Mary Holm: KiwiSaver debate benefits everybody

People tend to spend less as they get older. Photo / Thinkstock

Discussion about scheme covers broader issues such as deciding how much risk to take, and managing savings

Q: Each week, I read your column to see if it can throw up any investment pearls of wisdom we retirees can clutch. But in the main it's just KiwiSaver. Bah!

In jest, I suggest you rename your column KiwiSaver Kids Korner — lessons for our financially illiterate children and grandchildren.

Is KiwiSaver an innovation to solve a demographic bulge and mitigate some perceived future social issues? Or is it an attempt to change attitudes on saving?

It won't be a solution as I believe that in order to maintain their current lifestyle in retirement, a couple will need an income from pensions and investments of $100,000 a year. That's in today's money. So they will need a diversified portfolio of $1.2 million as well as no debt and no upcoming replacement issues. In my view KiwiSaver alone will not provide this nirvana.

KiwiSaver is created by the state and that allows the state the opportunity to intervene. There is now talk of using the scheme as a "tool" to control interest rates. That's a negative for savers. Term deposits are the safe haven for retirees who have saved.

Our taxes help pay for KiwiSaver, but we are excluded from joining. Surely we are not going to be dudded by this "tool".

It would be nice to see some stuff on balance sheets, trends and growth opportunities we all could share.

A: Where does the $100,000 a year come from? That's way above the average income for everyone, and people tend to need considerably less income in retirement.

Usually retirees don't spend as much as younger people on dependants, they've paid off their mortgage and — a big difference — they're no longer saving. Also, they spend less or nothing on work clothes, commuting, bought lunches, dry cleaning and loss of income and life insurance. And as people get into their 70s and 80s, they tend to go out less.

Health insurance costs rise a lot, and perhaps other spending on health, but for most people these are easily offset by the drop in other expenses.

Many retired people living on just NZ Super or not much more say that they manage financially — especially if they have a mortgage-free home. I expect that most people will find KiwiSaver plus NZ Super provides enough.

Your comment about using KiwiSaver to control interest rates isn't quite right. Labour says it proposes "to adjust KiwiSaver contribution rates, rather than interest rates, as a means of controlling inflation". The target is inflation, not interest rates.

I appreciate that, if this means interest rates are raised less, that would hurt many retirees. But if the tool does help to keep inflation in check, that's good for retirees, who tend to be hit hardest by high inflation. So it might be a mixed bag for you.

On Q&As about KiwiSaver, I acknowledge there've been too many lately. Letters often generate other letters on the same topic, and it's good to explore the topic — KiwiSaver or otherwise — from several angles.

Because I've had complaints like yours before, I've kept a tally. So far this year, 38 per cent of the Q&As — including yours — have been about KiwiSaver. But that's unusual. In 2011 it was 25 per cent, in 2012 it was 28 per cent and last year it was 20 per cent.

Given that about half the population — and I'm sure more than half the readers of this column — are in KiwiSaver, those percentages are probably too low. Certainly I publish a smaller proportion of all the letters I get about KiwiSaver than about other topics.

There's another point here, too. A lot of KiwiSaver Q&As cover broader issues that we can, indeed, all share — such as repaying debt versus saving, how to decide how much risk to take and how to manage any type of retirement savings.

Still, I don't like to have you "Bah-ing"! Will try to veer in another direction shortly.

Total package

Q: A query on KiwiSaver. The company I work for has individual employment agreements with all the employees and in each agreement they pay a total package, which covers everything.

When KiwiSaver was introduced, and after I had been there for several years, it said that as the employment agreement already covered everything, it would not pay extra towards KiwiSaver.

This means the employee has to pay both their individual and the company KiwiSaver contributions. Does the law allow this?

A: Maybe. Under the KiwiSaver Act, there must be an agreement between the employer and employees — made after December 13, 2007 — that allows this approach, sometimes called total remuneration.

The agreement needs to be negotiated in good faith and accepted by employees. Usually this will occur when pay increases are being offered.

It's not clear whether your employer has toed the line. Perhaps show this Q&A to them and discuss it.

The rationale behind letting employers do this is that they can treat KiwiSaver employees the same as non-KiwiSaver employees. Those doing the same work receive the same total pay, regardless of whether some of the money goes into KiwiSaver.

While this approach was allowed when KiwiSaver started in July 2007, the following year the Labour-led government disallowed it. However, after the election that year, the National-led government permitted it again.

What might happen next? Read on.

