KiwiSaver

This past week has finally seen the official release by the Minister of Finance of the details of the KiwiSaver scheme, first announced in last year’s budget.

The officials have a 1 April 2007 deadline to have the scheme up and running, as the first funds will be collected via employer PAYE tax payments beginning in April 2007.

For those starting new jobs, they will automatically be included in the scheme, unless they opt out.  For existing employees, they will have the option of opting in.

Contributions to the scheme will be set at either 4% (the default rate) of income or 8%.  Let’s put this into perspective.  At the average wage (and assume that it is $40,000 pa for ease of calculations), the contribution will be around $61.54 per fortnight.

It is hoped that around 25% of the workforce may take up the scheme.  What is worrying is that the 4% default rate is less than half the rate really needed for people to fund a reasonable standard of living in retirement and that assumes saving for 40 years.  It may give people a false sense of financial security.  However, it is a start.

It appears that contributors will be given a choice of four or five schemes to be provided by various financial institutions.  No doubt they will all be lobbying to be on the approved list.  Information will be provided by IRD to employers who will then pass it on to the employees. 

KiwiSaver will not be sold via financial intermediaries such as financial planners, insurance agents, or share brokers.  There is probably a very good reason for this, and it relates to cost.  Quite simply, it would be uneconomic for these advisers to be able to service contributors on a one on one basis. 

What could be interesting is whether employers could be deemed to be providing financial advice.  Currently it is normal practice for employers to offer a choice of provider for super schemes to pass all responsibility of choice to the employee rather than themselves.

Employees will need to be advised their savings in KiwiSaver will not be government guaranteed.  Therefore there is the potential for savings to go down as well as up in value during certain periods.
 
We may see some employers decide that the best way of handling the financial planning side of things, could be by contracting advisers to make presentations to groups of employees.  This is a logical approach, however there is always the danger that one scheme may be favoured over another, by the advisers if they have any ties with one of the financial institutions administering one of the schemes.

The KiwiSaver scheme will address some of the long term saving problems that New Zealand has.  Because of the potential size of the overall investments, the costs associated with the investments should be low.  However the administrative costs associated with individual account holders especially in the first few years when the funds under management will be relatively low, will be a significant cost to the providers of the schemes.