New Zealand
Compiled by Allianz Global Investors
Pension System Design
The New Zealand three-pillar pension system underwent a major overhaul with the introduction of the KiwiSaver scheme, a voluntary occupational pension scheme, on July 1, 2007. This scheme complements existing occupational schemes and is intended to increase the overall coverage ratio of occupational complementary pensions in New Zealand. In 2007, this coverage ratio stood at 21%, a level regarded to be insufficient.
Generally, the pension system comprises the New Zealand Superannuation, a non-contributory state pension in the first pillar, and occupational superannuation schemes and the KiwiSaver scheme in the second pillar. Private pension savings in the third pension pillar complement the pension landscape.
Public Pensions
New Zealand’s public pension system, the New Zealand Superannuation (NZS), differs from those in many other countries. Its primary goal is to provide social protection rather than to replace earnings. Achieving a sufficient level of income replacement is viewed as a matter of individual responsibility.
The non-contributory flat-rate pension is paid to all residents fulfilling the residence requirements at the age of 65. The beneficiary must have lived in New Zealand for at least 10 years since turning 20 with at least five years spent in the country after the age of 50. The pension is financed from general tax revenues. More than 95% of the age-eligible population receive a pension from the NZS. By law, the amount payable to a married couple must be 65-72.5% of the after-tax average weekly wage. A single person living alone receives 65% of the rate payable to couples.
The NZS represents the major source of retirement income. A survey by Statistics New Zealand reported a coverage rate with private or work-place pensions of only 21%.
All benefits received under NZS are subject to income tax. The pension is paid regardless of whether the person is still employed or not, that is, it is neither work nor income-tested. It is noteworthy that New Zealand has not legislated for a compulsory retirement age. In addition, employers are not allowed to specify a mandatory retirement age in contracts of employment.
Early retirement is limited in New Zealand. The NZS does not provide benefits to those who retire before the age of 65. Those who leave the labour market before being eligible for NZS benefits can apply for conditional, means-tested public income support.
The New Zealand Superannuation Fund was established in 2001 to meet the future costs of an aging population. It is expected that the portion of the population aged 65+ will double from 12% in 2005 to 25% in 2051. As a result, governmental expenditures are projected to grow from 3.4% of GDP in 2007 to 6.9% in 2050.
The Fund made its first investment of NZD 2.4bn (EUR 1.3bn) in 2003. As of January 31, 2008, total assets amounted to NZD 13.2bn (EUR 6.95bn) and this is expected to grow to approximately NZD 109bn (EUR 57.4bn) by 2025 and to NZD 307bn (EUR 161.7bn) in 2050. Over a period of 20 years, the government plans to transfer an average of NZD 2bn every year to the fund, which represents around 1.3% of GDP per annum. No withdrawals are allowed from the fund before July 2020.
The Guardians of New Zealand Superannuation Fund are in charge of the management and the administration of the assets. Assets need to be invested in a prudent manner, avoiding any undue risk. An annual report gives a detailed statement of investment policies, standards and procedures, as well as a list of all external investment managers appointed. Currently, 39 investment mandates have been awarded to 29 external asset managers. The appointment of investment management companies follows a formal selection process.
The fund is invested in a diversity of asset classes according to a strategic asset allocation (SAA) policy established by the Guardians. The specific asset allocation is reviewed at least annually. The fund’s long-term objective is to exceed the risk-free rate of return, that is, the interest rate on New Zealand Treasury bills, by at least 2.5% p.a. over rolling 20 years periods. The fund has performed strongly since its inception in 2003 with annual returns averaging 14.9%.
The Superannuation Fund is subject to income tax on any income derived from the fund's investments. It is subject to the same income tax regime as equivalent privately owned entities, although the Fund is actually the property of the Crown. This means the Crown is effectively taxing itself.
Occupational Pensions
The occupational pension landscape in New Zealand saw a major reform in 2007. In addition to the existing private-sector superannuation schemes, the KiwiSaver scheme was implemented in July 2007 to complement the pension vehicles available for second pillar pension provision.
KiwiSaver scheme
KiwiSaver is a voluntary, work-based savings scheme intended to complement the New Zealand Superannuation and help increase overall retirement savings. New employees are enrolled automatically, although they have eight weeks to opt-out if they do not wish to take part. Existing employees may opt-in if they wish.
