Transcript Slide 1

Growth Opportunities for the Finance Sector
Peter Neilson,
Chief Executive
Financial Services Council
Presentation to
FINSIA/ANZ Luncheon
“What Does 2013 Hold for Us”
Midday, Friday 15th March 2013
Hotel Intercontinental
Grey Street
Wellington
Who is the FSC and what do we do
What
the the
Report
About
The FSC replaced
ISI in May is
2011Not
with the
aim of:
• Applying evidence based advocacy to help grow and protect the wealth of
Zealanders.
Why does
that matter?
The wealthiest
1% of New in
1.New
How
we will
provide
retirement
incomes
Zealanders
hold 16.4%
of the wealth,
50% own just
the next
20 years
so ifwhereas
you the
arebottom
already
5.2% of the wealth.
retired or soon will be, it is not about you.
• We represent the investment management and personal insurance
Property and general insurance is covered by the ICNZ and
2.industries.
Relitigating
the debate about National
Health Insurance is covered by the HFANZ. If you have a KiwiSaver account,
Savings. fund, life or income protection policy, there is a better
a superannuation
than 80% chance it is provided by one of our members.
Today I am going to talk about the growth opportunities that exist for the
financial services industry and what the industry, other New Zealanders and
the Government will need to do to bring them to fruition.
2
Some numbers to put the current vulnerability of New
What
theinto
Report
Zealanders
focus is Not About
• Only 9% of New Zealanders think NZ Super ($349 per week maximum after
1.taxHow
we willandprovide
retirement
in
for an individual
$537 for a couple)
is sufficientincomes
to retire on. (Horizon
Decthe
2012)
next 20 years so if you are already
• Only
15% of New
have income
(Horizon
retired
orZealanders
soon will
be, itprotection
is not insurance.
about you.
Oct 2012)
• ForRelitigating
New Zealanders: the debate about National
2.
•Savings.
Only 15% say they have sufficient savings to last six months if they were
made redundant.
• 26% would not be able to pay their bills after just one week.
• 54% have insufficient savings to last 4 weeks after being made
redundant.
The majority of New Zealanders are financially living close to the edge and
unemployment, sickness or retirement could put them quickly over that edge.
3
KiwiSaver Contribution Rates – Horizon Survey
What
the2012
Report is Not About
December
%
1.NotHow
we will currently
provide retirement incomes in
making contributions
20.4
the next
20contributions
years so
if you
are
already
Employees
making 2%
(employer
2, 4 or
8%. Soon
to lift to
36.8
3% + 3% at least)
retired or soon will be, it is not about you.
Employees making 4% contributions (employers 2, 4 or 8%)
2.Employees
Relitigating
the debate
about
National
making 8% contributions
(employers
2, 4 or 8%)
NotSavings.
sure
Another contribution rate
18.7
3.4
15.7
7.9
So about 1 in 10 KiwiSaver members with their employer could be saving at a
rate sufficient to fund a comfortable retirement, about 10% of salary.
4
The Income Protection Insurance Gap
If you have an accident in New Zealand and are off work for more than one week,
ACC will pay you 80% of your previous earnings until you return to work. 100% of
New Zealanders are covered by ACC and what you receive is not impacted by the
earnings of your partner.
What the Report is Not About
If
are sickwe
and off
workprovide
for longer than
your sickness or incomes
annual leave covers,
1.youHow
will
retirement
in
you are eligible for a sickness benefit that is slightly lower than NZ
the next
years
if you
are
already
Superannuation
but20
if your
partner so
also has
earnings
above
the benefit level you
will not
be eligibleor
forsoon
a sicknesswill
benefit.
retired
be, it is not about you.
Many New Zealand families living with long term sickness find they are too rich to
2.
Relitigating
debate
receive
a sickness benefit the
but too
poor to payabout
the rent orNational
mortgage.
HereSavings.
is the kicker, you are 2 to 3 times more likely to be off work for six months or
more because of sickness than you are for an accident.
There are 972,000 households in New Zealand with a household income above
benefit levels that are without income protection insurance. Our missing million
customers. Most people with a mortgage have life insurance but only a minority
have income protection insurance. Your partner is currently more secure in your
home if you die than if you have a long term illness.
5
What can we do about the Income Protection Insurance Gap?
The industry has funded the FSC study undertaken by Massey University into
What
the
Report
the
size of the
personal
insuranceis
gap.Not
Of theAbout
$650b gap about 2/3rds of it is
related to income protection insurance.
1.launch
How
weMassey
will report
provide
incomes
The
of the
put thisretirement
issue on the agenda
but we willin
need
sustained
to keep
it there.
thefollow-ups
next 20
years
so if you are already
We know from our focus group and polling work undertaken by Nielsen’s and
retired or soon will be, it is not about you.
Horizon, that:
• Potential
customers findthe
the whole
topic intimidating,
the language
2. Relitigating
debate
about National
impenetrable and mistrust the industry and perceive the products as
Savings.
expensive.
• We make people offers they don’t understand, we talk numbers when they
want to talk about preserving their family going forward, the purchase,
underwriting and claims processes are all seen negatively.
