KiwiSaver evaluation reports

KiwiSaver Annual Report 1

1 July 2007 - 30 June 2008

IRD Shoulder Number:

Document summary: The first annual report of the KiwiSaver evaluation, covering the period 1 July 2007 to 30 June 2008.

Document content:

Executive summary

Report purpose and scope

This is the first annual report of the KiwiSaver evaluation. It is part of the programme of reporting, agreed to by Ministers at the outset of the evaluation, which is intended to provide regular performance-related information on KiwiSaver. The objectives of the evaluation are to:

• Assess the early implementation and delivery of KiwiSaver to inform on-going development and service delivery;
• Assess whether KiwiSaver's key features are generating the expected outcomes;
• Monitor the response to KiwiSaver 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.

This report relates to the first full year of KiwiSaver's operation, 1 July 2007 to 30 June 2008, and brings together results from analysis of Inland Revenue's administrative data and recent research conducted by the evaluation. It focuses on the following:

• Describing the profile of the KiwiSaver membership base and drawing comparisons between KiwiSaver members and non-members;
• Outlining KiwiSaver's design features and examining the extent to which individuals are taking advantage of these features (for those features that are currently available to members);
• Discussing the implementation of KiwiSaver in year one, particularly implementation in the workplace and Inland Revenue's administration; and
• Describing features of the KiwiSaver market, including providing some provisional results of research on the early impact that KiwiSaver has had on New Zealand's superannuation industry.

From a research perspective, it is still relatively early days for KiwiSaver. Much of the evaluation work conducted to date raises as many questions as it provides answers. Further, given the long-term nature of retirement policy interventions, trends and expectations regarding the impact of KiwiSaver will take time to emerge. In light of this, this report is intended to be read as a commentary on the evaluation findings to date, and the emerging questions and priorities which require further research. The next evaluation report will be reported in March 2009.

Evaluation findings

KiwiSaver's introduction in 2007 marked a significant shift in New Zealand's retirement policy structure. Alongside New Zealand Superannuation, a universal publicly-funded pension scheme, KiwiSaver now sits as a voluntary, private contributory scheme with Crown and employer-funded incentives for membership.

As a result of the Budget 2007 announcements (which included the introduction of compulsory employer contributions and the member tax credit) KiwiSaver was forecast to have 346,000 members (including 70,000 members of complying funds) by the end of year one. The actual membership figure at 30 June 2008 of 716,637 (excluding complying fund members) was not forecast to be reached until 2011.

The Crown and employer-funded incentives, supported by changes to the taxation of investment income, as well as effective communications activity, and competitive and marketing activity on the part of providers, are likely contributing factors to the significant growth in KiwiSaver membership.

Enrolment patterns

As of 30 June 2008, 855,443 people had been enrolled in KiwiSaver.

• Of the 855,443 enrolments, 138,806 have either opted-out or have had their account closed, leaving a net enrolment figure of 716,637.
• Of net enrolments, 47% opted in directly with a provider, 17% opted in via their employer and 36% were automatically enrolled.
• Enrolments by opt in methods peaked twice during the year, firstly in KiwiSaver's early months (July/August 2007) and secondly in the last quarter of the year (April/May 2008).
• Automatic enrolments grew steadily over the year and the rate at which individuals opted-out remained stable at approximately one-third of automatic enrolments.

Evaluation research shows that KiwiSaver's financial incentives (for example, the compulsory employer contributions, the member tax credit and the kick-start payment) are encouraging individuals to join KiwiSaver along with the desire to save for retirement. The minimum 4% contribution rate is the main feature that is discouraging enrolments. Other factors discouraging participation include having other provisions made for retirement and concern that future governments might change, or discontinue, KiwiSaver.

Membership profile

At the conclusion of KiwiSaver's first year, the profile of members looks as follows:

• Members are equally split between men and women. This is consistent with the gender split in the total eligible population (ie those who are eligible to join KiwiSaver, whether or not they have joined).
• Age distribution of members differs notably by method of enrolment. Opt ins via provider peak at the under 18 and older than 55 year bands. Those who opt in via an employer tend to be older; nearly 50% are over 45 years of age. The profile of those who have been automatically enrolled is more heavily weighted towards younger individuals, suggesting that automatic enrolment has been effective in enlisting individuals who are new to the workforce and overcoming savings inertia.
• Just over half (55%) of KiwiSaver members earnt income solely from salary and wages (which includes benefit payments received) for the 2007 tax year. A further 31% earn a portion of their income from salary and wages and the remainder from other sources (e.g. self-employment).
• Those who earn their income solely from salary and wages, and have opted in to KiwiSaver, have average incomes approximately one-quarter higher than the average income for all eligible salary and wage earners aged 18 to 64 (ie those within the eligible population who earn their income solely from salary and/or wages). Those who have been automatically enrolled have average incomes approximately one quarter lower than the total eligible salary and wage earner population (aged 18 to 64).
• Analysis on a sample of members, a sample of those that have had no interaction with KiwiSaver, and a sample of opt-outs shows that both members and those who have had no interaction with KiwiSaver are associated with mid to older age groups and mid to higher incomes. Opt-outs, however, are associated with lower incomes and younger age groups.
• While there are relationships evident between individuals' age, income and membership status, age and income alone are not strong predictors of whether or not an individual is a KiwiSaver member.

