KEY POINTS:
Within a single generation KiwiSaver and the New Zealand Superannuation Fund will form a pool of money worth close to a quarter of a trillion dollars.
Apart from funding New Zealanders' retirement income, this will propel the nation's economic performance skyward.
With what NZX chief executive Mark Weldon
describes as "a wall of cash" generated by KiwiSaver looking for an investment home and a favourable new tax environment, "everything is lined up" for a great leap forward for New Zealand's markets and economy.
"If it doesn't happen, it will be one of the great mysteries of life," Weldon says.
Although it is a less bold scheme than Australia's compulsory superannuation regime, which has accumulated a trillion dollars in 15 years, KiwiSaver in its new, improved form should attract about $75 billion in funds by 2028, according to Treasury estimates.
The same year, the NZ Super Fund is expected to have grown to about $160 billion, contributions will cease and it will begin paying out to help to fund universal superannuation.
That $235 billion represents a big improvement on the $56 billion in retirement savings New Zealanders hold today, not including the $12.8 billion now in the NZ Super Fund.
Treasury estimates that 50 per cent of working-age New Zealanders will be participating in KiwiSaver after 10 years. Those forecasts are based on the impact of the tax incentives and compulsory employer contributions announced by Finance Minister Michael Cullen in last week's Budget, which have immensely improved the workplace savings scheme's appeal.
Many in the funds management industry, which will invest the money on behalf of New Zealanders, believe KiwiSaver is now so attractive that the take-up rate will exceed that estimate.
Either way, it won't be enough to see New Zealand's retirement savings catch up to those in Australia, where the compulsory workplace savings were introduced 15 years ago.
Mark Brighouse is chief investment officer for Arcus, which manages investments for international fund manager AXA, one of the default KiwiSaver providers.
He says the level of employee, Government and maximum employer contributions under KiwiSaver is roughly equal to the level of contributions under Australia's regime.
"We're really going down the same path as Australia, but considerably later." But the voluntary aspect of KiwiSaver means New Zealand's savings are likely to grow at a slower pace.
Nevertheless, comparisons with Australia can illustrate what's at stake.
Brighouse says that had New Zealand got off to an earlier start and achieved a similar level of per capita savings to Australia today, our funds management industry, sharemarket and wider economy would be scarcely recognisable.
The total capitalisation or value of our sharemarket would be about $300 billion rather than $76 billion. The number of companies listed would be 350 to 400, rather than 180, and average daily turnover would be more than $1billion rather than $12 million. At the same time, rather than having about a dozen domestic fund managers here, there would be 20 to 30, and instead of just 120 chartered financial analysts there would be about 300.
Should New Zealanders care about having a larger finance industry?
Brighouse says it's a no-brainer. Sure, the funds management industry will benefit from a big increase in savings, "but New Zealanders should also be aware that this will improve capital allocation in the economy".
Unsurprisingly, NZX's Weldon agrees, saying KiwiSaver in its revised form and recent tax changes including those for portfolio investment entities and overseas investments have given businesses a rare opportunity.
"Put all those things together and you have a substantially meaningful long-term wave of money forming that will be available to the New Zealand corporate sector broadly and largely through the stock market."
David Skilling of the New Zealand Institute, who has for some time championed a strengthened local savings industry, says the increase in supply of local cash to the sharemarket would address the growing concerns about the number of companies leaving it.
Ironically, many of the companies lost recently were delisted after being taken over by Australian companies armed with superannuation cash.
"It will potentially flow down into the venture capital side of the market. It's not just more money flowing into a given supply of stock, it's also about incentivising new listings. You would imagine that capital markets in New Zealand would become larger and more liquid and hopefully that would induce more listings."
But given the relatively small size of the New Zealand sharemarket, it is inevitable that KiwiSaver funds, like much of the cash in the New Zealand Superannuation Fund, will be invested overseas, even if only for the sake of diversifying to reduce risk.
"You would hope that even if a good chunk of the KiwiSaver money gets invested offshore, it will at least be intermediated through local New Zealand fund managers," said Skilling.
Carmel Fisher of Fisher Funds Management said that despite concerns about the New Zealand sharemarket already being quite highly priced, it should still be able to absorb significant amounts of KiwiSaver cash and produce respectable returns. Her company is finalising its own KiwiSaver product which will invest primarily in New Zealand and Australian equities.
"We had the same sort of questions asked when the New Zealand Super Fund said they were going to allocate 7 per cent to New Zealand equities. The Super Fund money was all invested seamlessly. The reality of these things is the money comes in dribs and drabs and it will be even more so with KiwiSaver."
She pointed to the Australian experience after the introduction of compulsory super. "It didn't cause a big leap up in a year or two, it's just been a baseline developed for the market."
But there will be challenges for the funds management industry, says Brighouse, one being finding enough skilled investment managers, especially when the local industry has to compete with Australia's.
He also says that despite the euphoric response from fund managers to last week's changes, KiwiSaver is not necessarily a bonanza for the industry, at least not straight away.
It means much more work, but initially that will be servicing a lot of customers with little money.
Fisher says the KiwiSaver changes are a significant step forward for the industry and investors.
"For the first time we've got some tax incentives to save and invest and we should all embrace that."
IF WE HAD FOLLOWED OZ ...
* New Zealand's population is one-fifth that of Australia. If our retirement savings were also one-fifth the size, ie, $200 billion rather than $56 billion ...
* Our sharemarket would be worth about $300 billion rather than $76 billion.
* The number of companies listed on it would be 350 to 400, rather than 180.
* Its average daily turnover would be more than $1 billion rather than $123 million.
* We would have 20 to 30 domestic fund managers rather than about a dozen.
* We would have about 300 chartered financial analysts rather than 120.
Source: Arcus
