The NZ retirement savings system could be nudged into A-grade territory but not by preferential tax treatment, according to Martin Lewington, head of Mercer NZ.
Lewington said the evidence that tax lurks increased overall savings levels was “ambiguous” at best.
“I much prefer that we have a level playing field for all investment vehicles than preferential tax treatment for KiwiSaver,” he said.
The Sir Michael Cullen-led Tax Working Group (TWG) has proposed giving some taxation relief to lower-income KiwiSaver members.
However, Lewington said lower-income New Zealanders would be better-served by a more inclusive KiwiSaver system that offered flexible contribution rates while encouraging more to join the scheme with ‘soft compulsion’ measures.
Currently, employees must tip in at least 3 per cent of their income into KiwiSaver, which could price some out of the market.
“Even if people can put 0.5 per cent of their income into KiwiSaver – matched by their employers – that can change behaviour,” he said. “It can create a ‘muscle memory’ for saving.”
Contribution flexibility at the lower end combined with regular government “sweeps” to auto-enrol (with opt-out still available) all working New Zealanders – including the self-employed – would dramatically improve the coverage of KiwiSaver across the population, Lewington said.
Lifting KiwiSaver coverage is one of four strategies that could push the NZ retirement savings system into world-class standings, according to the just-released 2018 Mercer Global Pension Index (MGPI).
While NZ lifted its overall MGPI score compared to its inaugural appearance last year, the B-ranked country remains over 10 points adrift of achieving global top-tier retirement savings status under the Mercer ratings. Just two countries – Netherlands and Denmark – made the Mercer A-grade in 2018 (there were none in 2017) based on scores across three underlying categories: adequacy; sustainability; and, integrity.
The NZ system edged up 0.6 points over the year to score 68.5 – ninth out of 30 countries in the MGPI list – with improvements across sustainability and integrity while adequacy declined. NZ’s adequacy score dropped away primarily due to changes to the MGPI ranking system that marked down countries that “have a universal pension and no income related social security”.
Australia fell almost 5 points in the MGPI scale to sit just slightly ahead of NZ on a score of 72.6: a tougher pensions asset test and the inclusion of household debt triggered the decline.
Aside from increasing KiwiSaver coverage (currently boasting almost 2.9 million members), the MGPI report says NZ could hit the A-scale by:
- increasing the level of KiwiSaver contributions;
- raising the level of household savings and reducing the level of household debt; and,
- increasing the focus on income streams in place of lump sums.
Lewington said NZ was unlikely to follow recent Australian superannuation moves to tack on a default annuity-like option to KiwiSaver.
“We are different in NZ,” he said. “There’s a relatively generous universal pension and current KiwiSaver balances are lower than Australian super – so there is less demand for income streams.”
But the need for retirement income solutions would inexorably rise, Lewington said, with other options besides annuities available.
“Annuities tend to be complex and expensive,” he said, citing ‘mortality pooling’ solutions – such as one offered by Mercer in Australia – as a more efficient retirement income vehicle.
“We could have something with a more NZ flavour that uses the wonderful NZ Super system,” Lewington said.
For example, he said the government could offer New Zealanders incentives to defer taking up NZ Super past age 65 and contributing a portion of their KiwiSaver lump sum savings to fund lifetime pension top-ups.
With just over 4 million people in NZ, Lewington said the country probably wasn’t populous enough to sustain too many pension products.
“Who is in the best place to spread the [retirement income] risk but the government?” he said.
While the idea has been floated for some time, Lewington said there hasn’t been much “political appetite” for introducing a flexible, government-run retirement income system.
“The time will be right at some stage,” he said. “The pension gap challenge is getting closer every day.”
Nonetheless, the latest MGPI rankings show the NZ retirement savings system is on the right track, Lewington said.
“That reflects the good work that government, industry and other stakeholders have done over the last 10 year,” he said. “We can certainly improve it but it’s better we do it by tweaks rather than a major shake-up of the system.”