Savings choices

Approximately half (49%) of KiwiSaver members have made an active choice of scheme, over one-third has been allocated to a default scheme (38%) and the remaining 13% have been allocated to their employer's nominated scheme. For those who are automatically enrolled or opt in via their employer, it appears that scheme membership is being influenced by the enrolment process rather than widespread proactive investment choices.

While regular contributions holidays could not be taken during the first year, 3,490 members have been granted a contributions holiday for reasons of financial hardship. Interestingly, of those, approximately two-thirds have made contributions to their accounts while on holiday. Possible explanations for this could include time lags in the deductions process, gaming of the system, or relatively low thresholds being applied by those determining financial hardship contributing to a high approval rate.

Research with the evaluation's employer panel and feedback from providers suggests there is still a need for financial education for both KiwiSaver members and potential members, in particular in the areas of how to choose a scheme provider and investment fund, understanding the products scheme providers invest in, and the information members should expect to receive from their provider.

Implementation and delivery

As a principally workplace-based initiative, KiwiSaver is reliant on employers understanding their obligations and implementing them effectively. Ongoing research with the evaluation's employer panel finds that employers are generally administering KiwiSaver as intended. Business size affects employers' approach to implementation; small businesses are implementing KiwiSaver on an as-needed basis and large employers have tended to determine how they will manage KiwiSaver over the longer term. Employers interviewed do not consider that administering KiwiSaver creates considerable compliance costs for their organisations.

The majority of employers that participated in the panel have deferred the decision about how they will accommodate compulsory employer contributions into their wage structures until the contributions affect their operating costs. For those employers that have planned ahead, the type of employment contracts in force appear to determine employers' approach to paying contributions. Amongst employers participating in the panel, there was a slight tendency to pay employer contributions in addition to existing gross pay for employees on collective contracts, and to suggest paying the contributions as part of total remuneration packages for employees on individual contracts.¹

As the central administrator, Inland Revenue's implementation and delivery of KiwiSaver has the ability to impact individuals' KiwiSaver membership experience. In KiwiSaver's early months transferring funds and refunds through the system presented processing challenges, resulting in delays in funds being passed to providers and refunds being returned to those who opt out. Changes made to the way Inland Revenue processes Employer Monthly Schedules (EMS) have resulted in improvements in KiwiSaver's administration and the performance target of 90% of EMS processed and funds ready to be passed to providers at the end of the month following the EMS filing date is now being met.

KiwiSaver market

At the end of the first year, there were 54 KiwiSaver schemes registered with the Government Actuary, delivered by 31 scheme providers. Of these schemes, 37 are open to the general public and the remaining 17 are schemes for employees of specific companies or industries.

Inland Revenue has passed $1.037 billion in member, employer and Crown contributions to scheme providers. Over half (55%) of the contributions passed to providers are Crown contributions and the remaining 45% of funds are employee deductions and employer contributions.²

While there are many players in the market, funds and members are concentrated in a relatively small sub-set of providers and schemes.

• 77% of the membership base and 74% of the funds passed from Inland Revenue are held by six providers. Sixty four percent of the membership base and 62% of the funds passed are held in the six largest (determined by funds passed from Inland Revenue) schemes.
• Default schemes, while dominant in the market, do not account for the six largest schemes. Default providers have been successful in achieving a greater share of the market than that accounted for by their default schemes.
• Most KiwiSaver schemes are currently small; 45 of the 54 schemes have fewer than $40 million contributions and of those 45, 34 have fewer than $5 million contributions. Half of the schemes with fewer than $5 million are retail schemes and half are company or industry schemes.

Evaluation of the initial impact that KiwiSaver has had on the superannuation industry is nearing completion. Provisional results are included below and full results and conclusions will be included in the next evaluation report in March 2009.

Membership of superannuation schemes, both corporate and personal products, was in decline prior to the introduction of KiwiSaver. Many corporate superannuation products were being closed to new members, wound up or incorporated into master trusts to improve administrative efficiency. Individual superannuation schemes were also affected as individuals favoured alternative vehicles for retirement savings.

Many providers interviewed for the evaluation consider KiwiSaver's introduction has stimulated the managed funds industry by broadening the nature of the superannuation market. Entering the KiwiSaver market for existing superannuation providers was primarily driven by the need to continue to compete. For those who had not previously provided superannuation products, KiwiSaver was seen as an opportunity to expand their brand and product offerings. Despite concentration in the market, there is diversity evident in both providers and products, providing competitive opportunities for innovation in distribution, service and investment approach.

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¹ These interviews had been completed prior to the government's announcement and passing of changes to the Employment Relations Act concerning KiwiSaver's compulsory employer contributions.

² Figures relating to funds passed from Inland Revenue to providers are gross (ie they exclude refunds from providers) and are provisional only. Inland Revenue is currently reconciling final payments.

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Date published: 22 Oct 2008

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