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© Copyright 1997-2025 Tarawera Publishing Ltd. All Rights Reserved
New Zealanders provide for their living standard in retirement through a variety of private sources. One of the most significant is home ownership, although its value is excluded from taxation statistics on incomes. Over 80 percent of New Zealanders in their early 60s are homeowners, and most have paid off the mortgage or reduced it to low levels.
Investment income and occupational pensions are the main private income sources for people who have stopped working. Unlike people in some other countries, older New Zealanders tend to keep or increase their asset holdings in their early retirement years, and reduce their assets when they enter rest homes or nursing facilities. Home equity conversion (which allows owners to stay in their homes while releasing some of their housing wealth) has had little attraction for older people in New Zealand. (The Office of the Retirement Commissioner's paper 98/2f discusses this issue more fully.)
Why do many of the current older generation have such conservative attitudes to assets? The reasons could be:
The people currently approaching retirement include a significant proportion with income-earning assets and/or income other than New Zealand Superannuation. They also have high home ownership rates. However, succeeding generations may not necessarily be as well placed because:
It seems likely that there will be very different situations between two-earner, one-earner and no-earner households, and between those who inherit large amounts and those who do not.
With these factors in mind, statistics on pension and investment patterns in New Zealand show some interesting trends.
New Zealand statistics have consistently shown that the proportion of retired people who receive occupational and private pensions has been substantially lower than the proportion of the working age population who are members of occupational pension or other schemes. For example, in 1987 (before tax concessions were withdrawn) about one-quarter of the adult population aged under 60 and about one-third of the workforce were members of occupational or private superannuation schemes. However, at the same date only 13 percent of adults aged 60-plus were receiving pension payments from these schemes.
A 1992 survey of retirement provision showed a similar pattern, with a preference for schemes that provided lump sum endowment policies. Approximately 47 percent of people aged 15 to 59 reported having some form of retirement superannuation. However 28 percent were lump sum schemes only, and only 19 percent were schemes that provided for some pension in retirement. Men aged 45 to 59 had the highest proportion of policies with pensions, but this ratio was still only 37 percent.
The gap between the reported superannuation fund membership percentages in the workforce age groups and that of the retired population who reported private superannuation income may be owing to a time lag. However, two other factors also seem important:
The Government Actuary's report showed that between 1990 and 1999 total assets of employer-sponsored defined benefit schemes dropped by 13 percent to $5,811 million, and members by 30 percent to 71,128. Over the same period the assets of employer-sponsored defined contribution schemes rose 58 percent to $4,464 million, although membership fell by 13 percent to 181,208.
Research in New Zealand and elsewhere indicates that occupational pensions are more common among higher earners and those in stable, full-time work. They are much less common among low earners and part-time workers, or those with broken career patterns. Overall, occupational pensions are received by a minority of the retired population in New Zealand.
The Government Actuary's report indicated that until about 1997 rapid growth in "retail" schemes had more than offset the decline in employer-sponsored schemes. Hence total superannuation scheme membership continued to grow. More recently aggregate membership has plateaud, with growth in retail scheme membership just offsetting the continuing decline in employer-sponsored schemes. In 1999 total scheme membership edged up by only 0.3 percent. In 1999 total membership was 35 percent above the 1990 level despite a contraction in the number of superannuation funds. Total superannuation assets had also risen from around 15 to about 18 percent of GDP.
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What these figures actually mean is more open to question. Membership of employment-based schemes fell sharply, while many members of the expanding "retail" schemes appear to have been older people reinvesting assets into "surcharge-efficient" superannuation policies. These investment shifts allowed investors to reduce or eliminate their liability to pay the then superannuation taxation surcharge. The motivation for much of this growth has changed since the surcharge was eliminated.
It is not clear what proportion of people in the working age groups are investing in "retail" schemes. However, while there has been some growth in public sector employer schemes set up since the Government Superannuation Fund was closed to new members, this growth has not been enough to offset the decline in contributors to the closed scheme. Private employer and National Provident Fund scheme membership has been continuing to decline.
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Beneficiary numbers were 46,287 in 1994, but by June 2000 had edged up to 47,323. They are now a larger group than the active contributors. Benefit payments were $712.1 million in the year ended 30 June 2000. Of this amount contributing members provided $103 million and the Government $458.4 million. Most of the balance came from earnings on Fund Investments.
As at 30 June 2000, the Government Superannuation Fund had net assets of $3,454.1 million, but an unfunded liability of $8,318 million. The General Manager's 1997 report noted that this liability happened because "the government as an employer does not meet the liabilities of the Fund as they are accrued, but pays out its share of benets as they fall due". The 1999 report commented that "reliance is placed on the provisions of the Act for the Crown to ensure that sufficient funds are available or will be available to pay benets as they fall due".
Annuities or private pensions are based on the concept of using savings to buy an income stream that stops when the person dies. They have rarely been able to compete with New Zealanders' preference for putting discretionary savings into assets such as property, shares or interest-bearing securities, which are seen as more easily realized to meet particular needs and as having a continuing value for bequests. Lump sums received under superannuation policies may be invested in other assets, but there is little reliable information about what people do with their lump sums when their policies mature.
Generally the average value per fund member of private superannuation policies is lower than in occupational schemes. For example, in 1999 retail schemes in New Zealand had an average asset value per member of $15,861 compared with $40,720 for private employer superannuation schemes. The retail schemes are also heavily oriented towards lump sum endowment policies rather than pensions or annuities. Retail fund assets grew from $1,464 million in 1990 to $7,462 million in 1999.
While the superannuation payment from a private superannuation fund is notionally tax free to the recipient, the income of the fund providing the payment is taxed at the company tax rate of 33 cents in the dollar. This is higher than the tax rate many individuals would pay if the "grossed up" amount were treated as their ordinary income, though lower than the new 39 percent maximum percentage tax rate.
Proposals to deal with this issue were put forward in 1997 by the Taxation and Life Insurance Savings (TOLIS) committee and became part of a Government Bill in Parliament. However, the proposals failed to achieve majority support in Parliament and this section of the Bill did not proceed. It is understood that this issue is being reviewed again.
Significant items generating retirement income include shares, bank deposits, fixed interest securities, rental properties, and part ownership of businesses. Farmers have traditionally relied on "cashing-up" the farm on retirement.
The risk for many in
the current workforce is that when they retire the state pension
system may provide proportionally less than it provided for their
predecessors. Those who wish to maintain more than a modest living
standard will need to build up their own income-earning assets.
This will require not only a more distinct savings effort, but
good judgement about investment options. Special Offers © Copyright 1997-2025 Tarawera Publishing Ltd. All Rights Reserved
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