Superannuation

Making predictions about the future has proved a risky game recently in the financial sector.

But an absolute given is that the business media will spend a large part of 2003 – particularly the first half – reporting on the state of financial markets and the widespread falls in the value of people’s investments. The impact on people’s retirement nest eggs is an inevitable angle and the first reports have already come through that New Zealanders’ retirement savings dropped in value by more than $2 billion last year.

The principles of successful investing haven’t changed, but in the current climate it will take steady nerves and persistence to keep repeating them – know your risk profile, diversify, keep expenses low, keep investments simple, and stay the course.

From the superannuation perspective the fall in investment values could not be happening at a worse time for pushing the message that New Zealanders are not saving enough to provide the retirement income they want. It would be easy to put our heads down and hide until returns showed some sign of improvement. But now more than ever the industry needs to take its own advice and stay the course.

Looking back over the last year, it is difficult not to conclude that 2002 delivered less than it had promised on the savings front.

With the NZ Superannuation Act in place, the year began with high hopes that the focus would shift from the mechanics of state provision to action on improving the private savings rate. There was also optimism that superannuation would enjoy a profile as a key election issue.

But early in the year the Government announced it would not make any moves to improve the private retirement savings rate. A later announcement that the superannuation tax anomaly for low income earners will be removed was welcome, although it is disappointing that nothing will happen until 2004. It remains hard to fathom how those who have the hardest job making ends meet could be so penalised, especially in the face of the salary sacrifice benefit for those on the top tax rate – unintended though it might have been. Less surprising was the way serious election issues were sidelined in preference for ‘corngate’, paintings, and the worm.

To be fair, 2002 did have some bright spots on the superannuation front.

Despite only a small employer contribution, the primary teachers’ retirement savings scheme has proved more popular than expected, with 42% of teachers signed up by the end of November compared to the 30% officials predicted. This is welcome evidence that people will respond to any encouragement to save. Even better news is that the scheme is pitched as a model for a wider state-sector scheme, though there are no dates yet for when it will be extended.

AMP released research that showed attitude is the key driver of savings behaviour, rather than income as intuition would suggest. The research shows people need to learn good savings habits early in life and these habits will carry on regardless of what people earn and what they’re saving for – education, an overseas trip, a house, health needs, or retirement.

So what are the lessons from our recent experience?

1. State provision of superannuation is only one of the building blocks for a comprehensive savings framework. There has been discussion for many years of the ‘three pillars’ model of superannuation, which covers state, workplace and private provision for retirement. Michael Cullen’s determination to set up his super fund has put some rings around the first pillar and he deserves credit for keeping the Government’s mind focussed superannuation during the early years of the new administration. Unfortunately there are many people, including politicians, who still struggle with the idea that anything active needs to be done to promote the second and third pillars.
2. Workplace savings schemes are the easiest way for many people to save and will make a real difference if given some support. AMP’s research shows that the most successful savers are those who put money aside before they see it and what better way to do that than through the workplace. The take-up of the teachers’ scheme is heartening support for the effectiveness of workplace schemes. Despite the benefits, the statistics on workplace saving have gone from not great to pretty awful over the last five years. Turning the numbers around will take more than talk.
3. The Government has a key role to play in improving our savings rate, but others must play a part too. Employers must offer their support by setting up workplace schemes – the payback for such corporate responsibility is better staff recruitment and retention. Unions must recognise the benefits for workers in joining schemes and take advantage of any help offered to save, however modest. The financial services industry must provide simple, flexible products that meet people’s needs, and offer the right advice and support so people can make the savings decisions that are appropriate for them.
4. Saving needs to be a life-long habit and superannuation is only one end of the savings spectrum. Is it any wonder that persuading a 20-year-old to start a superannuation scheme is an uphill battle? Instead let’s try and enthuse and encourage our 20-year-olds to save for the things they want now, while still keeping one eye on the long-term. From the government’s perspective, superannuation is not the only spending area under pressure. If individuals are able to help themselves through the security of having savings, there are less long-term fiscal risks from spending pressure in social policy areas, especially health, education and superannuation.

These lessons aren’t rocket science, so how do we make them work for us?

This year the Investment Savings and Insurance Association (ISI) will be working on a savings campaign. Our objective is to work towards a savings framework that actively encourages workplace and individual savings, as well as making it clear what people can expect from the state. We won’t be able to develop the framework on our own, but nor do we see it as something the government is responsible for on its own. It will be a case of gaining the support of a wide section of the community, sharing issues and ideas, and all taking responsibility for doing something to support savings.

This is also the year that the next periodic report on retirement income policies is due. The Periodic Reporting Group has been appointed and its report, due by 31 December, is to include commentary on retirement income policies and suggestions for the adjustment of government policies to enhance the provision of private retirement income. There is plenty of potential in this brief and scope for coordination with the ISI’s savings campaign.

Let’s not take fright at the financial climate and go to ground. Let’s make 2003 the year of action on savings.

Ross Kent is the managing director AMP Financial Services

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