KiwiSaver should be used to pay down student debt

MEDIA RELEASE

May 12, 2011

KiwiSaver should be used to pay down student debt

KiwiSaver members should be able to use their accumulated funds to repay student loans, helping young people to start saving faster and cutting the amount of debt carried by the country as a whole, said Milton Jennings, chief executive of Fidelity Life.

Prime Minister John Key and Finance Minister Bill English have confirmed they are planning changes to the KiwiSaver scheme. Key said that less would go in to KiwiSaver accounts from tax credits and more would go in from both individuals and employers.

"Young people are saddled with so much debt as they get educated that saving for their first home, let alone retirement, is a distant dream," said Mr Jennings, who helps oversee some $200 million in KiwiSaver funds for the New Zealand-owned insurer.

"We want to establish a culture of savings in New Zealand rather than a country with the highest personal debt levels in the world. KiwiSaver members should be able to reduce their student loan obligations to the Government and the Government will, in turn, be able to reduce the balance of its student loan book."

The Government currently contributes $20 a week to KiwiSaver accounts, but that is set to come down over time, Key has indicated. The lower contribution from the Government would be offset by higher contributions from individuals and employers. The changes will be officially announced at the May 19 Budget.

Under present legislation, KiwiSaver funds, which totalled $8.8 billion as at March 30, can be withdrawn before the age of 65 only when buying a first home, emigrating, or suffering financial hardship or serious illness.

"It's illogical to allow withdrawals from KiwiSaver funds to buy a first house and not for clearing the earlier debt of a young person's student loan with the Government," said Mr Jennings.

"KiwiSaver is a fantastic savings scheme for this country; Fidelity Life would like to see it expanded, not scaled back. If the Government is serious about reducing the level of New Zealand's indebtedness, then the diversion of accumulated funds into paying down student debt makes sense for members as well as for the state's own books."

Mr Jennings said a New Zealander on an average graduate salary of $50,000 a year would, in five years, be able to reduce his or her student loan by some $10,000, plus interest, based on a diversion of 2 per cent employer contributions and 2 per cent employee portion into paying down the debt.

He also said that many KiwiSaver members change their fund provider without having a good reason to.

"Any sophisticated investor knows that investments have to be made for a length of time in order to produce healthy returns. There is no advantage for the average person to switch funds and they should ask questions about why they are being encouraged to transfer.

"They should seek a comprehensive comparison between the two products in terms of returns, fees, risks, benefits, service and so on. In summary, the kind of information that only a qualified adviser should be giving."

Fidelity Life has more than 70,000 KiwiSaver members. Its Options Kiwi Fund was named top performing KiwiSaver Fund out of the 120 surveyed by research house FundSource for the three years to 31 December 2010, with an annual average return of 11.591 per cent over the three years.

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