Budget changes may erode KiwiSaver growth - Tower

KiwiSaver provider Tower Investments says last month's budget changes to KiwiSaver have been "disconcerting" for potential members, because government changes chipped away at certainty around retirement planning.

Net membership of the scheme rose 1.5 percent during May to break through the 1.73 million mark, but Tower Investments chief executive Sam Stubbs said today that the budget "may make KiwiSaver a bit less attractive for people to join in the short run".

"The wild card was changes to KiwiSaver announced in the Government’s budget on May 19.”

The Government announced that it would cut in half its KiwiSaver contributions in the form of member tax credits starting June 30, 2012 from a maximum of $1040 to $521 yearly.

Tax will also be introduced on the full minimum 2 percent employer contributions starting April 1 next year. Currently, tax only applies to employer contributions over 2 percent.

And on April 1, 2013, workers and employers will be required to lift their minimum contributions from 2 to 3 percent.

Mr Stubbs noted that the financial impacts from these changes would not flow through until 2012 in the form of taxation of employers’ previously tax-exempt minimum contributions and halving payments of the government’s member tax credit subsidy.

"We probably won’t know for a few months yet whether the growth rate of sign-ups to KiwiSaver has been seriously impacted by the budget," he said.

During May numbers of members opting in through a KiwiSaver provider grew by 1.8 percent -- a similar sign-up rate to April -- to over 860,000, and another group of savers automatically enrolled by employers grew by 1.4 percent to over 640,000.

"If the monthly membership growth rate continues to average around 1.5 percent for the rest of 2011, over 26,000 new members will sign up per month, taking total membership to around 1.8 million by the end of the year," Mr Stubbs said.

“The wild card was changes to KiwiSaver announced in the government’s Budget on the 19th of May.”

Mr Stubbs said that even with the government giving KiwiSaver less support, it would still be an efficient, low-cost, well-regulated retirement savings vehicle.