Transcript Powerpoint File - KiwiSaver: A Presentation for the
A Presentation for the Singapore Central Provident Fund
Dr Brian McCulloch — Strategy Unit 30 August 2006 © The Treasury
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NZ has a multi-pillared retirement income framework.
• simple and efficient • fits World Bank prescription • has political consensus • has room to evolve 0.
1.
2.
3.
4.
World Bank Pillars Basic social pension Public pension plan Mandated personal Voluntary personal Informal support, social programs, other individual financial and nonfinancial assets New Zealand New Zealand Superannuation Private Schemes, SSRSS,
KiwiSaver
Health care, disability support, long-term residential care, financial assets, home ownership, student loans © The Treasury - 3
• • •
New Zealand Superannuation provides a basic public pension.
Universal benefit Paid to all residents over age 65 A married couple receives 65% of the national average wage (32.5% each) • • • • Indexed annually No income test or means test Not related to past earnings history Not a contributory scheme
Fortnightly payments (as at 1 April 2006)
Single, living alone Single, living with others Married or civil union couple (when both partners qualify) Married or civil union couple (when only 1 partner qualifies) [Fortnight = 2 weeks]
Before tax
$640 $589 $486 each $462
After tax
$528 $488 $406 each $387 [NZD1.00 ≈ SGD1.00] © The Treasury - 4
Population level and structure will change significantly over the next few decades 6 Projection 85 and over 5 4 Total population 65-84 3 15-64 2 1 0-14 0 1940 • • • • 1960 1980 2000 2020 2040 2060 2080 2100 A larger proportion of “elderly”, especially “older elderly”.
Some “unexpected longevity” – people underestimating how long they live.
People available for work for longer and/or longer in retirement/semi retirement.
There will be changing demands on Crown finances.
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Most countries will experience ageing populations over the next few decades.
35% 30% 25% 20% 15% 10% 5% 0% New Zealand Singapore
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The cost of New Zealand Superannuation is set to rise significantly.
10 Projection 8 6 4 2 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 © The Treasury - 7
New Zealand Superannuation Fund Policy Background
• • • • • Seek a stronger Crown Balance Sheet to cushion the impact on Crown finances … … and Public Debt is already at relatively low levels, so … … build up a fund of Crown-owned financial assets.
Also a diversification benefit of broadening the Crown financial portfolio across capital markets.
But need good governance arrangements to avoid repeating the international record of poor financial performance of public funds.
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Capital contributions to the Fund smooth over time the Budget effect of the increase in NZS.
9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 Net NZS Expenditure 2015 2025 2035 Capital Contribution Plus Net NZS Expenditure 2045 2055 2065
Year ended 30 June
2075 2085 2095 © The Treasury - 9
NZ has a multi-pillared retirement income framework • simple and efficient • fits World Bank prescription • has political consensus • has room to evolve 0.
1.
2.
3.
4.
World Bank Pillars Basic social pension Public pension plan Mandated personal Voluntary personal Informal support, social programs, other individual financial and nonfinancial assets New Zealand New Zealand Superannuation Private Schemes, SSRSS,
KiwiSaver
Health care, disability support, long-term residential care, financial assets, home ownership, student loans © The Treasury - 10
According to flow measures, household savings are low relative to other countries, and chronically negative …
$b
12 -2 -4 -6 -8 -10 4 2 0 10 8 6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 United Kingdom United States Australia New Zealand © The Treasury - 11
… but stock measures suggest that wealth has increased, even after allowing for house price increases.
600 500 400 300
Removal of house prices
200 100 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 -100 Net Worth Adjusted Net Worth excluding house price effects © The Treasury - 12
Average household wealth levels are within the range of those of other countries …
$ (000)
350 300 250 200 150 100 50 0 Canada Finland Italy Sweden US NZ (couples) NZ (individuals) Australia © The Treasury - 13
… but retirement wealth varies significantly across the population.
2,800,000 2,400,000 2,000,000 1,600,000 1,200,000 800,000 400,000 0 1 2 3 Housing Wealth 4 5 6 7 8 Financial Wealth 9 10 11 12 13 14 15 16 17 18 19 20 Wealth Ventile Pension Wealth NZ Superannuation
Total Net Wealth of Couples aged 56-64 by wealth ventiles (2001 Household Savings Survey) © The Treasury - 14
What are the policy implications?
8-10 5-7 1-4
Upper income deciles: More than adequate wealth to sustain retirement consumption as a rule - not a focus of policy.
Middle income deciles: Average levels of wealth Ok but wide variation. Scope for higher saving.
KiwiSaver
is likely to self-select to this group.
Lower income deciles: New Zealand Superannuation will meet their main retirement income needs. Limited scope for any significant change in saving rates.
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What is
KiwiSaver
?
• • • A voluntary work-based savings scheme.
Announced in Budget 2005 as part of an ongoing package of initiatives to increase individual savings and support New Zealanders in retirement.
KiwiSaver’s
purpose is to encourage a long term savings habit and asset accumulation to improve financial well-being, particularly for retirement.
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What are the underlying drivers of
KiwiSaver
?
• • • • Creating a long term saving habit Encourages saving by making it easy – Immediate benefit to join – Simple to join, rules of thumb – Safe, secure with effective oversight Avoiding constant temptation to spend – Deduction from pay through Inland Revenue – Lock in until age 65 Home or retirement saving accommodated © The Treasury - 17
• • • • • • • •
What are the key features of
KiwiSaver
?