Mockery

Q: I understand that according to the rules of KiwiSaver, employers can avoid paying their employer KiwiSaver contributions through wage bargaining by reducing the employees' gross pay.

As many employees now have this as part of the "standard" contract with their employer, this makes a mockery of the term "employee" contribution. In addition, with every future increase in the employer/employee contribution rate, my gross take home pay will be reduced by 2 per cent — 1 per cent for my normal employee contribution and 1 per cent for the "employer" contribution that I have to pay.

I am now alarmed to hear that the KiwiSaver rate may be increased to 9 per cent depending on who wins the election. My total KiwiSaver deduction will be a whopping 18 per cent, assuming the employer contribution rate is also increased. I would rather pay that into my mortgage.

Now with the election coming up, have you heard of any proposals to make other changes to KiwiSaver? More specifically, is any party promising to remove the "wage bargaining" clause in KiwiSaver legislation?

A: You wrote before Labour announced its KiwiSaver policy this past week. Key elements are:

From October 2015, KiwiSaver would be made compulsory for all employees 18 to 65 except those on very low pay. Students, beneficiaries and the self-employed would also be exempt.

For people compulsorily enrolled, employee contributions would start at 1 per cent, rising gradually to 4.5 per cent by April 2021.

For employees already in KiwiSaver, minimum employee contributions would rise from 3 to 3.25 per cent in April 2016, and then gradually to 4.5 per cent by April 2021.

Employer contributions for both groups would also rise from 3 to 4.5 per cent over the same period.

From 2021, the Reserve Bank could use the new tool referred to in the first Q&A, called the Variable Savings Rate. It's possible but unlikely it would be used earlier than that.

The $1,000 kick-start, maximum $521 annual tax credit, hardship withdrawals and first home withdrawal and subsidy would all remain — although the kick-start would be paid over five years for those compulsorily enrolled.

For you, this would mean that the maximum employee plus employer contributions would rise from 6 to 9 per cent by 2021 — not 18 per cent — unless the Variable Savings Rate was used earlier. After 2021, though, it could go higher, depending on how the tool is developed.

But take heart. Asked if Labour might again outlaw applying total remuneration to KiwiSaver, finance spokesman David Parker said, "Yes, although once everyone is in KiwiSaver the ability to discriminate against employees who are in KiwiSaver is largely overcome."

In other words, because employers would be paying KiwiSaver contributions for all employees, they might remove KiwiSaver from their total remuneration packages and pay the contributions directly. They would perhaps do this in lieu of a pay rise.

You also asked about other proposed KiwiSaver changes. As I said last week, the current Government plans to automatically enrol all employees, giving them the right to opt out. This would probably take place in 2015-16 if the fiscal surplus is as big as expected.

What else? A summary of political parties' KiwiSaver policies put together by the Retirement Policy and Research Centre says New Zealand First, the Maori Party and United Future all favour compulsory KiwiSaver. The Greens prefer automatic enrolment and opt out - like National. They also favour creating a public KiwiSaver fund with lower fees than current providers.

Advice needed

Q: I think there's been one or two things missed out in your recent reply to the couple wondering what to do with their KiwiSaver financial hardship withdrawal.

This couple needs expert budget advice from a lawyer and Family Budgeting Services and they need it fast. As neither of them is working they are entitled to apply to Winz for job seekers benefits. They should establish their benefit entitlement first.

Second, they are so far in debt that filing for bankruptcy may be the best option, and they really need the expert advice outlined above to make a decision. At the very least a proper budget advisory service may be able to negotiate payment plans with the various creditors.

A: Thanks for your suggestions. One of them is excellent — to seek help from Family Budgeting Services. Its advice is free, and you're right, it can often arrange for a client to repay debts in a workable way. This alone can justify using the service. For more information, see familybudgeting.org.nz.

On applying to Winz, the couple can certainly inquire, although they might not be eligible for a benefit.

I'm not so keen on the lawyer idea, though. For one thing, lawyers usually cost plenty, and the couple haven't got plenty.

Also, most lawyers are not experts on bankruptcy, let alone budgeting. I worry that many lawyers seem willing to give advice on all sorts of financial issues — including investing — when they know little. Never be shy to ask a lawyer if they have expertise in the area before consulting them.

On the other hand, many advisers at Family Budgeting Services are trained to help clients work out whether insolvency — which includes bankruptcy but also some less drastic options — would be appropriate for them, says Raewyn Fox, chief executive of the NZ Federation of Family Budgeting Services.

For anyone considering bankruptcy or similar, ask for someone with that knowledge when you make an appointment with an adviser, says Fox.

• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.