What the PRG means for workplace super
Melville Jessup Weaver reviews the Periodic Review Group's report on superannuation, focussing on the issues primarily from the perspective of sponsors and trustees of employment based superannuation schemes.
Thursday, January 8th 2004, 10:06AM
The Periodic Review Group report does not make any major new proposals for retirement saving in New Zealand. However it does document current issues on this subject and its goal appears to be to put in place future work relating to retirement savings. The report makes the point that the public has, in 2003, great confidence in the level and sustainability of New Zealand Superannuation. This undoubtedly reflects the lack of any major changes in the regime in the last six years and also the introduction of the New Zealand Superannuation Fund.
The report was never going to argue in favour of tax incentives or compulsion and was always going to argue for the status quo while improving the neutrality and operation of the regime.
Of interest is the fact that the word compulsion appears only once in the document. The initiative therefore remains with the Government to introduce any significant policy changes.
The issue facing New Zealand
The challenge is summed up in the following statistics:
Importantly, the report recognises that the issue of retirement savings is an issue for middle New Zealand as the top 10% are always going to save, and the bottom 20-30% do not need to save because of the safety-net of New Zealand Superannuation. The issue is then how to make the middle group save. The report notes that ultimately the welfare of retired New Zealanders will depend on the ability of the economy to grow and produce the necessary consumer goods.
Work-based savings
The report is keen to promote and highlight the advantages to New Zealand of employers providing schemes and is looking for reasons for employers to establish and promote schemes. It observes that employees are most likely to join schemes if a direct employer contribution is provided, and the same applies albeit to a lesser extent when the employer provides only the cost of the scheme’s administration fees and a direct salary deduction facility.
The PRG commissioned research on the impact of belonging to a scheme on an employee’s overall financial position, and as expected membership is a positive feature. But while the benefits to an employee are clear, the report struggles to make a strong case for an employer to establish a scheme.
The stated benefits to an employer of establishing a scheme are:
The research also investigated why employees do not join a scheme even when one is available. The reasons are about perception of the value of the scheme rather than design issues. In effect employees are choosing to either save in other forms or not save at all.
The findings of the research on existing schemes included:
The PRG has recommended that Government establish a Work-based Savings Group (WSG) to pursue:
The WSG would comprise representatives from employers, unions, academia, officials and the financial services industry, and be chaired by the Retirement Commissioner.
However, when reviewing these ideas it is hard not to think that they are less than tangible and the impact they may have on the willingness of employers to establish new schemes is at best limited.
The research commissioned by the PRG did find that employers generally are willing to facilitate access to schemes by their employees.
A separate issue noted by the PRG is the current problem of employees being required to be offered a cash up option when employers merge or are taken over resulting in members having to transfer to a new scheme. It is recognised that this “leakage” is not beneficial to retirement savings.
The report notes that a new scheme is due to be introduced into the State sector in July 2004. It is a scheme available to all State servants and they will receive a small employer contribution which will be in addition to their current remuneration. It will be based around offering employees a choice of master trust schemes. It is probably the biggest initiative by Government to date on superannuation and their most tangible effort to increase retirement savings. The implications are important in encouraging private sector employers with no current scheme to follow this initiative.
Taxation arguments revisited
The PRG sets out a useful summary of the current taxation regime and a restatement of the non-neutral aspects of the regime. The issues here remain:
The section debating the benefits and costs of tax incentives is interesting. It sides against tax incentives, but then sets out a “best tax scheme design” in case the Government does decide in favour. Not surprisingly, the design is similar to that put forward by the 1992 Todd TaskForce.
The research conducted shows minimal take up of salary sacrifice arrangements to take advantage of the 33 cents on employer contributions rather than 39 cents on direct pay.
Other information in the report
While the focus of this review has been employer-based schemes, the report includes useful sections and information on the following:
Implications for employers and trustees
At this stage there are no implications for employers or trustees. If the Government does accept the report and the work schedule proposed including the setting up of the WSG then there will be a need for employer industry groups to become involved.
However, the report has highlighted that the average employee needs to save for the future. We will be addressing how this can be achieved in a further review of the PRG report. Trustees should highlight the need for members to continue to save for their retirement and the position that for many employees aged less that 45 there may be a serious gap in their retirement savings provision.
This is an edited review of the PRG written by consulting actuaries Melville Jessup Weaver.
Special Offers
The question has always been: “What is the best means for New Zealand in total to provide for the financial security of all its residents in retirement?”.
The prevalence of work-based schemes in New Zealand is much lower than in other OECD countries. Undoubtedly the driving reason for this is the lack of any tax incentives to remunerate employees through contributions to a scheme. But in addition the report notes two further reasons - the abundance of small employers, and the fact that for most employers the direct costs including contributions outweigh the advantages to the employer of providing a scheme.
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