New Zealand is ahead of the curve when it comes to pensions provision, but as the country’s leading pensions economist Susan St John explains to David Blackman, many of the issues the sector faces are universal
It’s hardly surprising that Susan St John is clutching a large Cafe Nero coffee cup when she meets Pensions Insight.
The diminutive New Zealander is squeezing us in between a presentation to Nest (National Employment Savings Trust) and provider Friends Life. This packed day follows a dash across the Irish Sea from Dublin, in the teeth of one of the winter’s wildest storms, where she had spent the previous day talking to the Irish pensions authorities.
The reason so many people want to hear from St John is that when it comes to auto-enrolment, New Zealand is ahead of the curve.
St John is well placed to comment as the country’s leading pensions economist. And while this may sound like faint praise to a UK audience, the Kiwis have plenty of lessons about pensions for their old colonial masters.
New Zealand implemented its version of auto-enrolment in 2007 due to the dire state of New Zealand’s pension provision. By this time last decade, just one in ten of the country’s workforce was in a work based savings scheme.
Tax concessions were seen as grossly unfair and distortionary
This in turn was rooted in the NZ’s decision in the early 1990s to get rid of all saving tax incentives. The move was part of a wider overall programme to reform the New Zealand economy, dubbed ‘Rogernomics’ after the then finance minister Roger Douglas.
St John acknowledges that there was “a very sound, purist economic rationale” to the initiative. “It was a tax argument - tax concessions were seen as grossly unfair and distortionary.”
Current roles: Associate professor, co-director, Retirement Policy and Research Centre, University of Auckland; spokesperson and policy analyst for the (New Zealand) Child Poverty Action Group (pro bono)
Past roles: Deputy Chair, Periodic Report Group 1997, New Zealand’s first major review of its pension reforms, advisor to New Zealand Treasury (2103-14), co-founder Child Poverty Action Group
First job: Maths and chemistry teacher before retraining as an economist
Books: Include Superannuation in New Zealand. Averting the Crisis (1988), Private Pensions in New Zealand, Can they avert the crisis? (1993), A Super Future? The Price of Growing Older in New Zealand (1998)
Interests: Meditation, squash, the gym, walking, swimming and political films
Family: Four children and seven grandchildren
But the policy backfired, leading to the plunge in workplace savings rates. New Zealand’s relatively generous state pension arrangements, which are fixed at 33% of the average national wage, masked the shortfall, but didn’t entirely disguise it.
Middle income bracket people were not making adequate provision
St John says: “Occupational based superannuation had fallen away: the concern was that middle income bracket people were not making adequate provision.”
The lack of saving prompted the Kiwi auto-enrolment initiative, which included the establishment of Kiwisaver, a New Zealand version of Nest that unlike its UK counterpart is designed to cover the entire population.
More than half of the total population belongs to Kiwisaver
St John believes that auto-enrolment has been a qualified success in New Zeland, giving it “six out of ten”. More than half (55%) of the total population belongs to Kiwisaver, which every New Zealander joins when they are automatically enrolled rather than a provider chosen by their employer. Individuals can join the scheme at any age from childhood onwards.
The opt in rate for workplace savings across New Zealand is now 67%, a sixfold jump compared to the picture before auto-enrolment. Kiwisaver itself had accumulated assets of $19bn (£9.5bn) by September 2013.
St John says: “I see a lot of people in middle income brackets, who are delighted that for the first time they have a savings pot that they see growing. It may not be great but it’s theirs and the effect of that is very positive.”
The Kickstart grant has been crucial to Kiwisaver’s success
Under Kiwisaver, employees are auto-enrolled when they start a job regardless of how little they earn with the option to opt out between the second and eighth weeks of employment. After being in the scheme for three months, they can get a Kickstart cash grant of NZ$1,000.
The Kickstart grant has been crucial to Kiwisaver’s success, believes St John who describes it as “the petrol that has got the thing up and running.”
Businesses, initially uneasy about the concept of compulsory, were wooed meanwhile with the offer of a tax credit to offset their contributions. The right of centre government, which took over power from Labour in 2008, axed these reliefs. However by this point it didn’t matter, according to St John.
You can have sweeteners to help people enter a scheme but once they are in inertia will kick in and if you take the sweeteners away it probably doesn’t matter much
“People were still joining and there were not great exits. You can have sweeteners to help people enter a scheme but once they are in inertia will kick in and if you take the sweeteners away it probably doesn’t matter much.”
Another factor smoothing the way was the government’s decision to give responsibility for running auto-enrolment to the tax authorities instead of employers.
Besides taking the pressure off business, this approach goes with the grain of modern society with its mobile populations, globalisation and casualised employment patterns, St John argues.
The New Zealand approach leads us to something that is much more appropriate for the 21st century
“These are all reasons why you don’t want to focus on the employer. It was appropriate last century in DB (defined benefit) schemes where the employer got an advantage from locking people in. We are in a different world. The New Zealand approach leads us to something that is much more appropriate for the 21st century where it doesn’t matter who your employer is. ”
This shift undermines the very concept of the pension as a reward and retention tool, she argues.
“That role has gone anyway. We only had 10% coverage so we’re not really worried about that – it’s not really part of the discussion.”
However while the introduction of auto-enrolment has been smooth, the debate over contributions is heating up, like in the UK.
It’s going to be a huge bun fight - we’ve been down this road so many times before
Raising contributions from their current minimum level of 3%, with matching sums from the employer, to 4% is “the logical path”, believes St John.
But she is less enamoured by proposals from the Labour opposition, which is tipped to win a general election later this year, to introduce compulsory pension saving. “It’s going to be a huge bun fight - we’ve been down this road so many times before,” says St John wearily.
However St John’s main focus now is on what she sees as the next big issue - turning those pots being built up through auto-enrolment into meaningful sources of retirement income.
And for all the woes of the UK’s at retirement market, in the spotlight on the day we meet following the publication of the Financial Conduct Authority’s annuities report, she believes the lack of such products in New Zealand is a serious problem.
She blames this “market failure” in post-retirement provision in New Zealand on a lack of mandatory annuitisation.
The year before last three annuities were sold and no one in their right mind would voluntarily buy one
“New Zealand is a classic example of what happens when you take away all of the state underpinning including the mandation of annuitisation. The year before last three annuities were sold and no one in their right mind would voluntarily buy one.”
“You will not get an annuity market if you don’t have any state underpinning. Take that away and the annuity market folds because it’s too difficult with the risk of longevity and inflation.”
“The problem with the debate at the moment is the idea that market demands means there will be a rise in the private sector - well it won’t. Unless the government takes a very strong leadership role either designing or running the product, certainly subsidising, it, I doubt we shall see the emergence of an annuity market.”
“You have a product that doesn’t work, which suggests that there is scope for dramatic reform.”
Meanwhile the absence of tax incentives means that New Zealand can start with a blank sheet when reforming the country’s system, she adds. And the very success of auto-enrolment means that it has become a pressing issue.
A substantial accumulation makes it possible to do something about mandating decumulation
“A substantial accumulation makes it possible to do something about mandating decumulation.”
This reform of annuities could be used to tackle another pressing issue of the aging society: long term care, she argues.
Work done by Auckland University’s Retirement Policy and Research Centre, which St John heads, recommends the creation of new annuity products that would triple in value at the point when the retiree enters long term care.
Decumulation is an issue whose time has come
“It doesn’t makes sense to pay less attention to decumulation as accumulation - it’s an issue whose time has come, in five years’ time there will be a lot of debate about this.”