as ACC are collected through that code and transfer the savings to a central scheme administrator, with decisions on age, level of savings to start at, minimum contribution to make, and rate of contribution all built into that code
• have a scheme administrator remit the funds to the chosen provider (ways to choose and change the provider are in the report)
• ensure contributions can be voluntarily increased or suspended, and maintained despite job changes or absences from the workforce.

Details about how a “generic” scheme would operate are outlined on pages 48 – 62 of the Group’s report. What are your views on the key features of the suggested scheme, particularly; automatic enrolment; an opt out period; collection of savings through the PAYE tax system; use of a central administrator to manage the allocation of funds; exemption from mandatory offer for certain employers; contribution levels; ability to access funds prior to retirement and the form that retirement benefits can take?

‘Sweeteners’
The report outlines a process by which the Government could decide if it should fund any ‘sweeteners’ to encourage better participation in work-based savings and how it might decide on which type of sweetener to fund. Options given are to finance the administration costs of a central scheme administrator; to pay fund management fees; to offer group life insurance cover to younger participants in work-based savings plans; to ‘kick start’ savings; to make reward payments and to top-up balances.

For each option, the payment can have an equity element, aimed at boosting saving by low and middle-income earners. The Group warns that sweeteners should not be applied in a way that discriminates against the existing occupational superannuation savings ‘base.’

The discussion on sweeteners is on pages 64 – 68 of the Group’s report. Do you have any views on the need for sweeteners or their value? Do you have any views on the extent to which any sweeteners should be funded, or on which type of sweetener would be the most equitable and/or effective? What specific considerations need to be taken into account to protect the existing occupational superannuation scheme base?

Next steps

The Group has outlined an implementation sequence for any such changes on pages 69 – 76 of the report. Do you have any views on the practicalities of implementing such changes or on the feasibility of the timetable that the Group has outlined?

- - - - - - - -
Responses to the questions raised in this paper, or on any other matter that is relevant to the Group’s observations and recommendations, should be sent to:

“Workplace Savings Report”,
Office of the Minister of Finance,
Parliament Buildings,
Wellington,

by 31 October 2004.

Questions and answers prepared by the Savings Product Working Group

For further detail and explanation please refer to the full report available at:
www.beehive.govt.nz/cullen and www.retirement.org.nz.

1.Why should the government get involved with personal decisions on financial management?
There are two key reasons. First changes in savings patterns suggest younger generations will enter retirement in a significantly worse financial position than their predecessors and secondly significant increase in private debt (household debt has doubled from 65 percent of household income in 1990 to 130 percent now). This debt is financed internationally with borrowing from foreign banks around 90 percent of GDP. It has been identified as a serious weakness in the New Zealand economy.

2.Why don’t workers save?
International and domestic evidence shows it is not simply because people do not have enough money. People lack confidence about how, put off difficult decisions and fall back on non-saving habits. Establishing a saving habit is the single biggest factor in spreading the practice of regular saving and lifting the savings rate.

3.Does education provide a solution?
Education assists but, even when combined with employer obligations to offer employees access to a savings scheme, results are modest.

4.Why target the workplace to improve savings?
The workplace has a number of advantages. This is where people earn income and deductions from salaries at source for savings are considered less “painful.” Workers gain confidence about a savings decision if others are also doing the same thing. In addition bulk discounts are available.

5.How will the low paid be helped?
Collecting small amounts on a regular basis through a cost effective mechanism will help lower income groups to save without having to meet the high front-end costs associated with conventional retail schemes.

The ‘generic’ scheme

1.Will a scheme increase compliance costs for employers?
The Savings Group has designed a generic scheme that would work off existing employment obligations and routines to minimise compliance costs. Savers would have a specific IRD or tax code which would simply add an amount that is deducted from their salary (as tax and other payments like ACC are deducted). This would be sent off to a central administrator who would pass it on to a chosen savings provider. For the employer it would be business as usual – making salary deductions in line with IRD-supplied tables and sending a single cheque to IRD.

2.Would all employers be covered?
The Savings Group suggests two options. One is to exempt the large number of small employers employing five or fewer workers from the automatic enrolment rule. The other involves a slower roll-out by linking the obligation to use the automatic enrolment code to those employers who use the electronic “ir-File” computer system that IRD has developed.

3.Are there protections for employers and employees?
Yes. Laws that already apply to ensure employers pass on deducted tax and others payments would apply. The Savings Group has recommended that securities legislation be upgraded to clarify that employers are not promoters or financial advisors. Employer liability would also be clarified.

4.Do employers have to subsidise the savings of the employees?
No but they can if they wish.

5.Isn’t this compulsory superannuation by the back door?
No. The employee can opt out of the scheme by advising the employer to revert to using the standard tax code. The employee can also suspend contributions for a time if finances are stretched and can leave accumulated balances in the fund.

6.Why limit the enrolment to new employees?
Existing workers will be able to opt into the scheme however enrolling all workers on a set day would be complex.

7.How would the scheme impact on existing occupational schemes?
The Group has made a number of recommendations to protect existing savings.

8.Who sets the savings rates?
There is scope to test what would be regarded as acceptable levels of savings. The Group has developed a basic starting point that standardises all decisions on when to start saving and how much to save. Under that scheme, there would be a basic salary on which no savings would be made. Five percent of income above that base would be channelled into a saving plan, provided the amounts saved were above $10 per week.

9.Will savings be locked-in?
No. However, depending on other contributions made, some restrictions could be built into access rules. Some rules on frequency of withdrawals, amounts that are accessible and notice periods will need to be developed.

10.Will there be caps on the fees that providers can charge?
The Group opposes fee caps but does propose that fees be transparent.

11.What about the government: tax breaks, subsidies?
The Group does not recommend tax incentives. They tend to be expensive and invariably assist the better off. However, the Group invites the government to look at some “sweeteners” to encourage workers to join and stay in a savings plan.

12.Why use a central scheme administrator?
The scheme needs to be flexible but cost effective. A central administrator can avoid all of the costs of collection and transfer between multiple employers and multiple providers. It will also carry out a “registry” function, tracking and matching employees and providers as the employee changes employer, goes in and out of the workforce, and changes provider.

13.Is this just extending the monopoly of the existing industry?
The Group envisages a streamlined and uniform regulatory and tax structure that will open up the savings market to a wider range of providers to offer more savings plan choices. However, only approved providers would be able to participate in the generic scheme. An approvals body will have to be established to set and maintain standards.