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Brief Counsel

KiwiSaver changes - more upside than downside?

11 May 2011

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The Prime Minister today provided a little more detail on the KiwiSaver changes which will be announced in next week’s budget. 

Importantly for scheme providers, these will not be made until after the election – giving the public an opportunity to vote on them and industry time to adjust.

This Brief Counsel speculates upon the likely content of the new round of KiwiSaver amendments.

Key messages

  • The Prime Minister had a strong savings message in his speech.
  • He explicitly endorsed KiwiSaver as a valuable savings mechanism.
  • He emphasised that the proposed changes to KiwiSaver are designed to ensure its long-term sustainability and survival.

What will stay

  • The $1000 kick start for new KiwiSaver members.
  • The tax-exempt status of employer contributions (probably).
  • The first home purchase subsidy (probably).

What will be added

  • Increased contributions from businesses and individuals “when we can afford it economically”.  We read this as a signal that default employee and maximum employer contribution rates will revert (again over time, in the case of employer contributions) from 2% to perhaps 4% each, as was originally intended.  The Government expects these changes to produce a modest overall increase to KiwiSaver savings rates.  Total KiwiSaver funds are projected to rise from around $8 billion currently to $25 billion by 2015 and $60 billion by 2021.

What will be pared back

  • The member tax credit contribution of up to $20 a week for KiwiSavers.
  • Member tax credit contributions are likely to be either reduced across the board, or targeted to low and middle income earners (it is unclear which).  We deduce this from Mr Key’s comment that the Government will change the mix of contributions to KiwiSaver, with less coming from the member tax credit and more from individuals and employers. 

Chapman Tripp comments

The Government is fudging when it signals that the member tax credits have no real utility because they “make no difference to national savings”.  The argument ignores the fact that people can access these incentives only if they save.

Given the options of either targeting the $20 a week incentive or reducing it but maintaining its universality, we expect a targeted approach would be safer politically as, for higher salary and wage earners, the employer contribution is a powerful driver to join and  contribute to KiwiSaver.

From a provider perspective, this is yet another round of amendments to a scheme which has been subject to almost continuous tinkering during its relatively short life.  However, the deferral of the latest changes until 2012 might just make it possible for schemes to be re-documented in one hit next year, when providers adopt a range of other pending governance, reporting and disclosure changes.

For further information, please contact Mike Woodbury, Partner.

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