Fixing our retirement system

Our retirement system has an overriding purpose - to ensure that all New Zealanders can live in dignity in their old age. But a recent review shows the current system isn’t working as well as it should for those who need it the most, says Barry Coates of Mindful Money.

Equity should be the priority for the retirement system, rather than unwarranted concerns over affordability.

As more of us live longer, the issues of age care and retirement grow in importance. How a society treats its elderly is recognised as a test of a civilised society, but it is also eye-wateringly expensive.

While there is cross Party support for universal superannuation, the settings are hotly debated. The Prime Minister and its coalition partners have ruled out any change to the age of eligibility for NZ Super, but National’s policy is to increase it from 65 to 67 years old.

Last week, the Retirement Review made a bold call on the choices ahead. The outgoing interim Retirement Commissioner, Peter Cordtz, reversed the position of previous three yearly reviews, and recommended that the age of retirement stays at 65 years.

The review of retirement policy calls for equity and well-being to be placed at the centre of NZ Super, KiwiSaver and ethical investment choices. It notes that our superannuation scheme has been successful in significantly reducing old age poverty, an important achievement that should be celebrated. Interviews for the review also showed there is a widespread lack of confidence that benefits would continue at the current level, leading to fear and insecurity about the future.

A problem with raising the age of retirement is that would disadvantage some groups in society, notably manual workers, Māori and Pasifika, that have lower life expectancy and need retirement support at an earlier age. In addition, around 15-20 percent of New Zealanders are already entering retirement with significant material deprivation, and this proportion is likely to increase in future.

Research by Massey University’s Health and Ageing Research Team shows that there are rising pressures on those entering retirement, as a result of forecasts of falling home ownership, rising housing costs, insecure jobs and debt. The report cites risk factors for disadvantage being not owning a home, being single or in poor health, being Maori or Pasifika, being female, and having experienced redundancy or unexpectedly being unable to work.

The question of affordability then becomes a question of priorities. Under current settings, the forecast net cost of 6-7 percent of GDP by 2060 is lower than many other OECD countries. The review concludes that this is not unaffordable – it’s a question of priorities. The Review noted that NZ Super is “the backstop intervention that addresses inequalities experienced and accumulated during New Zealanders’ lives.”

The review also notes that there are other ways to limit costs, including a clawback of tax from wealthy beneficiaries, a policy proposed by the Retirement Policy Research Centre at the University of Auckland. However, the age of eligibility has taken on political significance. Expect more debate in the year ahead.

A second plank of the retirement system is the KiwiSaver scheme. There are now three million members in the KiwiSaver scheme, so on one level it can be regarded as a success. But it doesn’t work so well for those outside formal employment. Enrolment rates are far lower for those who are self-employed, freelancers, stay at home carers and those on benefits, and 40 percent of members aren’t contributing on a regular basis.

The review has proposals to replace the current 1 for 2 match for employees (up to $521 government contribution) with a broader government match for voluntary contributions. Eligibility for the employer match would be extended to those over 65 and those under 18 years old, removing current ageist exclusions. The review also proposes that the government provides a basic 3 percent contribution for beneficiaries and considers making contributions for stay at home carers.

Other recommendations to make KiwiSaver work for those on low incomes include removing fees for KiwiSaver accounts that have balances under $5,000 (as some providers already do) and strengthening the mandate of the Commission for Financial Capability. An example of improved coordination in the review is linking applications for early withdrawal of Kiwisaver funds on hardship grounds to the network of groups providing budgeting advice.

While there will be debate about the details of these proposals, they signal that the KiwiSaver scheme needs improvement. It has largely failed to meet its aim of building a savings culture amongst those with few assets, a key target for the policy.

For the first time, the review was asked to also look at public perceptions and understanding of ethical investment. The practice of investing ethically is growing rapidly and is making international headlines, largely driven by worsening impacts of climate change. Already this year, two of the world’s largest asset managers, BlackRock and State Street, have committed to changing their investment practices to integrate risks, such as the risks of stranded assets of coal, oil and gas companies. The Bank of International Settlements has warned that climate change is a threat to the stability of the world economy. And ethical investment is on the rise in response to bushfires in Australia.  

In New Zealand, surveys show that investing ethically is increasingly important to the public, including young and old, wealthy and low income. The latest annual Colmar Brunton survey for Mindful Money and the Responsible Investment Association of Australasia shows that 83 percent of New Zealanders expect their money to be invested ethically and responsibly (up from 72 percent in 2018).
The survey shows this means excluding investments in sectors like fossil fuels, weapons and gambling and in practices that violate human rights or harm animals. The reality is different. Around $4.3 billion of KiwiSaver funds is invested in these sectors and, for example, only 2 percent of KiwiSaver funds exclude fossil fuels.

The survey also shows that barriers to more widespread ethical choice are a lack for transparency and objective information, and a lack of time to research and compare the options. These gaps were recognised by the review and they have recommended government support to enhance transparency about ethical standards in KiwiSaver funds.

There are a wider set of government interventions on ethical investing under consideration. These include whether ethical standards should be included in the default KiwiSaver scheme and whether regulatory action is needed to prevent misleading claims (greenwashing) using terms such as green, ethical, responsible and sustainable investment.

A broader look at ethical issues is being developed by the Sustainable Finance Forum, an initiative of Aotearoa Circle. Its roadmap for sustainable finance is due for release in late July. These initiatives are crucial. A significant shift in funding will be needed to finance the transition to zero carbon emissions by 2050 and the broader aims of enhancing sustainability and well-being.

Overall, the review makes an important contribution to shaping the retirement system for equity and well-being. The Minister, Kris Fa’afoi, plans a response in mid-2020.

Barry Coates is Founder and CEO of Mindful Money, a charity promoting ethical investing. Disclosure: The Retirement Review recommends providing support for Mindful Money in providing greater transparency on ethical investment.

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