New Zealand Superannuation
Automatic Government contributions to the New Zealand Superannuation Fund will be suspended until budget surpluses again become sufficient to meet contributions. This is not forecast to occur until 2020/21.
This projected 11 year suspension of contributions will not affect entitlements. But it will affect the future size of the Fund and its ability to fund those entitlements. The Government will defer drawing on the Fund for three years (drawdowns will start in 2030/31 instead of 2027/28).
The primary driver for suspending the contributions is to reduce Government debt. If continued, automatic contributions over the next 11 years would add $19.5 billion to debt, with interest on top of that.
Contributions by the Government are forecast to resume after the 11 year suspension at the rate provided under the formula prescribed in the Fund’s governing legislation. That rate will be higher than it would have been had the contributions continued, but the resulting Fund will still be smaller in size. This means that a greater proportion of the cost of New Zealand Superannuation entitlements will have to be met from future Government revenues and not from the Fund itself.
In the meantime the Government will contribute $250 million to the New Zealand Superannuation Fund this year, and will also review on an annual basis whether to make future partial contributions.
The $250 million contribution this year is to assist with the Government’s policy of the investment of 40% of the Fund’s assets in New Zealand investments. The Minister of Finance has said that there will be Ministerial direction to the Guardians of the Fund with respect to that policy.
The Government has committed to maintaining New Zealand Superannuation to be paid from age 65 and at the rate of 66% of the average wage.
Closure of KiwiSaver mortgage diversion facilities
The Government has announced that the mortgage diversion facilities provided for under KiwiSaver schemes (and, we understand, complying superannuation funds) will be closed to new applicants from 1 June 2009. These facilities allow members to divert up to half their contributions to mortgage repayments (subject to conditions).
Providers may keep a mortgage diversion facility open for existing participants, but will, if they choose, be able to stop providing the facility altogether.
The Government’s rationale for the closure is that the facilities:
give rise to additional and unnecessary compliance costs for providers, and
are contrary to the “lock-in” principle of KiwiSaver. There was no practical solution for stopping early access to funds via mortgage diversion, except by further complicating the law and imposing further compliance costs.
The details of the closure are set out in legislation being introduced today.
Deferral of tax cuts
As expected, the Government has deferred the tax cuts that were to have taken effect from 1 April 2010 and 1 April 2011. We expect the deferral will flow through to the rates for employers' superannuation contribution tax and other taxes that function as a proxy for income tax.