• We are talking with the industry about how to overcome these issues and
achieve ongoing promotion and increased take-up of income protection
insurance.
6
What can we do about the Income Protection Insurance Gap?
Continued...
What the Report is Not About
• There is product innovation to make products simpler and more flexible. (If you
want to see an example look at KiwiBank’s online calculator and Life and Living
insurance
product
ANZ’sprovide
Lifestyle product.)
1. How
we orwill
retirement incomes in
• There are more places where you can work out what you need and obtain a quote
the next 20 years so if you are already
without feeling hassled. (See Cigna’s Income Protection Policy on its website.)
retired
soon
be,
it is about
not the
about
• We will
be talkingor
more
with thewill
IRD and
Ministers
issues toyou.
do with the
taxation of income protection insurance. At the moment lump-sum policy
2. Relitigating
theanddebate
National
premiums
are not deductible
payouts areabout
tax free, whereas
payments based
on a Savings.
percentage of previous earnings are taxable and the premiums are
deductible. A 128 page technical paper provided little help in clarifying this issue.
• If the industry does not respond to fill this market gap, it is likely eventually that
either ACC will be extended to cover illness or a base level of life and income
protection insurance will be bundled into KiwiSaver.
• In the meantime take our advice and ask your adviser, bank or broker about
income protection insurance.
7
Gradually Stepping up contributions into KiwiSaver to 10%
We currently have little action and great inertia regarding increasing KiwiSaver
contributions to get them gradually up to the 10% required to provide most New
Zealanders with comfortable retirement incomes.
What the Report is Not About
The Government has decided that given its concern about the cost of the KiwiSaver
1. How
incomes
in has
incentives
likely we
from awill
day ofprovide
enrolment for retirement
those not yet enrolled
in KiwiSaver, this
been abandoned
for the
foreseeable
the next
20
yearsfuture.
so if you are already
The Opposition parties seem likely to support a gradual step-up in contribution rates to
retired or soon will be, it is not about you.
KiwiSaver and the Labour Party has signalled that it will retain its 2011 election policy to
make KiwiSaver universal but probably only up to 7% of incomes.
2.
Relitigating
the
debate
about
National
The minimum contribution into KiwiSaver will lift from 2% employee and 2% employer
Savings.
to 3% plus
3% from 1 April.
This move is popular and suggests that a programme to step up contributions each year
by 1% would also get general support.
As part of its contribution to the debate on achieving a comfortable retirement income
for New Zealanders, the FSC will be an active participant in the revision of the Long Term
Fiscal Projections and the Three Yearly Review of Retirement Income Policy.
Our Best contribution to these debates is to make sure they address the right questions.
8
Number of New Zealand Live Birth 1935-1979
Source: Infometrics from Statistics New Zealand
9
Net replacement rate for average income earner
Source: OECD 2011
Net replacement rate for average income worker
120
NTH
GRE
HUN
ICE
100
LUX
TUR
AUT SLV
SPN
DEN
ISR
80
CZE
60
CAN
AU
NZ
POR
CHL
EST
KOR
US
BEL DEU
FRA ITY
NOR POL
SVK SWE
SWZ
JAP
40
UK
public schemes
IRE
MEX
private tier 2 scheme
20
Dot size proportional to replacement rates
for people on 1.5 times average income
public& private tier 2
scheme
0
-10
0
10
20
30
40
50
60
70
80
90
100
110
Percentage of retirement incomes from earnings related (tier 2) schemes
10
New Zealand Superannuation (PAYGO) Costs as % GDP 1970-2100 with
age of eligibility at 65 and
FSC "Lancet" Longevity (2 years per decade)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
0.0%
Source: Infometrics
11
Retirement in the 20th
Century
Retirement in the 21st
Century
Funding retirement incomes in
1955
Over 65 population less than
300,000
Life expectancy at 65 - 12.8 years
for males and 16.9 years for
females.
Seven working age people support
one pensioner.
Age pensions cost 3% of GDP when
the universal pension was available
from 65.
Funding retirement incomes in
2055
Over 65 population reaches almost
1.7 million.
Life expectancy at 65 – 31.3 years
for males and 33.9 years for
females.
Two working age people support
one pensioner.
Age pensions will cost 9-10% of
GDP if the age of eligibility for NZ
Superannuation stays at 65.
12
The Pension Gap with Australia in 2055 Assuming No New Zealand Policy Change
New Zealand
NZS pension
in 2055
Australia
Ratio
pension for (AU/NZ)
someone
retiring in
2055 having
earned the
median
income
Australia
Ratio
pension for
(AU/NZ)
someone
retiring in
2055 in
Australia
having earned
the average
income
Retirement income
Dollars
$NZ 31000
$A60800
2.31*
$A69000
2.67**
% per capita
GDP
34%
52%
1.50
59%
1.70
Contributions
2011
4.3%
7.2%
1.66
2055
7.4%
9.9%
1.34
Average 20112055
6.4%
9.2%
1.44
*This table compares the compulsory retirement systems in both countries. Australia has its age pension and its Superannuation
Guarantee whereas New Zealand has New Zealand Superannuation and no compulsory retirement savings scheme.