Work-based savings scheme Voluntary participation (opt out) Defined contribution Private sector providers Payroll deductions through Inland Revenue Government up-front contribution and fee subsidy Locked-in until eligible for NZS (age 65) – Access for first-home ownership To be implemented in 2007 – 25% of workforce assumed to be enrolled by 2012 © The Treasury - 18
Why is
KiwiSaver
based on savings through the workplace?
• Allows deductions for contributions to be made at source.
– Avoids temptation to spend.
• Obtains benefits from economies of scale in administration in conjunction with income tax collection.
• Reaches a high proportion of the population who are able to save.
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Who participates in
KiwiSaver
?
• • • New employees are enrolled automatically.
– The need to actively opt out uses human inertia to encourage participation.
Existing employees and non-employed can sign up, either through their employer or directly with a provider.
Applies to all New Zealand citizens and permanent residents below the age of eligibility for New Zealand Superannuation (65).
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Why isn’t participation compulsory?
• • Some people might be better off not contributing to
KiwiSaver
.
– Those who would be better to be repaying debt.
– Those who have other goals than passive saving for retirement (for example, building a business).
– Those on low incomes for whom New Zealand Superannuation may be adequate in retirement.
Contribution holidays can be taken to temporarily suspend making contributions.
– Up to 5 years after a minimum membership of 12 months.
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What decisions to savers have to make?
• • When joining: Can choose which scheme (and investment profile) to join [or be allocated to a default provider].
Can choose a contribution rate: 4% [the default] or 8%.
• • • While saving: Can transfer between schemes.
Can take a contribution holiday.
Can make a first home purchase withdrawal.
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How much are the contributions to
KiwiSaver
?
• Employees contribute 4% (the default) or 8% of their gross salary or wages through payroll deductions.
• Employers can also make contributions.
– These count toward the 4% or 8%.
– Tax exempt up to a cap.
• Employees can make additional contributions direct to providers.
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What can
KiwiSaver
balances be withdrawn for?
• • • At age 65, the full balance can be withdrawn.
One-off withdrawal for first home purchase.
Under certain circumstances for financial hardship or serious illness.
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Will
KiwiSavers’
protected?
money be
• • • •
KiwiSaver
schemes will be run by trust deeds (like existing registered superannuation schemes).
Schemes must meet the requirements of the KiwiSaver Act and be approved by the Government Actuary.
Regulated as for other superannuation products.
No government guarantee of scheme balances.
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What support does the Government provide to
KiwiSaver
?
• • Financial – A kick-start contribution of $1,000 to new accounts.
– An annual contribution toward members’ fees.
– Targeted assistance to individuals buying a first home.
– Tax exemption for employer contributions up to a cap.
Administrative – Contributions are collected and aggregated through the PAYE tax collection system.
– The Government appoints default providers and negotiates their fees.
– BUT the financial returns of schemes are not government guaranteed.
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How will
KiwiSaver
affect employers?
• • • •
KiwiSaver
has been designed to minimize compliance costs by using the existing PAYE tax collection processes.
Employers will be required to: – Provide information packs (prepared by IRD) to all employees.
– Notify IRD of new employees’ details – Deduct contributions from payroll and remit to IRD.
Employers can: – Nominate a provider for their employees for when employees do not choose their own.
– Make voluntary employer contributions – Apply for exemption from automatic enrolment if their existing pension scheme meets certain requirements.
– Apply to convert their existing pension scheme to a
KiwiSaver
scheme.
Employers are not liable as a scheme advisor or promoter.
– (Unless they go further and provide specific advice.) © The Treasury - 27
What is the role of the Inland Revenue Department in
KiwiSaver
?
• • • • • • Inland Revenue is the central administrator: Providing information about
KiwiSaver
employers for distribution to employees to Administering the opt-out process Receiving contributions from employers and others and on-paying these to providers (with interest) Administering the contribution holiday Paying up-front $1000 contribution to each new
KiwiSaver
account Allocation of default schemes to employees © The Treasury - 28
What are the requirements on
KiwiSaver
providers?
• • • • Requirements for all
KiwiSaver
Superannuation Schemes Act providers: Comply with the securities legislation and the Comply with the KiwiSaver Act Register with the Government Actuary – Entry requirements for registration Ongoing Monitoring by Government Actuary and Trustee • • Requirements for
KiwiSaver
default Providers: Open and Competitive tender to appoint Default Providers Further Requirements for Default Providers © The Treasury - 29
KiwiSaver
Enrolment Process
Saver
Information pack Employee details
Employer
Send default investment statement Information packs Employee details
Central Administrator (IRD)
Allocate to fund
Fund Providers
Active opt-out (weeks 2 to 8) © The Treasury - 30
KiwiSaver
Contribution Process
Saver Employer
Annual contribution advice Contributions by employer Contributions deducted from wages
Central Administrator (IRD)
Investment return advice Transfer to fund
Fund Providers
Kickstart and fee contributions
Government
Contributions directly to provider (optional) © The Treasury - 31
What is the progress of implementation of
KiwiSaver
?
• • • • Select Committee has considered the draft legislation and reported back to Parliament last week.
Currently going through the final legislative processes before becoming law.
Implementation was intended to be by 1 April 2007, but now likely to be 1 July 2007.
A competitive tender process to select default providers has been initiated but will not be completed until the legislation is passed.
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Further information on
KiwiSaver
• Inland Revenue Department (Central Administrator) www.ird.govt.nz/kiwisaver/ • The Treasury (Overall Policy) www.treasury.govt.nz/kiwisaver/ • Ministry of Economic Development (Provider Selection and Regulation) www.med.govt.nz/kiwisaver/ © The Treasury - 33
Dr Brian McCulloch Director New Zealand Treasury [email protected]
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