KiwiSaver Annual Report 4 (Research and evaluation reports)

Document summary: The fourth annual report of the KiwiSaver evaluation. It summarises key performance data and trends for the year to June 2011 and results of research completed over the course of the year.

Document content:

Executive summary

This is the fourth annual report of the KiwiSaver evaluation. As in previous annual reports, it summarises the key trends and performance data for the year to June 2011 and the results of relevant research and analysis completed over the course of the year. The main pieces of new analysis outlined in this report relate to an initial evaluation of the KiwiSaver home ownership features and an initial evaluation of the impact of KiwiSaver on retirement savings.

Enrolment trends
Membership motivations and barriers
Impact of KiwiSaver features and incentives
KiwiSaver costs
Impact on retirement savings
Further work

Enrolment trends

Although not as high as the previous year, there continues to be steady growth in KiwiSaver enrolments. As the scheme settles, growth in enrolments is expected to be more in line with population growth. KiwiSaver membership reached 1.76 million and over the past year membership has grown by on average 25,000 a month. The majority (63%) have continued to opt-in to KiwiSaver. Approximately 28% of eligible children and nearly 60% of eligible people aged 18 to 24 years have enrolled.

Membership motivations and barriers

Most people enrol in KiwiSaver because they recognise that it is a good way to save for their retirement. Financial incentives from government and employers continue to be influential in people's reasons for enrolling in KiwiSaver. Although membership continues to grow steadily, there are still 56% of the eligible population who have not enrolled in the scheme. Along with not being able to afford to join, research this year found a key reason that people had not joined KiwiSaver was because they had other sufficient savings and investments for retirement. Another reason that ranked highly for people not joining KiwiSaver was concern about the uncertainty of the structure of the scheme due to a belief that changes were likely in the future. The research also highlighted some circumstances surrounding higher education, ethnicity and whether people have been planning for retirement as other potential influencing factors in some people's decision to join KiwiSaver.

Impact of KiwiSaver features and incentives

KiwiSaver has a range of features and incentives designed to encourage savings and asset accumulation among members. These features and incentives also recognise members' individual circumstances. This includes: the ability to opt-out, choose between schemes, choose the level of contribution, member tax credits, contribution holidays and using savings to buy a home.

The percentage of members who had been enrolled automatically and chose to opt-out as at 30 June has declined over the past three years from 34% for 2009 to 28% for 2011. Although many people have remained with the default KiwiSaver scheme they were allocated to, most people are choosing their own scheme. This is particularly relevant for those who joined the scheme early. In each of the past two years there were more than 120,000 transfers between schemes. Recent research has found that the reason many people switch provider is a preference for having their KiwiSaver account at their bank.

The default contribution rate of 2% of gross salary or wages for new members has been in place now for over two years and appears to be influencing the level of members' contributions. Over half of KiwiSaver members are currently contributing 2% of their salary or wages to their accounts. As at 30 June 2011, there were 63,707 members on a contribution holiday, including less than 1% on financial hardship holidays.

The KiwiSaver home ownership features became operational in July 2010. From 1 July 2010 to 31 March 2011, there were 1,274 withdrawals and the average value of a withdrawal was $9,640. There were also 619 subsidies of $3,000 each. An initial evaluation this year found the number of KiwiSaver members receiving a first home withdrawal and/or being approved a subsidy was higher than forecast. It also found many people experienced problems coordinating subsidy and withdrawal applications with providers, Housing New Zealand, Inland Revenue, banks, lawyers and real estate agents for a range of reasons.

KiwiSaver costs

Employers and the Crown continue to make significant contributions to KiwiSaver. This year, employers contributed $740 million. Over the four years to date, employers have contributed $1.79 billion to KiwiSaver accounts. Also this year, $998 million dollars were transferred by the Crown to KiwiSaver providers, mainly in member tax credits. This is expected to reduce in future years as a result of changes implemented in Budget 2011.

