Govt to proceed with KiwiSaver auto-enrolment

The Government will proceed with KiwiSaver auto-enrolment in 2014/15 subject to returning to surplus, as part of its programme to build genuine national savings, Finance Minister Bill English says.

“In the current environment, we need to be mindful of the fiscal costs of all programmes. So we will proceed with KiwiSaver auto-enrolment in the same fiscal year in which we return to surplus and start to repay debt,” he says.

“As signalled in the Budget, we believe there is merit in a one-off KiwiSaver auto-enrolment exercise, where people in the workforce not already in the scheme would be signed up with the ability to opt out.”

Details of the auto-enrolment framework will be finalised next year, after the Government considers submissions on a public discussion paper to be issued in early 2012.

The exercise complements a series of Government measures to build genuine national savings. They include:

• Mapping a path back to budget surplus by 2014/15 – the Savings Working Group said this is one of the most important things the Government can do to build national savings.
• From 1 April 2013, increasing the minimum KiwiSaver contribution for individuals to 3 per cent from 2 per cent – which will also be the default rate for new members.
• From 1 April 2013, increasing the employer contribution rate to 3 per cent from 2 per cent.
• In Budget 2010, reducing tax on work and savings and increasing tax on property speculation and consumption.
• Resuming contributions to the New Zealand Superannuation Fund when the Government returns to sufficient surplus and can contribute genuine savings rather than borrowing.
• Providing New Zealanders with investment options through the mixed ownership model for five state-owned companies.

“These measures are pushing in the same direction households are already moving,” Mr English says.
“Having spent more than $1.10 for every dollar they earned three years ago, households will this year have a positive savings rate for the first time in more than a decade.”

The Government decided against introducing auto-enrolment before 2014/15 because its immediate focus remains on returning to budget surplus.

“While we’re running deficits in the next two years, that’s money the Government would have to borrow. Borrowing more money to put into KiwiSaver accounts is not real savings – we are applying the same approach to resuming contributions to the Super Fund,” Mr English says.

“Depending on the uptake and design, officials estimate a KiwiSaver auto-enrolment could cost the Government up to $550 million over four years – including the one-off $1,000 kick start payments to new members and ongoing annual member tax credits. We intend to fund this from within existing budget allowances.”

These estimates assume a 55 per cent take up rate among people in the workforce who are not currently in KiwiSaver.

The exercise will be included as a specific fiscal risk in the Pre-Election Economic and Fiscal Update to be issued next week.

The Government agrees with the Savings Working Group that a compulsory savings regime is not warranted, Mr English says.

“Many New Zealanders have already opted out of KiwiSaver because they have valid reasons for not saving for retirement right now – including paying off their mortgage or being members of private savings schemes.”

With about 1.8 million members, KiwiSaver funds are expected to rise rapidly – from about $8 billion this year to $25 billion by 2015 and almost $60 billion in 10 years. Auto-enrolment will accelerate that growth.

The Government has delayed issuing public discussion paper until next year because of the proximity of the election next month.

“It’s important this is done thoroughly, so we can minimise administrative and compliance costs for both employers and the Government,” Mr English says.

FACT FILE

What is changing?

• A one-off automatic KiwiSaver enrolment campaign for employees, with the ability to opt-out, will take place in 2014/15 – subject to the Government returning to budget surplus. Currently, employees are signed up – with the ability to opt out - when they change jobs.
• The enrolment exercise will:
• enrol people who would benefit from KiwiSaver membership
• be based around the current auto-enrolment model, which applies when employees take up new jobs
• minimise inconvenience for non-members who do not want to become members
• minimise administrative costs for employers and the Government
• align with the 2014 re-tendering of KiwiSaver default providers.

Why wait until 2014?

• The Government decided against introducing auto-enrolment sooner because its immediate focus remains on returning to budget surplus by 2014/15. While the Government is running deficits, the estimated extra cost of up to $550 million over four years for auto-enrolment would have to be borrowed. That is not real savings.

What is the expected cost to the Government?

• The enrolment campaign is expected to attract between 200,000 and 275,000 new KiwiSaver members, with an estimated fiscal cost of up to $550 million over four years.

Membership and cost projections under different take-up assumptions
(indicative costs based on employees not already in a superannuation scheme)

Why increase voluntary membership?

• New Zealand’s low savings rate has created a longstanding dependence on foreign capital. This makes the New Zealand economy vulnerable to market shocks and is likely to damage our economic performance and reduce growth.

What else is the Government doing to increase national savings?

• In Budget 2011 the Government said it would reduce debt and return to fiscal surplus by 2014/15. It also announced increases to employee and employer contribution rates that will see KiwiSaver funds continue to grow rapidly, but with a larger share of contributions coming from members and employers, and a lower share from borrowed Government money. This is expected to raise national savings, as Government borrowing to fund private savings will reduce.
• The Savings Working Group highlighted encouraging private individuals to save more, as well as returning to fiscal surplus, as among the most important ways the Government can increase national savings. The Government is acting on both of these issues.

Why have some people not joined KiwiSaver?

• A 2010 Colmar Brunton survey of people not in KiwiSaver indicated 28 per cent had not got around to joining and 13 per cent wanted more information about KiwiSaver. This indicates that, of the people not already members of KiwiSaver, over a third would be willing to save through KiwiSaver if actively prompted.

Why not make KiwiSaver compulsory?

• Not everyone would benefit from KiwiSaver membership – and many have valid reasons for not joining right now. People on lower incomes, or those with large mortgages or already in other superannuation schemes, may be forced to reduce their spending on essential items to pay into KiwiSaver. 
• The Savings Working Group recommended against making KiwiSaver compulsory because some people may prefer to save for their retirement in other ways.

What are the next steps?

• The Government will early next year issue a public discussion paper on the design of the enrolment exercise. It will carefully consider submissions – particularly on minimising administrative and compliance costs for employers and the Government – before finalising details.