Better financial products, better tax incentives – which first?
In the second of two articles on superannuation, John Drabble highlights some opportunities to help us provide for retirement, but there must be a catalyst for action.
Tuesday, October 3rd 2000, 12:00AM
Whereas 93% of Australian employees and 55% of British employees are in an occupational superannuation scheme, in New Zealand the figure is 17% and falling.
However, according to a PA Consulting survey published in March of this year, superannuation is one of the most popular benefits for employees, after salary and wages.
It’s a vicious circle. Too few New Zealanders are making adequate savings for their retirement, and of those who want to, few have access to one of the most effective retirement savings vehicles.
But we have the opportunity to convert that from a vicious to a virtuous circle.
The challenge is to find a circuit breaker which will change people’s behaviour.
There is a compelling case for tax incentives to make occupational superannuation more attractive to employers.
One objection is that tax incentives are distortionary and do not result in any increase in the quantum of savings, but merely influence where those savings go.
But supporting evidence is far from conclusive. Even if it were conclusive, this would still not weaken the case for incentives.
If incentives do result in more savings being directed into superannuation schemes where they are locked away until retirement and not able to be accessed for spending on holidays, cars or home renovations, that would be a rational and worthwhile rather than distortionary use of those savings.
Finance Minister Dr Michael Cullen has recently indicated he is considering broad tax incentives for occupational super schemes. Already, work is underway to entrench the tax incentive potentially created for people on a 39% marginal tax rate by enabling employers to contribute towards employee savings at a 33% withholding tax rate.
That is encouraging, but a more immediate concern than any consideration of tax incentives is the need to address serious tax anomalies - in particular the lack of a level playing field for savings products.
The current tax system is skewed in favour of residential property and direct investments. In addition, taxpayers on lower marginal tax rates are further disadvantaged if they invest in superannuation schemes or life insurance bonds rather than unit trusts. With the former their investment returns are taxed at 33% rather than their own marginal tax rate.
While New Zealanders have a clear preference for investing their money in residential property, many also reach retirement asset rich but cash poor – a point stressed by the Todd Task Force.
There are clear disadvantages associated with investing in a single, undiversified, "lumpy" asset - not the least of which is trying to derive a retirement income stream from it.
For too many New Zealanders their home is a lifestyle asset and not the superannuation nest egg they may have once considered it.
I am not suggesting New Zealanders should be discouraged from owning their own homes. But the tax system should be changed to remove the tax disadvantages of managed funds and to encourage people to make rational rather than tax-driven investment decisions, such as overcapitalising in residential property.
Ideally, there should be tax neutrality across different investment assets and structures.
That extent to which that happens is in the hands of politicians.
While what happens on the tax front is in the government’s hands, the industry itself can do much on other fronts to make it more attractive and more straightforward for New Zealanders to save for their retirement. It is up to us to take the initiative.
The lack of products providing retirement income streams is a case in point. New Zealanders face a dual retirement funding challenge: how to amass a sufficient nest egg to fund their retirement, and then how to convert that nest egg into an income stream.
The latter isn’t an issue for those fortunate enough to have joined a defined benefit superannuation scheme, as these schemes pay members a pension once they retire or reach the scheme’s age of eligibility. However, most of these schemes are no longer open to new members.
Now, all retail and most occupational superannuation schemes are defined contribution schemes, paying members a lump sum, which then needs to be converted into an income stream. This is not always as straightforward as it could be, as few New Zealand financial institutions offer pension or annuity products. Consequently, with a restricted market, consumers have limited choice.
While annuities are a huge market in Britain and Australia, they scarcely rate on the New Zealand industry’s radar screens - as noted recently (The Independent 12 April). While New Zealand has a $40 billion-plus managed funds industry, only an estimated $300 million to $400 million of this is in annuities. According to statistics published by the Investment Savings and Insurance Association, its members – who comprise the majority of the industry – made annuity payments of $28.7 million to 5,896 policyholders in 1999 and $28.9 million to 6,008 policyholders in 1998. By comparison, the government paid out some $5.1 billion to 456,000 superannuitants in 1999/2000.
There is a real opportunity for the industry to come from behind and make real progress here.
We have the opportunity to design leading-edge annuity and pension products. Currently, annuities – especially lifetime annuities - are seen as inflexible and something of a gamble: you win if you outlive your life expectancy, but if you don’t you lose and the insurance company wins. In Australia, by contrast, annuities come in various shapes and sizes and the annuity market is thriving.
A further reason annuities don’t sell here is cultural. When New Zealanders think of retirement, they automatically think NZ Super rather than annuities or occupational pensions. In Britain, you’re more likely to think annuities because the chances are your father and his father before him had one. Of course, compulsion must take the credit for this. Because there are tax breaks for retirement savings schemes, the British government has a vested interest in ensuring investors’ nest eggs are actually used to provide them with a retirement income. Therefore when investors reach retirement, they can withdraw only a quarter of their retirement savings as a lump sum and must use the balance to buy an annuity.
Finally, our tax regime also reduces the attractions of annuities as they are taxed here at 33%, regardless of the policyholder’s own marginal tax.
The superannuation debate must be broadened to include retirement income – as opposed to retirement savings - products.
We must do more than simply look to politicians to solve our problems. Employers, employees and the financial services industry, as well as political parties, must work together to address the common challenge of boosting retirement savings.
In Australia, the 1986 Accord among the government, employers and unions resulted in the creation of its present compulsory, tax-incentivised, employment-based superannuation system.
After watching their retirement funds build up for over a decade, Australians’ behaviour has changed and they are making more informed retirement savings decisions.
But it wasn’t automatic. It took the twin prompts of compulsion and tax incentives.
Compulsion provided the catalyst, the circuit breaker.
In New Zealand, more than a quarter century of political dissent and policy changes has created an atmosphere of inertia and caution. It should therefore come as no surprise that too few people are committing to long-term retirement planning.
To change that requires leadership, policy consensus and stability - not just from politicians, but from all stakeholders, including employers, the financial services and superannuation industry, and ordinary New Zealanders.
As the Retirement Commissioner Colin Blair told a retirement savings conference two years ago: "A framework which sets out some core principles for retirement income policy and allows for managed change over time will go a long way to providing the policy stability New Zealanders are asking for."
Our challenge is to contribute to that framework.
John Drabble is General Manager of AMP Financial Services New Zealand
| « Lack of debate disappointing | AMP & Good Returns launch superannuation website » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
