The fourth anniversary of KiwiSaver on July 1, 2011 passed with little comment. Figures for July show the number of new applications has dropped off markedly compared to previous months.
Some of this will be reaction to the changes made in the Budget which is making new contributors nervous. Much of it could also be due to the increasing cost of living making saving a low priority when many are struggling to keep themselves fed and clothed.
In Australia on August 16, the Association of Superannuation Funds of Australia (ASFA) held a celebratory dinner in Canberra to commemorate 20 years of compulsory superannuation.
The prime minister of the day, Paul Keating in 1991, is credited with having the vision to set it in place. It started with a government pay rise across the board of 3%. Australian employers were worried that it would cost them greatly to contribute but it has never been a cost to employers as it is paid as part of a salary/wages package. It is the employee who is paying.
The amount of compulsory contribution has risen steadily since 1991 and has been 9% since 2002. It will rise over the next five years to 12% of an employee's gross salary/wage. It was supposed to rise to 15% in 1996 but Keating lost the election and the new Government canned such a large increase.
Since 1991, $A1.4 trillion has been saved. This is a credit of 110% of Australia's GDP. (The US debt level is close to 110% of GDP.) The savings have been credited with helping many businesses survive the downturn of 2008/2009 because super funds were able to contribute to the massive capital raising needed by businesses to keep them solvent.
Nathan McPhee, the chief executive of Australia's industry watchdog Super Ratings, was one of several speakers at the celebratory dinner. He commented that over the 20 years of superannuation the average annual return for balanced funds was 7.1% when inflation was running at an average of 2.6% a year. He produced a graph showing only six years in the 20 were below this average return.
KiwiSaver returns to June 30, 2011 for balanced funds was 9.7% with a three-year return to June 30 of 4.0%. As we all know the past three years have been volatile. (Morningstar Research figures). There have been discussions in the New Zealand media about making KiwiSaver compulsory and our professional industry certainly wants it. Also, the minimum of 2% per employee and 2% per employer are far too low to get a satisfactory retirement lump sum.
The example of Australia is very strong. There is now $8.5 billion in KiwiSaver, expected to rise to $60 billion over the next 10 years. The New Zealand Superannuation fund holds $19.2 billion but is not receiving contributions. On current trends, these are never going to be enough to maintain a satisfactory retirement lifestyle.
If KiwiSaver was compulsory and the current small percentages were increased the availability of funds for development in New Zealand would be huge.
(Information in this article came from the Australian newspaper of August 20, 2011.)
• Peter Smith is an Authorised Financial Adviser and a Certified Financial Planner and is the principal of Kepler Group Otago Limited Email: pete@keplergroup.co.nz