Retirement provisioning and welfare dependency in New Zealand

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The Life Brokers Association has presented a paper on superannuation to the Government, and two of the opposition parties.

Tuesday, March 26th 2002, 10:05AM

Successive Governments have argued that there is no conclusive evidence to prove that a compulsory or incentive based option for retirement savings adds to the growth of savings as a percentage to GDP. This is a monetarist argument and has no relevance in relieving the fear and anxiety of the ordinary New Zealander.

Continued Government intervention by supporting a dependency culture hinders economic growth and the need for individuals to save for their retirement.

The need for a planned, long term sustainable retirement policy has been advocated by many Government administrations - The Kirk administration is a good example and actually went as far as implementing one. History of course documents the schemes end. More recently the Lange administration identified the urgency of establishing a retirement programme that bought New Zealand into line with what the majority of OECD countries already have.

Fact

The members of the Life Brokers Association (LBA) work daily with wage and salary earners and self employed persons (real New Zealand) assisting these individuals in risk management and retirement savings and some investment advice.

The majority of these people all struggle to meet actuarially calculated retirement savings objectives because they are committed to mortgages, consumed by children and family costs, high taxes and ever increasing living expenses.

This client sector represents 20-30% of the total New Zealand households and the majority are spending 105% of what they earn through revolving credit mortgage facilities, credit cards, ignorance, insufficient household income, lack of education and lack of financial intelligence.

Politicising and economic theory cannot help this section of our society. It beholds a strong political party with an agenda to implement a strong policy, focused on genuinely wanting to help the middle class New Zealand becoming independent. A party that will implement a savings program for them that is sustainable, realistic and free from future government administrations "tampering".

There is a genuine "need" for a strong Superannuation product to encourage:

• Social wellbeing
• Economic wellbeing
• Fiscally achievable objectives
• To relieve this, and future Governments, and the next generation, of an ever increasing and unsustainable pension scheme funded by a diminishing taxation pool

The Accumulation options

• Voluntary
• Compulsory
• Tax incentives on entry
• Tax exempt accumulation

The solution must deliver a workable and sustainable solution to both employees and to corporate New Zealand. It also must be flexible and fiscally workable. It must be compliant and friendly.

A recommendation and draft proposal for the solution of retirement provisioning and welfare dependency in New Zealand presented by The Life Brokers Association.

Foundation 1 - Exit provisions

Any programme must be "locked in" unconditionally to age 65.

Under no circumstances can the account balance be accessed prior to normal retirement age 65. If an individual wishes to retire prior to age 65 they must use their own funds, cannot be eligible for any Government subsidy or assistance (unless widowed or infirmed). Standard alternative benefits would then apply but these also must be subject to a very strong asset and income test so as to become a true "safety net provision" solution only, as opposed to alternative lifestyle options.

Rationale:

If they can’t get their hands on the funds until age 65, the Benefit will be achieved and anxiety reduced. The economy has the funds potentially captive. The taxpayer will not have to fund the Retirement Programme unless it falls within the safety net shortfall provision.

Foundation 2 – Annuity

The accumulation amount must purchase a lifetime annuity.

At retirement the individual cannot obtain the funds in cash, they must then purchase from the market an annuity. This is similar to the Australian model. The annuity should be taxed in the same way as other income.

For over-funded pensions unless the commuted accumulation account balance can purchase a pension of at least 100% of the national average wage no lump sum payment can be accessed.

Foundation 3 - Money Management

• Collection and Investment Manager Criteria

The regular contributions should be collected via the Inland Revenue through the PAYE/withholding system and transferred to the nominated Investment Manager, who will be a public Investment Company such as an Insurance Company, Superannuation Fund Company or International or National Fund Manager offering Fund Investment services through an approved Superannuation Trust Deed administered and monitored by the Government Actuaries Office.

Foundation 4 - Freedom of choice Investment strategy

The asset allocation of the funds can be determined by each individual member.

Where no adviser or election is made by the individual then a default program will be implemented based around a panel of Consulting Actuaries and Fund Managers who will create model portfolios based on the age to retirement of the individual i.e. Say up to age 45 to be 100% in growth funds, age 45-55 100% moderate growth, age 55-65 Conservative growth, thus protecting the downside from market volatility as the individual draws closer to retirement.

Foundation 5 - Portability

The appointment of the management of the fund must be flexible and portable, so as to maintain competitiveness and be performance focused, the individual being able to move their funds to an alternative manager on yearly election. A window should be available of one month per year for transfers to occur.

Foundation 6 – Death Provisions

If an individual dies prior to Age 65, if the benefit is funded from general taxation provisions no estate benefit is applicable. However, consideration should be given to a formula like the following:

If the individual has a legal spouse the benefit account balance transfers to the spouse in the first instance. If no spouse, but children, the benefit transfers equally to the children irrespective of age.

