Government Super plan targets pay packets

By AUDREY YOUNG and KEVIN TAYLOR

A work-based superannuation scheme, taking savings from workers' pay packets, has been proposed for next year's Budget.

All new employees in medium to large workplaces would be automatically enrolled in the scheme, with the right to opt out.

Existing employees would have the option of joining the scheme.

Employers would deduct the savings from pay in the same way as ACC levies, family support, student loan repayments, court fines, and taxation are deducted and sent to the Inland Revenue Department.

Inland Revenue would forward the savings, at least $10 a week, to an approved superannuation provider.

A central register would be kept of all contributors and their providers.

The scheme was unveiled yesterday in a discussion paper for Finance Minister Michael Cullen.

Dr Cullen said the Government did not have a position on the paper.

But he implied an in-principle acceptance by saying decisions on it could be made before next year's Budget, or as part of it, for an implementation date of April 2007.

Many details have still to be decided. It was unclear last night, for example, how existing employer-based superannuation schemes would co-exist with the new proposal.

Despite the lack of detail, the scheme has been cautiously welcomed by the Greens, New Zealand First, and United Future any of whose numbers would give the minority Government enough support to pass it into law.

The proposal came from a working group headed by Dr Cullen's former economic adviser, Dr Peter Harris.

Dr Cullen said: "I think the proposal we have here is the most interesting and practical proposal I have seen for encouraging work-based superannuation."

It was not a "Trojan horse" for compulsory employer contributions.

Asked if there might be sweeteners to encourage employer contributions to the scheme he said, "nothing is off the table at this point".

Dr Harris said the scheme was a mixture of "almost zero" compliance costs for employers and "very low" administrative costs for contributors.

Studies in the United States had shown that employees who had to opt out rather than opt in stayed with the particular savings scheme in far higher numbers.

"We are just trying to match psychology and economics."


Part of the reason people did not save was because they were confused and did not have confidence in financial management matters.

"They put if off. They say 'there's plenty of time, I'll make that decision later'. And they never make that decision."

Dr Cullen is inviting submissions on the report, and says he expects decisions and announcements on the scheme to be made "around or within the context of next year's Budget".

The working group was asked to consider a scheme that locked in savings until retirement,

But its report said that in the absence of sweeteners, "we struggle with the logical or moral justification for restricting the individual's access to personal funds".

The degree to which "sweeteners" are used to encourage participation may influence other decisions on such questions as access to money and how long an employee will have to be in the scheme before being allowed to opt out. Options range from one day to 90 days.

"Sweeteners" being considered include financing the administration costs of a central scheme administrator, paying fund management fees and offering group life insurance cover to younger participants.

Dr Harris said membership of workplace super schemes fell from 22.6 per cent of the workforce in 1990 to 13.9 per cent in 2002.

Household debt has risen from 65 per cent of annual disposable income to 130 per cent.

The report recommends exempting firms with five or fewer staff.

This would mean compulsory access for 1,179,830 employees and would exempt 347,370 employees working in 253,665 small firms. Eighty-six per cent of businesses and 23 per cent of employees would be exempt.

The plan

The IRD will collect the contributions of at least $10 a week.

New workers are automatically in the scheme unless they opt out.

Businesses employing five workers or fewer will be exempt.

Contributions will go to approved fund managers.

A register will track each worker's funds to allow portability.

The scheme could start in April 2007.