KiwiSaver 12% plan risks backfiring without total pay ban, provider warns

National plans to increase KiwiSaver contributions to 12% by 2032, with 6% from employers and employees. Photo / RNZ, Samuel Rillstone

By Susan Edmunds of RNZ

National’s announcement that it would push up contribution rates for KiwiSaver to a total 12% is a good step – but there is a major flaw that needs fixing first, one KiwiSaver provider says.

Prime Minister and National leader Christopher Luxon said on Sunday that if it was re-elected next year, the party would gradually increase KiwiSaver contributions to match the Australian 12% rate by 2032, with 6% contributions from both employers and employees.

It has already started a process to increase the default rate to 4% plus 4% by April 1, 2028.

“Smaller retirement balances present a challenge for New Zealand as a whole, too, as we rely more on investment from offshore to fund the infrastructure, start-ups and housing we need to grow our economy, create jobs and lift incomes,” Luxon said.

“If we’re serious about building the future, and I am, it’s time to aim higher.”

Simplicity managing director Sam Stubbs has said the policy could be a “turning point for economic growth” in New Zealand, as more saving led to more investment – and the next step should be making KiwiSaver compulsory.

Rupert Carlyon, founder of Koura KiwiSaver, agreed contribution rates were currently not high enough.

He calculated that with a return of 5.5% a year and 12% contributions, a 21-year-old could end up with $2.13 million in their account at 65, compared to $1.08m at a 3% plus 3% rate.

Even a conservative investor could end up with another $370,000 as a result of the change, and a balanced fund could have more than $500,000 more.

But he said a big problem was that employers could dodge the increase by moving employees to total remuneration packages.

People already paid that way would not benefit from the increase. About half of employers use total remuneration for at least some employees.

Under a total remuneration package, an employee is told that a certain amount of money is available to them and they can make their KiwiSaver contributions out of that, or use it as take-home pay.

These have been highlighted as a problem by many providers and the Retirement Commission, who want them banned.

Carlyon said as contribution rates got higher, more people might be tempted to shift over.

“An economically rational person would be better taking the cash in hand rather than opting to have 12% of your salary locked up until the age of 65. Without incentives, this policy has the potential to achieve the opposite of what we want - people will be actually discouraged from investing in their KiwiSaver.”

He said employers could not put people on to total remuneration contracts simply to avoid the increase. “But they will be able to turn around, and I suspect to a lot of employees they’ll say ‘hey what do you want to do if you want I’ll give you cash from now on’… they’ll use this as an excuse to move a lot of contracts to total remuneration.”

Carlyon supported calls for a ban on total remuneration. “Admittedly it will put a burden on the private sector but actually it’s a nice fiscally neutral way to incentivise people to save for their retirement.”

- RNZ