Te Ara Ahunga Ora Retirement Commission has today released a comprehensive analysis on how the current settings for joining, contributing, and withdrawing from KiwiSaver are working. KiwiSaver is a crucial component of the retirement income system.

Retirement Commissioner Jane Wrightson has made 15 recommendations for the Government, as well as several to KiwiSaver providers, the wider financial services industry and employers to improve the scheme.

The Retirement Commissioner says the biggest opportunities for change to KiwiSaver is to increase contribution rates by individuals and employers.

“I’d like to see a higher default contribution rate of at least 4% with employers matching at this level or more. We know that default rates are “sticky”, meaning people tend to stay with them,” she says.

“KiwiSaver balances across all the age groups are lower than we would have expected after almost 18 years of the scheme, and we need to improve this. The reality is we all need to be saving more for our retirement but know that it’s particularly challenging against the current backdrop of high inflation and cost of living challenges.”

The KiwiSaver Opportunities for Improvement paper delves into the history of the retirement savings scheme, and uses data from the Inland Revenue, the Financial Markets Authority and the Retirement Commission’s own research to analyse KiwiSaver and identify where there are opportunities for improvement.

The Retirement Commissioner says, “Throughout the paper, we’ve stress-tested some of the suggestions that have been floated across various quarters and posed some new ideas we think would improve KiwiSaver.

“Making KiwiSaver compulsory is one that comes up frequently in discussions, but when you consider the evidence, we already have high membership. Those not contributing are most likely not in paid work, on low incomes, or self-employed.

“We believe the existing soft compulsion setting of auto-enrolment with opt out, and the ability to opt-in directly is working. However, improvements could be made to incentivise the self-employed to contribute to the scheme.”

The paper concludes, when it comes to:

Joining KiwiSaver
The settings for joining KiwiSaver are working as intended. There are very high levels of KiwiSaver membership, especially among younger cohorts (97% of those aged 25-34, and 95% of those aged 35-44 are KiwiSaver members).

The current setting limiting membership to one provider keeps to the uniform and simple approach recommended by the OECD.

Contributing to KiwiSaver
There is no evidence base for making KiwiSaver compulsory and such a requirement is unlikely to make a material difference. Those contributing to KiwiSaver represent 80% of the total population in paid employment. Approximately 90% of eligible paid employees (the main target of the scheme under its current settings) are contributing. Those who are not contributing are not in a position to do so. One million KiwiSaver members (one third of all members) have incomes lower than $20,000 per year (including approximately 200,000 children). There are also limited incentives for the self-employed to contribute.

Withdrawals from KiwiSaver
The pre-65 withdrawal settings are working as intended with their relatively high bar. Over the past 12 years a total of $8.3 billion has been withdrawn for first home purchases. This is a very small portion of funds under management, with an average of 1.2% of total funds withdrawn each year. Only 1% of members on average have withdrawn funds for first home deposits each year. Home ownership is an important contributor to security in retirement.

The number of people withdrawing funds for financial hardship also represents a very small proportion of KiwiSaver members - an average of less than 0.5% each year.

The Retirement Commissioner says, “KiwiSaver has been instrumental in promoting retirement savings across New Zealand, but it’s time to look at it again.

“By implementing changes, we can ensure that KiwiSaver continues to serve New Zealanders well into the future, providing a safety net that adapts to the changing tides of work and life.”

Summary of the key recommendations

• Changing the KiwiSaver settings to make it compulsory is not necessary.
• Introduce a higher default contribution rate of at least 4% (with employer matching at this level), retaining the 3% contribution rate as the minimum.
• Retain existing settings limiting membership to one KiwiSaver provider.
• Increase the government contribution for those who do not benefit from employer matching (e.g. the self-employed).
• Employer contributions should be required for over 65s and under 18s.
• Remove total remuneration approaches.
• Extend government contributions to those on paid parental leave to include those who cannot continue to make their own contributions.

The full report is available at KiwiSaver - Opportunities for Improvement (retirement.govt.nz)

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