Impact on retirement savings

This year, KiwiSaver providers hold $9.2 billion in KiwiSaver schemes, consisting of member contributions, employer contributions and Crown payments mainly of member tax credits and the kick start payment.

An initial evaluation this year of the impact of KiwiSaver on retirement saving examined the alternative use of funds going into KiwiSaver, the adequacy of income in retirement, the effectiveness of the scheme in reaching its target population and its impact on national savings. The analysis was based on the KiwiSaver survey conducted in 2010 of 825 people.

The analysis found that KiwiSaver was encouraging individual savings, some of which would have otherwise been consumed. But many respondents, particularly those that own their own home, indicated that they would have used a substantial proportion of their KiwiSaver contributions for other forms of saving or to reduce their debt. The analysis also found that most respondents expected their retirement incomes would be adequate to meet their basic needs. About one half felt that their expected retirement income would be sufficiently comfortable. The results indicated that 22% had a shortfall in expected retirement income based on needs. In contrast, 50% reported an expected shortfall with respect to being comfortable. These results were broadly similar for both KiwiSaver members and non-members. After controlling for the effects of other factors likely to affect retirement income outcomes, the analysis found no evidence that KiwiSaver membership was associated (either positively or negatively) with the expected shortfalls found.

The analysis explored the effectiveness of KiwiSaver in reaching the target population the scheme is intended to help; namely those who would not otherwise have saved enough to maintain their standard of living in retirement. It estimated 33% of the target population based on need became members and 46% based on being comfortable became members. For each of those members who were in the target population a further four to 14 people joined from outside the target population. This implied that the ongoing cost of the scheme for each target member could be around $4,000 per year (if the standard is living comfortably) or around $13,000 per year (if the standard is meeting needs). These estimates of the cost per target member will decrease due to the reduction in member tax credit and removal of the employer superannuation contribution tax exemption proposed from 2012 onwards.

The analysis also explored the impact of the scheme on national savings. It estimated, on the conditions and settings of the scheme at that time, that over the ten years to 2021 the net contribution of KiwiSaver to national savings would be marginal at best in the longer term, and may in fact reduce national savings. When sensitivity analysis in the form of allowing for much higher rates of additionality on employer and Crown contributions were conducted, the analysis found modest increases in national saving. In either case, fiscal costs over the period were projected to total nearly $8 billion in net present value terms. As outlined above, this estimate wil decrease due to the reduction in member tax credit and removal of the employer superannuation contribution tax exemption proposed from 2012 onwards.

Further work

Further work is required to evaluate the initial impact of KiwiSaver on saving and net worth. This work is based on providing a comprehensive basis for assessing changes in individual or household saving behaviour over time from the longitudinal survey, Survey of Family Income and Employment (SoFIE).

SoFIE will play a key role in further work planned as part of the KiwiSaver evaluation in the coming year. The KiwiSaver evaluation team proposes to link selected KiwiSaver administrative data with SoFIE data. The linked dataset would provide greater insights into actual savings behaviour of those who are members of KiwiSaver compared to those who are non-members and would provide valuable information in terms of addressing KiwiSaver's impact and effectiveness.

Other work planned in the coming years includes a follow up by the Department of Building and Housing of the initial survey on the home ownership package to assess the impact and effectiveness of the package against its agreed outcomes. The Ministry of Economic Development also plan to update its work on the KiwiSaver Supply Side evaluation.

The planned work in the coming years will put the KiwiSaver evaluation in a strong position to provide further assessment of the overall impact of the scheme on individual and national savings. However, this assessment will only span the early years of the scheme. Given KiwiSaver represents an important part of New Zealand's retirement income policies, it will be crucial to continue ongoing assessment and evaluation of the performance of the scheme as it matures. This ongoing assessment and evaluation will require access to relevant and reliable sources of information and data, particularly longitudinal data that can track saving behaviour over time. At present, there are no active sources of longitudinal data available. Without this information and data there will be limited ability to assess the ongoing performance of the KiwiSaver in the future.

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