1. New Zealand’s KiwiSaver Why Has It Been So Successful? by Peter Neilson, Chief Executive Financial Services Council Second National Summit on Pension Reform Presentation to be delivered at 2.45 pm 9 October 2014 Allstream Centre Toronto Canada

2. 2 New Zealand, Ireland and the UK: The Outliers Amongst OECD countries only New Zealand Ireland and the UK combine low net replacement rates compared to average incomes and rely on a Tier 1 basic old age pension with Tier 3 private savings for a minority of employees.

3. Basic problemExamplesOutcome Self Control People find it difficult to implement decisions to save. People are tempted to spend when they want to save. People procrastinate even when they know what needs to be done. Insufficient saving. Regret Attitudes to losses depend on whether a person was responsible for a decision. People blame themselves for bad outcomes. People avoid risk when managing their own money. Poor investment choice. Loss Aversion Attitudes to risk depend on how investments are framed. People avoid risk if framed as a loss to current consumption standards. People create special accounts with different reference points to manage money. Poor investment choice Poor JudgmentPeople have biased estimates of investment returns. People over-rely on past history. People rely on anecdotes, not statistics. People are misled by irrelevant information Incorrect calculation of required saving. Poor investment choice. The behavioural economic revolution has changed how we view retirement savings issues which auto-enrolment is designed to overcome. Biases that Distort our Savings and Investing Behaviour Source: Andrew Coleman, MOTU Research 3

4. The Success of KiwiSaver KiwiSaver has been described as the most successful savings innovation over the last 100 years in New Zealand. KiwiSaver was the worlds first national auto-enrolment programme for retirement savings. In 2006 the NZ Treasury forecast that 680,000 people would have enrolled in KiwiSaver by 2013/2014. Currently 2.3m are enrolled in KiwiSaver out of 4.4m New Zealanders and the numbers are still growing. Before the start of KiwiSaver on 1 July 2007 we had only about 250,000 people in registered superannuation schemes. 4

5. The Success of KiwiSaver continued… At November 2013, 56.7% of all New Zealanders 18+ were enrolled. Consisting of: 57.4% of women 18+ and 56.2% of men 18+ Prior to KiwiSaver only a minority were in Superannuation Schemes and they were disproportionally male, employed in either the public sector or the largest corporates and were from higher income households. 5 By Household Income < $20,000 $20,001 to $30,000 $30,001 to $50,000 $50,001 to $70,000 $70,001 to $100,000 $100,001 to $150,000 $150,001 to $200,000 > $200,000 Don’t know/ Prefer not to say 34.9%53.9%50.7%63.4%66.1%56.8%69.8%64.7%60.4%

6. How does KiwiSaver work? Features KiwiSaver was introduced by the Government to provide a simple way for New Zealanders to save for their retirement through the workplace. Employees were initially auto-enrolled (with opt-out mechanism) and whenever they changed or started jobs. Key incentives for individuals to join KiwiSaver are: A $1000 one off kick-start payment Annual tax credit (up to $521.43 pa, 50c for each dollar you contribute up to $1042 pa) Employer contributions, 3% minimum or more voluntarily Access to funds for first home purchase (after 3 years of saving) 6

7. How does KiwiSaver work? Features continued… Your KiwiSaver account stays with you – If you change jobs or leave the workforce, your KiwiSaver account goes with you with the full balance (no vesting). Contributions holiday - After being a KiwiSaver member for 12 months, you can choose to take a break – called a contributions holiday. This can last between three months and five years. You can still contribute $1,042.86 each year in order to receive member tax credits of $521.43 p.a. from the Government. Your contribution - If you are employed, you need to contribute at least 3% of your gross (pre-tax) salary or wages that you earn at that job – this is deducted from your net (after tax) pay. The employer is obliged to match the KiwiSaver’s contributions up to 3%. If you are self employed or a non-worker, you can decide how much you contribute to KiwiSaver. Pick your own provider and investment style – you can pick from a wide range of providers and investment styles available or default into a conservative option with a default provider. 7

8. How does KiwiSaver work? Benefits of KiwiSaver You can elect to contribute either 3%, 4%, or 8% of your gross salary, with 3% being the minimum from your pay. If you are not employed you can contribute directly to your KiwiSaver account. Employer contributions at dollar for dollar up to 3% of your gross salary. This is paid by employers to the KiwiSaver’s account without coming off your salary. The employer obligation is to match the employee contributions at the minimum level only. No employer contributions are payable during a contributions holiday. Investment returns on all the accumulated contributions (government, employer and your own) belong to you individually and are accessed at age 65. KiwiSaver schemes must have a Trustee licensed under the Securities Trustees and Statutory Supervisors Act 2011 to look after the benefits and safeguard the interests of members. There is no Government guarantee on KiwiSaver accounts. 8

