Returning to last week’s subject of compulsory pension savings versus auto-enrolment, there is one great example of how a country can increase savings without having to resort to full compulsion.
That example is New Zealand, which has cleverly designed an approach which takes its populations’ lifestyle into consideration and therefore is very appealing to the average man and woman, particularly as it is open to everyone, irrespective of whether they are employed or not.
If we examine New Zealand’s way, called the ‘KiwiSaver’, it immediately becomes apparent why New Zealanders are so keen to join or remain in once auto-enrolled. The government set out incentives and benefits which are clearly designed to attract savers and to overcome people’s fear of locking away their money for the future. This fear is entirely rational because while the population as a whole is living longer and healthier in all western countries; for each individual it is always uncertain what their future will be.
In the KiwiSaver, the government delivers every saver a NZ$1,000 bonus three months after joining which is non-retractable. In addition, the government contributes a yearly amount equal to your contributions up to a ceiling of NZ$ 1,043. On top of this, if the person is an employee, their employer must make a minimum contribution of 2% of your salary to the account.
So far, so standard; these are, in one form or another, features of most pension schemes, although the early 3 month bonus is a useful feature to encourage savers to stay with the scheme, as it gives a significant boost to initial returns.
However, it is the flexibility of the withdrawal approach that is encouraging such a large take-up of KiwiSaver. Although under normal circumstances you cannot withdraw until you reach standard superannuation age, there are 7 circumstances in which you can access your savings:
The first three are obvious. If you leave New Zealand, if you divorce, or if you die, you, or your estate in the final case, can access your funds.
However, then it gets more interesting. If you suffer significant financial hardship, which has to be verifiable, you can withdraw some or all of your contributions, employer contributions, and any interest gained on them.
Or in the event of serious illness or disability, you can access all your money, including government incentives.
If you are buying your first home and have been saving for three years, you can withdraw some or all of the fund value, with the exception of the government contributions to help with the purchase. And finally, if you have been saving for over a year, it is possible to divert up to half your contributions to pay your mortgage.
While there are some restrictions around these, it is clear that there has been some clever thinking to overcome peoples’ natural resistance to long-term saving; in particular the greatest fear for an individual which is desperately needing cash and not being able to access their own savings.
It’s no surprise that the take-up of KiwiSaver has been above expectations. The New Zealand way shows other governments that taking a more holistic approach to the idea of lifetime savings is the best way to ensure that savers want to save in long-term vehicles.
Just knowing they have a way out if a crisis strikes seems to be enough to make them relax about locking away money for the future. And as crises only happen to a small minority, New Zealand can look forward to a large proportion of its population arriving at superannuation age with substantial savings in tow.
Those Kiwis are clever folk.