The ideological war on KiwiSaver is heating up ahead of two major policy decisions scheduled for next year with calls to scuttle the current default system and delete the tax advantage for higher income earners.
Binu Paul, co-founder of financial product comparison tool, Pocketwise, said the default scheme system has clearly failed with 400,000 members – or 15 per cent of the total – languishing in state-allocated funds.
Paul said in a statement that it “should be easier to force members to make appropriate decisions early on rather than leave it for later”.
“‘I’ll take a look at it later on’ hasn’t clearly worked for close to half a million Kiwis,” he said.
He said as well as channeling members into potentially risk-inappropriate funds, the system creates a de facto government endorsement of the nine schemes currently anointed as default providers. There are about 20 retail KiwiSaver providers, implying at least 11 aren’t up to scratch according to government default standards.
“Perhaps a more effective solution would be to require all providers to satisfy all requirements and if they are fit for purpose, to have at least one fund in their scheme as a ‘default’ fund – rather than approving only some providers to offer default schemes,” Paul said.
The government will carry out a statutory review – the third to date – of the KiwiSaver default system. Kris Faafoi, Commerce Minister, has put both fees and default scheme asset allocation on the review agenda.
In another pre-emptive strike last week, well-known actuary, Michael Chamberlain, lobbied against proposals to lower the portfolio investment entity (PIE) tax rates for low-to-middle income KiwiSaver members.
Chamberlain founded the SuperLife KiwiSaver and superannuation schemes bought by the NZX in 2014 for $35 million. He left the NZX last December after completing a three-year work-out agreement.
The Sir Michael Cullen-led Tax Working Group (TWG) floated plans in September to cut the PIE rates by 5 per cent for KiwiSaver members currently taxed at 17.5 and 10.5 per cent: higher income earners on the top 33 per cent tax rate already have a 5 per cent PIE tax discount.
Under the TWG proposals only KiwiSaver funds could likely access the PIE relief with investments held outside the regime to be taxed at marginal rates.
However, Chamberlain said an analysis of KiwiSaver returns shows that the proposed tax relief for those on lower rates would have minimal influence on returns. But the PIE discount at the top end created a “huge tax advantage for the highest paid”, he said in the release.
Instead of carving off a tax-preferred KiwiSaver market, the TWG should create a level playing field for all investment vehicles, the statement says.
“Tax breaks for retirement are very expensive, distortionary, inequitable, regressive and demand high, growing regulatory walls around affected assets, to ensure the incentives are not ‘misused’,” Chamberlain said. “But worst of all, tax incentives seem not to work (raise overall savings). That’s also likely to be the case for KiwiSaver but we need to find out. The TWG hasn’t bothered to do that.”
The TWG is due to release its final report in February with the imposition of a broad capital gains tax expected to be the centre-piece.