KiwiSaver Six-monthly report 2 (Research and evaluation reports)

Document summary: This report is the second of a series of six-monthly reports evaluating the effectiveness of KiwiSaver, including its implementation, delivery and, in the longer term, impact on the savings levels of New Zealanders and the development of the financial sector.

Document content:

Executive summary

Report purpose

The KiwiSaver evaluation reports to Ministers on a six-monthly basis to provide regular performance-related information on KiwiSaver. This is the third report of the evaluation and is the mid-year progress report for the 2008-09 year. The report relates primarily to the period from 1 July 2008 to 31 December 2008, and brings together results from analysis of Inland Revenue's administrative data and recently completed research.

Evaluation objectives and scope

The evaluation is a six-year project running from 2007-08 to 2012-13. Its objectives are to:

Assess the early implementation and delivery of KiwiSaver in order to inform on-going development and service delivery;
Assess whether KiwiSaver's key features are generating the expected outcomes;
Monitor KiwiSaver usage to understand the scale and pattern of take-up;
examine the impact of KiwiSaver on individuals' saving habits and asset accumulation; and
Examine the impact of KiwiSaver on superannuation markets and the financial sector.

The evaluation timeframe was set to take into account the initial implementation of KiwiSaver, the rollout of the home ownership assistance, and the fact that critical longer-term trends (including whether KiwiSaver has resulted in additional savings or whether it has simply resulted in substitution between various savings alternatives) will not be evident immediately but instead will emerge towards the end of the evaluation period, and, in fact, beyond.

KiwiSaver changes

In December 2008, the government passed legislation making changes to KiwiSaver. These changes include reductions in the minimum contribution level for both employers and members, removal of the fee subsidy for members and the employer tax credit, and changes to the Employment Relations Act regarding the payment of employer contributions. The extent to which these changes influence the uptake of KiwiSaver and utilisation of its various features, as well as other impacts they have on providers, employers and individual savers, will be investigated by subsequent evaluation.

Evaluation findings

Enrolments and forecasts

At 31 December 2008, 900,509 people were KiwiSaver members. Monthly membership growth, whilst still steady, has slowed in the latter months of 2008 following strong growth in the quarter to 30 June 2008. Opting-in via a provider and automatic enrolment continue to be the dominant methods of enrolment.

Forecasts anticipate membership will reach 1.064 million by the end of the current financial year (June 2009) and the rate of membership growth will slow over the next three years to June 2012, at which point the number of members is predicted to plateau at approximately 1.4 million. These forecasts take into account the recent legislative changes but not the full extent of ongoing changes in the economic environment.

Membership profile

The demographic profile of the membership base at 31 December 2008 is similar to that at 30 June 2008. Gender is evenly split between male and female and the age distribution of members varies according to the method of enrolment. Excluding children who can only join by opting-in via a provider, those who are automatically enrolled are younger than those who opt-in. The age distribution of the member population has flattened over the past year, although remains older than that of the eligible population.

Slightly more than half of members earned up to and including $30,000 for the 2008 tax year and three-quarters earned less than $50,000. These figures are consistent with the eligible population. Women and automatic enrolees are more heavily represented in the lower income brackets than men and those who opted-in.

Member and employer contributions

Most employed members are contributing 4% of their salary or wages to their account and are receiving the minimum 1% contribution from their employers. The extent to which members are actively choosing their savings rate, including whether existing members change their contribution to 2% and new members choose to contribute at the new default 2% rate (or elect a higher rate) following 1 April 2009, will be further investigated through the evaluation.

There has been steady growth in the number of members on a contribution holiday over the period July to December 2008, a result of the first members being eligible to take an ordinary contribution holiday from 1 July 2008. At 31 December 2008 there were 11,476 members on an ordinary contribution holiday, an estimated 4% of those eligible to be on a holiday at that time.¹ A further 2,121 members were on a financial hardship contribution holiday.

KiwiSaver contributions have cost employers $251 million for the period April to December 2008, $170.3 million (68%) of which has been covered by employer tax credit payments received from the Crown. These costs exclude administrative and compliance costs employers incur having employees as KiwiSaver members.

Funds for investment and Crown contributions

In the six months to 31 December 2008, $1.197 billion in contributions was passed to scheme providers for investment, more than the $1.037 billion passed for the full financial year to 30 June 2008.

Approximately half ($606 million) of the funds transferred for the period were contributions from the Crown, the majority of this (53%) accounted for by member tax credit payments for the first year of membership. The proportion of funds being contributed by the Crown is declining over time; for the full financial year to 30 June 2008, the Crown's $572m contribution accounted for 55% of the total funds passed to providers for investment.

One-third (36%) of the funds passed to scheme providers for July to December 2008 were deductions from employees' pay and 13% were contributions from employers, an increase from 6% for the year to 30 June 2008, reflecting the impact of the compulsory employer contributions.

KiwiSaver market

The New Zealand superannuation market had experienced a steady decline in membership and the number of schemes on offer in the years prior to KiwiSaver. While membership was declining, ongoing contributions from remaining members and investment returns meant funds under management continued to grow.

KiwiSaver has been seen by many providers as an opportunity to turn declining superannuation membership trends around. It has, as a result, attracted a number of new organisations into the provision of retirement savings products, in addition to the majority of existing organisations. Entering the market for existing superannuation providers was primarily driven by the need to continue to compete and, for those who had not previously provided superannuation products, KiwiSaver was an opportunity to expand their brand and product offerings.

Despite considerable choice, the KiwiSaver market is relatively concentrated in terms of funds held by providers; at 31 December 2008, the six largest providers held three-quarters of the funds transferred by Inland Revenue.

This report sets up a framework for monitoring KiwiSaver's ongoing supply-side impact. The framework measures the growth and size of the market relative to the superannuation and managed funds industries and the efficiency within the KiwiSaver market, including the extent of competition, consumer choice and innovation, and expectations relating to profitability and consolidation.

Evaluation next steps

The next phase of the evaluation will focus on planning research on the early outcomes of KiwiSaver for employers and individuals (including planning work to measure the impact of KiwiSaver on individuals' savings), beginning the evaluation of home ownership features, and scoping further work on supply-side impacts.

As part of the work planned to determine the impact of KiwiSaver on savings, the evaluation intends to use Statistics New Zealand's Survey of Family Income and Employment (SoFIE) and, subject to final agreement, will include a set of KiwiSaver questions in the assets and liabilities module of wave eight of the survey which will be in the field from October 2009 to December 2010.

The next report will be provided to Ministers in September 2009.

¹ To be eligible to take an ordinary contribution holiday, an individual must have been a member for 12 months and be contributing from their salary or wages.

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KiwiSaver evaluation reports