Compulsory KiwiSaver, Super Fund investing set percentage of money domestically could boost savings, Kiwibank says

State owned Kiwibank wants to see KiwiSaver made compulsory and suggests that prescribing a minimum amount of the New Zealand Superannuation Fund's capital that ought to be invested domestically could both boost the local capital markets, and through creating a bigger domestic savings pool, could also cut reliance on offshore funding.

Kiwibank, a subsidiary of New Zealand Post, makes these comments in a submission to the Government's Savings Working Group. The submission, by Kiwibank's general manager for wealth Tracey Berry, tax manager Greg Grant, and head of advocacy Emma Bassett, suggests a transition towards compulsory KiwiSaver for all New Zealanders in paid employment with incomes above a prescribed threshold.

They point out that in little over three years since its introduction, about 1.54 million people have signed up to KiwiSaver with an estimated NZ$6 billion of funds now under management.

"In our view, compulsory KiwiSaver would significantly increase retirement incomes, and therefore quality of life in retirement, for many New Zealanders. It would also provide a significant savings cushion, reducing dependency on Government benefits and health care – effectively lowering the fiscal cost of retirement," Kiwibank says.

Kiwibank is the second bank to make a submission to the Savings Working Group after ASB advocated for a "targeted" capital gains tax. The call by Kiwibank for compulsory KiwiSaver isn't surprising given its previous CEO Sam Knowles also made the call in July when the bank launched its own KiwiSaver scheme.

'Make 'em join'

Berry, Grant and Bassett say making KiwiSaver compulsory could be a key way to help control looming fiscal liabilities for government from future age-related spending and care. They suggest people in paid employment with an income above a prescribed threshold, perhaps broadly equal to current New Zealand Super entitlements, should be required to join KiwiSaver.

The Kiwibank trio says this group has a good level of regular income, and most can be expected to want a standard of living in retirement that can't be supported by NZ Super alone. Those not in paid employment or on low incomes should not be required to divert their income or benefit to compulsory KiwiSaver, says Kiwibank. Rather this latter group may find NZ Super provides them with an adequate income in retirement.

"We note, however, that due to the impact compulsory enrollment in KiwiSaver will have on New Zealanders' disposable incomes, compulsion may need to be phased to preserve the net income position," says Kiwibank.

"Compulsion would make KiwiSaver the primary retirement vehicle in New Zealand, keeping more of this money in the retirement system, i.e. funds would be locked-in until retirement, with only limited withdrawal options prior to that, e.g. first home purchase and significant financial hardship."

'Boost employer contributions'

Berry, Grant and Bassett also say that given the inadequacy of New Zealanders' retirement savings, the Savings Working Group should consider the benefits of increasing the level of compulsory employer contributions from 2%. They argue increasing the level of compulsory employer contributions would help increase retirement savings to a level sufficient to provide for a comfortable retirement for most New Zealanders.

"A higher compulsory employer contribution rate would also bring New Zealand more into line with Australia, where the superannuation guarantee is equal to 9% of ordinary time earnings for eligible employees – and due to rise to 12% by 2019. A significant transitional period would allow employers to take the increased contribution rate into account when negotiating future pay increases, and would help mitigate the risk of a one-time shock to the economy."

However, they acknowledge additional employer contributions are likely to be considered by employers' as part of their employees' total remuneration package, with salary or wages correspondingly reduced. Therefore, any increase in the rate of compulsory employer contributions should be balanced with an acknowledgement that this is money being diverted from the employee, who might be better advised using it to reduce "expensive" debt like mortgages and credit cards instead of adding it to their retirement nest egg.

"However, we believe this is an important step in transitioning New Zealand savers' behaviour from consumption to investment in their future well being."

Meanwhile, Kiwibank also points out that the majority of the New Zealand Superannuation Fund, which stood at NZ$17.66 billion at the end of October, is invested offshore, and just over 40% of KiwiSaver savings are invested overseas. The bank's submission suggests the Savings Working Group, chaired by ex-BNZ chairman Kerry McDonald, might consider whether prescribing that a minimum amount of the Super Fund's capital should be invested onshore would help improve the "depth and robustness" of New Zealand capital markets and provide a platform for future growth.

"While increasing investment potential, a larger domestic savings pool could also lower reliance on offshore funding."

Banks required to tap retail cash

These comments follow the Reserve Bank's introduction of the core funding ratio (CFR) on April 1, designed to help reduce New Zealand banks reliance on international wholesale, or 'hot' money, markets.

The CFR means the banks must source at least 65% of all their funding from retail deposits or bonds with terms of at least one year. The central bank wants to increase the CFR to 75% by about mid-2012. Its introduction has increased competition for retail deposits with Knowles saying in August that Kiwibank's Australian owned rivals were coming on shore to take "our money."

Since then Kiwibank has established a European commercial paper programme and is hoping to tap the Australian debt market, for a second time, for at least A$250 million.

Berry, Grant and Bassett say they are assuming a pool of domestic investments would be available for the bigger savings pool so that asset prices "are not unduly bid up."

"It may therefore be necessary for this threshold to be increased over time so that it assists in creating that pool, while not distorting values. Further, we acknowledge that diversification of investments lowers the associated risk, and that the required returns are not likely to be generated by investing exclusively domestically."

The Super Fund currently has a directive from the Government to "appropriately identify and consider" opportunities that would enable it to increase the allocation of New Zealand assets in the Fund. See here a Double Shot interview between Bernard Hickey and the NZ Super Fund's Matt Whineray about how the fund is investing more in New Zealand.

The Savings Working Group last week said it is looking at automatic KiwiSaver enrollment and a more wholesale approach to KiwiSaver's retail structure, with possibly fewer providers. It also released an interim report to Finance Minister Bill English on how to improve New Zealand's national savings. The report says high foreign debt puts New Zealand in a difficult economic situation with the country vulnerable, and warns continued increases in debt are unsustainable.

The group will release its final report in the New Year, ahead of the Government's May 2011 Budget.

Meanwhile, like ASB, Kiwibank is critical of the Savings Working Group's narrow terms of reference.