BUDGET PREVIEW: Another chance to improve KiwiSaver

Since conception, KiwiSaver has gone from strength to strength. Any initial hesitation has been replaced, on the most part, with acceptance.

The most recent figures show two million New Zealanders are now signed up – a fantastic uptake.

The latest KiwiSaver Performance survey from Morningstar showed that funds have grown from $954.10 million as at June 30, 2008, to $14.48 billion as at March 31, 2013.

And on top of this, investment funds have been performing especially well over the last 12 months. Growth has been remarkable, but we have a long way to go yet.

While the recent 1% increase of the minimum contribution to 3% is a positive step in the right direction, this rate needs to be much higher.

The upcoming Budget is the perfect opportunity for the government to further increase this minimum contribution to ensure future generations will be comfortable in their retirement.

A recently released Infometrics report commissioned by the Financial Services Council has shown that if 80% of the workforce was contributing to KiwiSaver – and if the contribution was increased to 10% (5% by employees and 5% by employers) – the fund would grow from its current level of $14.48 billion to $731 billion by 2066.

Fantastic effect

This would have a fantastic effect on New Zealand’s economy, productivity and our capital and job markets.

Australia is way ahead of us in their retirement scheme. Employers there contribute 9% and this is increasing to 12% by 2020. This is smart and New Zealand needs to follow their lead – the sooner the better.

The Infometrics report also found that if contributions were increased to 10%, those starting work today would get twice the pensions they would be entitled to currently from NZ Super when they retire.

Only 9% of New Zealanders believe that NZ Super alone will be sufficient for them to live on when they reach retirement, according to a Horizon Research survey released by the FSC.

And this majority is right – the current entitlement of approximately $13,000 to $18,500 per annum would barely cover most people’s essential household expenses.

Demographic changes show that people are living longer and are more active in their retirement. As these changes continue, a much bigger nest egg will be required to fund these lifestyles.

While everyone’s needs and requirements are different, a typical rule of thumb is that people should look to have a post-retirement income at a level of 70% of their pre-retirement income if they want to maintain a similar lifestyle.

The bottom line is, that to be comfortable in retirement, every New Zealander needs to be saving roughly 10% of their income. And while some people will achieve this across a range of measures, the majority are unlikely to do so without government intervention.

Hopefully, this year’s Budget results in further improvements to the KiwiSaver scheme. While it’s unlikely there will be an increase to 10%, any small rise will be another step in the right direction.

Roger Sutherland is director, Grant Thornton Wealth Management Limited, at Grant Thornton New Zealand, chartered accountants and business advisers. Email: roger.sutherland@nz.gt.com