**The ratio of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since 1990.
Source: Coleman (2012)
Source: Australian Treasury
13
What are the right questions to ask about retirement income
policy?
the
Report
is Not
About
1.What
Should the
objection
for retirement
income
policy be a comfortable
retirement not just the avoidance of absolute poverty?
1.• How
we
willZealanders
provide
Only 9%
of New
thinkretirement
NZS alone will beincomes
adequate. in
• the
Its not
just about
the financial
of NZS,
NZS on its own is
next
20 years
sosustainability
if you are
already
inadequate as an income and needs supplementing with an expanded
retired
or soon will be, it is not about you.
KiwiSaver.
2.2.
Shouldn’t
we be talkingthe
aboutdebate
NZ Superannuation
KiwiSaver, not or
Relitigating
aboutand
National
KiwiSaver?
Savings.
• With 2 million New Zealanders already enrolled, shouldn’t we stop
pretending PAYGO (NZS) and SAYGO (KiwiSaver) are competitors and
treat them as complements?
3. What really is happening to longevity after 65?
• We have consistently underestimated the improvements in longevity
after 65.
14
What are the right questions to ask about retirement income
policy? Continued ...
What the Report is Not About
4.
Do we really have a hang-up about KiwiSaver compulsion?
Why dowe
we think
to pay for someone
else’s in
1.• How
willcompulsory
providetaxation
retirement
incomes
pension (NZS) is OK, but compulsory contributions to fund your own 2nd
the
next (KiwiSaver)
20 years
soOK?
if you are already
tier pension
is not
soon
will (compulsion)
be, it is not
• retired
If we haveor
universal
coverage
can weabout
avoid theyou.
cost of the
current KiwiSaver incentives?
2. Relitigating the debate about National
5. Are we prepared to do something about the tax and other bias against
Savings.
savings
in equities or bonds, particularly those products with compounding
returns, while we treat preferentially investments in real estate?
• If not, should we offset this with compensatory tax reductions on longterm savings such as for retirement?
15
What are the right questions to ask about retirement income
policy? Continued ...
the
Report
iswithNot
About
6.What
Shouldn’t
we start
this debate
a realistic
Business As Usual BAU case?
The Treasury draft Long Term Fiscal Projections assume that:
1.• How
westops
willincreasing
provide
retirement
incomes
Longevity
at a rate
it has for the past
40 years. in
• the
Labour
productivity
growthso
rates
be 25%
than the last 40
next
20 years
ifwill
you
arehigher
already
years.
retired
or soon will be, it is not about you.
• The Government will not give tax cuts to return fiscal drag for 50 years.
2.These
Relitigating
theproduce
debate
National
assumptions would
a lowabout
ball estimate
of the likely cost of
funding
NZS and provide more excuses for delay.
Savings.
7. On reasonable assumptions, doesn’t SAYGO (KiwiSaver) cost less than
PAYGO (NZS) to produce the same pension, or a larger pension, for the
same consumption foregone?
• What therefore, is the optimal balance between NZS funded from
taxation and KiwiSaver funded by contributions and when do we need
to start the transition if we need to afford to pay for both?
16
What are the right questions to ask about retirement
Whatpolicy?
the Report
is Not
income
Continued
... About
8. Can we make this NZS/KiwiSaver hybrid fair for women, the
1.low
How
we will provide retirement incomes in
paid, Maori and Pacifica, and how?
the next 20 years so if you are already
9. If we do have universal KiwiSaver, should the savings be
retired or soon will be, it is not about you.
guaranteed?
10.
we requirethe
that debate
you take part
of your
KiwiSaver “pot”
2.Should
Relitigating
about
National
and
turn it into a pension?
Savings.
We are in for an interesting debate during 2013.
17
Population Aged 65 and Over
2500.0
Historical
SNZ Series 5 (1 in 10)
2000.0
SNZ VLM Projection 2012
SNZ P50
1500.0
1000.0
500.0
2110
2100
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
1990
1980
1970
1960
1950
0.0
Source: Infometrics from Statistics New Zealand
18
Actual over 65 Population Compared to SNZ Mid-Series projections
19
Period Life Expectancy at Age 65
35.0
30.0
Historical
P50
25.0
VLM
20.0
15.0
10.0
5.0
2070
2060
2050
2040
2030
2020
2010
2000
1990
1980
1970
1960
1950
1940
0.0
Year turn 65
20
Contribution rate needed to achieve same KiwiSaver Plus
account balance at age 65/70 for
(Cohort turning 65 in 2061) Median Income
Account balance at 65
Male
KiwiSaver Plus Account
Balance if you start at
Age 25 on 10%
contribution rate:
638,000
Starting age
Account balance at 70
Female
Male
Female
420,000
781,000
515,000
Required contribution rate (%)
25
10.00
10.00
10.00
10.00
35
13.84
14.25
13.54
13.90
45
23.60
24.54
21.94
22.64
55
58.64
60.43
46.34
47.12
21