9. How does KiwiSaver work? Default arrangement New employees not already in a KiwiSaver scheme are automatically enrolled but may opt-out within 55 days of starting that employment Those who don’t take an active step to pick a provider or an investment style are allocated to one of 9 default providers and put into a conservative fund (only 15-25% in growth assets). Changing Providers Members wanting to change providers can arrange this with a telephone call or online and then the completion of a form. 9

10. Why was KiwiSaver so successful? Convenience Auto-enrolment made it easy and convenient for middle and lower income employees to join and save because they didn’t need to make choices and their money was saved before it could be spent. Inertia Inertia makes it very easy to stay in and keep saving even if you are not very engaged. Ease of Compliance for existing Superannuation Schemes It was very easy for existing Superannuation Schemes to become complying KiwiSaver schemes and enjoy the same benefits. Individual accounts Having individual accounts managed by banks and insurance companies gave people confidence that it was their money and not controlled by the Government and that contributions were not just another form of income tax. Easy for the employer Using an individual’s tax number and the Inland Revenue’s tax collection system made it convenient for employers and in particular smaller employers saved costs and avoided the creation of multiple accounts. 10

11. Why was KiwiSaver so successful? continued… Access for first home deposits Being able to use KiwiSaver savings for a first home deposit made it attractive for many younger people who saw saving for a home deposit as their first saving priority. Flexibility The option of switching providers or investment styles, taking a contribution holiday and the initial opt out provision meant most people did not think they were being taken where they did not want to be. “Free Money” The $1000 kick start payment, the matching $1042pa tax credit (now reduced to $521pa) and the matching 3% contribution from employers were seen as attractive, even for people who were ideologically opposed to KiwiSaver. Confidence The simplicity of the Scheme, the Government sponsorship and education campaigns by the Retirement Commissioner gave confidence to those people who knew they needed to save but were paralysed by indecision. The KiwiSaver programme managed to provide a compelling value proposition for young and old, rich and poor, men and women as well as employers, so it became easy and acceptable to do the right thing. For most people it was a “no brainer”. 11

12. Knowing what we know now what should we have done differently? The incentives could have been better targetted. 8% of KiwiSavers only put in enough savings to maximise the incentives and they are typically those who can afford to save anyway. Incentives at the levels provided did not totally overcome affordability issues for the poorest households in employment. The “anchoring” problem means that those less engaged stay where they were initially placed whether or not it is appropriate given their long term interest. About one third of KiwiSavers default into a 3% + 3% option which on current policy settings will not fund a comfortable retirement (a retirement income at 70-80% of the average wage). It probably would have been better to have had an option to start at a 1% contribution rate and annually step up contributions over time to reach 10%, 5% from you and your employer). The default investment style should have been growth or balanced rather than conservative including a capital guarantee fee funded by the default KiwiSaver member. 12

13. Knowing what we know now what should we have done differently? Continued… Inertia works well both positively and negatively. You can take a 5 year contribution holiday if you wish and recently one of our members looked at the typical contribution holiday and found out it was around 4.3 years which can be very costly in terms of the final nest egg. A 5 year contribution holiday is probably too long. As the prime purpose of KiwiSaver is for retirement savings the rules on pre-retirement withdrawals other than in the case of death, permanent migration or extreme hardship are not able to accommodate a situation of extended illness preventing employment. Bundling a base level of life and income protection insurance would have prevented this problem. Unlike most developed countries, superannuation funds in New Zealand are tax disadvantaged relative to other forms of retirement savings in particular compared with investment in rental property. 13

14. Knowing what we know now what should we have done differently? Continued… Affordability has prevented some lower income New Zealanders from enrolling in KiwiSaver or getting the full value of the incentives. An option to start at 1% contributions matched by the employer and growing each year till they reached a combined 10% contribution rate may have enabled many more lower income employees to join and stay in KiwiSaver and achieve a comfortable retirement. Gender equality. If men have higher incomes than women, women live longer on average than men and spend more time out of the work force on family duties, then they are likely to have lower nest eggs at retirement and lower pensions. It would be possible to have a top up guarantee that was mildly redistributive for those who had contributed for 30 years or more but had not quite saved enough to reach a certain level of income in retirement. Annuities and decumulation. We have not resolved the issues about whether there should be any obligation to take some of the KiwiSaver nest egg and turn it into an additional pension. While it is early days for most KiwiSavers this is an issue that we are still to resolve. 14