While it has flaws, the savings scheme is coming of age, writes Andrew Gawith.

On July 1, KiwiSaver will turn 5. By then it looks as if we'll be just short of two million members with a total of about $12 billion in retirement savings accounts.

That sounds like quite a success story and far exceeds the early predictions for the scheme, although Treasury studies remain unenthusiastic about KiwiSaver's contribution to lifting national savings.

While KiwiSaver now has a wide base in terms of membership (a little under half the eligible population) the total value of accounts falls well short of the $18.5 billion being managed via registered superannuation schemes, and as a savings story it pales into insignificance when compared to the $415 billion equity New Zealanders have stashed away in residential property.


To really rub in just how immature KiwiSaver is let's look at Australia's compulsory superannuation scheme. Australians now have around $1.6 trillion in compulsory superannuation accounts - that works out at about $75,000 for every Australian, versus just $2700 in KiwiSaver per New Zealander.

There are three obvious reasons for the big difference: Australia's scheme has been going for 20 years, not five, it's compulsory, and the required contribution rates are much higher than for KiwiSaver.

After five years the strong points and shortcomings of KiwiSaver have become reasonably obvious.

Although compulsion is supported by some providers and a few politicians a strength of KiwiSaver is that it is a voluntary retirement savings scheme.

We can probably all agree that saving for retirement is sensible for most people, but not everyone.

Firstly, some people will be relatively better off in retirement given the existence of New Zealand Superannuation, so it would not make sense for them to further reduce their current income to make themselves even better off in retirement.

Secondly KiwiSaver is by no means the only, or best, way to save for retirement - a young person may achieve a far better return for themselves and the country investing in creating their own business.

And finally, if the scheme were compulsory people may be more justified in thinking it is government guaranteed. In summary, the non-compulsory, opt-out nature of the scheme deserves a tick.

When you start a new job you are automatically enrolled in KiwiSaver if you are not already in the scheme, but you have the option of opting out within eight weeks. That has no doubt helped "capture" a number of lukewarm savers.

Self-employed, people not in work, and children are not subject to this auto-enrolment process.

However, the Savings Working Group proposed that everyone over 18, eligible to enrol, but not yet a member of a scheme should be automatically enrolled and to avoid being locked in would have to opt out within eight weeks - if auto-enrolment is sensible for new employees, it's surely sensible for everyone.

This sweeper-type strategy would remove apathy as a barrier to membership and boost KiwiSaver numbers. The National Government said it would look at the idea once the budget was back in surplus.

Other strengths of KiwiSaver are that Inland Revenue is involved in managing a large portion of all payments to the various schemes.

That leads to a relatively simple and efficient payments system for employees, employers and providers. Even self-employed people can make electronic payments via Inland Revenue to their scheme provider.

The rule that a person can be a member of only one scheme at a time is a simple but valuable attribute of KiwiSaver. Unlike Australian super where a person can have accounts with many providers and lose track of what they have where, the one account rule here keeps life simpler for everyone.

The combination of Inland Revenue's involvement, the one-scheme rule and the ability to transfer between schemes gives rise to another nifty benefit for KiwiSaver members.

If you can't recall who your KiwiSaver provider is (and it's surprising how many people don't know), and your provider has lost track of you, an easy way to reconnect yourself with your savings is to apply to join another scheme.

Your completed application form goes to Inland Revenue and it then tells the scheme you have applied to join who your most recent provider was enabling your new scheme to complete the transfer and send you a "welcome" letter; and Bob's your uncle. Or you could simply ring Inland Revenue and ask them who your provider is.

KiwiSaver does have some shortcomings. The worst is probably the lack of protection from political tinkering. Even before the regime was launched the Labour government made some substantial changes to it, and almost every year since changes have been made.

From April 1 this year the compulsory employer contributions will be taxed and the Government is proposing to lift the minimum employee and employer contribution rate to 3 per cent from April 1, 2013.

As members have found over a dramatic five years in financial markets, saving and investing is uncertain enough without politicians changing the rules every year.

Another design fault was incentivising children (0-18) to join the scheme. The cost to the Government has been more than $300 million - everyone that joins KiwiSaver is given a $1000 kick-start payment.

Sounds great to kick the kids into the saving habit, but the reality is that most are dormant accounts except for the fees and taxes being deducted. Most schemes charge pretty chunky fees on low account balances reflecting a fixed administration cost of managing a member's account.

While there are no doubt a host of other gripes you could level at KiwiSaver the regime is innovative, is probably well enough established to survive political meddling, may eventually encourage greater financial independence, is lifting standards in the funds management industry and may eventually improve New Zealanders' financial acumen.

Andrew Gawith is director of Gareth Morgan Investments, an Investment Manager and KiwiSaver and Superannuation provider.