If an individual dies after Age 65 the annuity purchased will determine the passage of future funding. If a life and survivor, or certain annuity is purchased, the spouse will continue to receive the annuity for a nominated or contracted period. If a lifetime annuity is purchased then the payments cease at death.

If the funding is made by personal contributions via tax cuts then the account value forms part of the individual’s personal estate and the following provisions apply:

If the individual has a legal spouse the benefit account balance transfers to the spouse in the first instance. If no spouse, but children, the benefit transfers equally to the children irrespective of age.

Rationale:

The funds are to be "locked in" to Age 65 for the benefit of the household and the fact that one party dies should not disadvantage the household like the current New Zealand Superannuation Pension does. The household expense by the removal of one spouse does not reduce by 50%, yet the current superannuation benefits do (subject to living alone allowance).

Foundation 7 - Taxation

The Tax treatment of the fund is to be neutral. The Fund Manager is not required to provide for taxation on the accumulated account value, thus implementing a TET regime.

The compounding effect on the fund and ultimate return for the saver to purchase an annuity with, is greatly enhanced by the interest on interest formula. Commonly referred to as the "power of compound" interest. This would also avoid the necessity for tax legislation to correct the existing anomaly with the flat tax rate of 33% on employer contributions and individual’s actual tax rates.

Foundation 8 - Funding

The method of funding the programme should be a compartmentalisation of taxation starting with a 3% initial contribution and building at 1% per annum to 10% of income tax over 10 years linked to a maximum of $70,000 per annum and optional for savers over and above this level of salary.

For low income earners the Government will provide a safety net minimum retirement benefit which will include beneficiaries. Any person who is in receipt of a benefit will have the compulsory percentage credited from their benefit to their individual account.

Rationale:

The account balance at end of year one, needs to be significant to justify and satisfy the acceptance of the programme by individual New Zealanders and the report needs to show a projection of benefits based on a realistic earnings rate to age 65 and what that value will purchase as an annuity at age 65.

Foundation 9 - Incentives

Some incentive could be added at a later stage if fiscally affordable, i.e.

• Tax cuts – The value of the inidividual’s tax cut transferred to the individual’s personal "locked in" retirement account
• Investment retained in New Zealand - If a certain percentage of the fund contributions are retained in New Zealand assets (we do not see this as a necessary no practical option but for illustration purposes). We believe that the financial markets should be made to be competitive and any incentive favouring New Zealand over other markets encourages and promotes mediocrity.
• TEE (tax, exempt, exempt) – Currently we are proposing a TET (tax, exempt, tax). This could be reviewed at some later stage if fiscally affordable.

Summary

This proposal and these recommendations are not dissimilar to the Australian Model. This model has worked successfully for Australia, to the point where there is by 2004 predicted to be $1 trillion in the Australian superannuation savings base, a matter of 8 years since the introduction of this programme. Australia’s capital markets are now financed largely by the continuing contributions to superannuation. Similarly, the 401k markets contribute as much as $30 billion per month to the American capital markets.

In New Zealand the level of contributions to superannuation has significantly fallen over the past ten year period. Statistics show a continuing decline in the capital value of superannuation investment and this must be a large concern for any caring concerned government genuinely trying to balance social and fiscal policy.

The value in our recommendation is that the "rank and file" New Zealander can plan, with certainty, their retirement. The savings landscape will alter perhaps not in the way Monetarists would like but the relief on future fiscal budgets 20 years out is far more palatable than a huge debt financing future retirement provisioning which will only provide a "smoothing" but will not eliminate the situation and is yet another "band aid".

Money not needed for Superannuation could then be diverted into the critical arrears of both health and education.

Strong measures demand strong government. Can Labour meet and fulfill the promise that they made in 1935? To educate our children, provide the best health service and guarantee a minimum retirement income to all New Zealanders. We do not believe these words included "by mortgaging our children’s and nation’s future".

The Life Brokers Association thank you for the opportunity to present to you this discussion document for your consideration to address our Nation’s major problem in the first half of the 21st Century, the retirement funding and security of ordinary New Zealanders.

SUMMARY

• Sufficiently Robust and Fiscally Responsible to Withstand Future Political Pressure
• Easily Established Basis for Determining Contributions
• Effective Collection Mechanisms - IRD
• Contributions Funded from Indirect Tax Cuts – via compartmentising
• Payment During Retirement Through an Annuity
• Effective Integration with Existing Savings Schemes
• Individual Accounts for Savers
• Easy Portability between Funds, Managers, Employers
• Private Sector Management of the Contributions
• Broad and Flexible Investment Criteria – freedom of investment choice and management
• Locked in to Age 65 unconditionally
• No lump sum provision

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