The employee must choose the KiwiSaver scheme provider to where the savings should be allocated as well as how much to contribute. The contribution rate is either 4% or 8% calculated on gross salary. Employer contributions are voluntary and subject to a vesting scale. In case the required contribution rate of either 4% or 8% is split between the employer and the employee, the full amount vests immediately.
Employer responsibilities in the KiwiSaver scheme are the following:
- Offer access to KiwiSaver scheme;
- Provide an information pack to participating employees;
- Notification of new employees to the Inland Revenue;
- Deduct contributions from gross salary for those who participate in the scheme.
Employers with an existing, approved superannuation scheme may apply for exemption from automatic enrolment into the KiwiSaver. This is achieved by meeting certain criteria concerning accessibility, vesting, distribution age (lock-in rule) and portability. In addition, the combined employer and employee contribution must be at least 4% of gross earnings.
Nevertheless, an employer is still required to pass KiwiSaver contributions to the Inland Revenue in the case the employee insists on participating in the scheme. All contributions are collected by the Inland Revenue, which then forwards them to a selected or default provider within three months.
An organisation can apply to become a KiwiSaver scheme provider at any time, as long as it meets the certification and registration requirements. Scheme providers must be certified before they can be registered. Inland Revenue is responsible for certification and the Government Actuary is responsible for registration. There are a number of operational and technical requirements to ensure scheme providers can set up and run KiwiSaver schemes effectively. A list of organisations registered as KiwiSaver scheme providers are available on Inland Revenue website.
The eligibility age for KiwiSaver benefits was set in line with the NZ Superannuation eligibility age of 65. Savings will be paid out as a lump sum.
KiwiSavers who do not make an active decision for a preferred scheme are allocated to the scheme initially chosen by the employer, in case the employer selected a scheme, or to a default scheme provider appointed by the Ministry of Finance and Commerce. The Government has appointed six default KiwiSaver scheme providers.
The KiwiSaver products have different investment risk profiles: conservative, balanced or growth. For employees who have neither decided how much they want to contribute, nor have chosen a scheme provider or an investment option, a default rate of 4% is allocated to the employer-chosen provider or to a default scheme provider appointed by the Ministry of Finance and Commerce. In such a case, contributions are allocated to a product with a conservative investment profile.
All KiwiSaver schemes are run by the private sector, but require approval by the Government Actuary. The statutory provisions are similar to those of the existing registered superannuation schemes. There are no governmental guarantees for individual schemes.
To give impetus to the uptake of the KiwiSaver scheme, the government makes an upfront contribution of NZD 1000 (EUR 527) to each individual account. In addition, it also contributes to paying the saver’s ongoing account fees the savers’ ongoing account fees.
KiwiSavers that have contributed for at least three years will be able to make a one-off withdrawal for a deposit on the first home. The withdrawal is limited to the savers’ own savings; employer contributions and the governmental upfront contribution are excluded and locked in the account until retirement.
Tax treatment of contributions and benefits
Employer contributions to the KiwiSaver scheme are tax-exempt up to a limit of either the employee’s contributions or 4% of the employee’s gross salary, whichever is lower. The tax exemption, which is a new element in New Zealand’s complementary pension system, was extended to all registered superannuation schemes as of July 1, 2007.
In order to ensure tax neutrality between KiwiSaver schemes and other registered superannuation schemes, the tax exemption was extended, but is only applicable for registered defined contribution schemes. Withdrawals from the KiwiSaver scheme account are tax-free.
Private-sector occupational schemes
In 2005, employer-sponsored pension plans, including public-sector schemes, had 304,622 active members covering 14.8% of the workforce. Total assets amounted to NZD 11.5bn (EUR 6.1bn) with 56.5% allocated to defined contribution schemes.
Occupational pensions are provided through superannuation schemes, either registered or unregistered, on a stand-alone basis or as a part of a master trust. The total number of registered superannuation schemes is steadily decreasing. This is partly due to the fact that stand-alone schemes are being transferred to multi-employer arrangements in order to save administration and compliance costs through outsourcing.
It is intended that the KiwiSaver scheme will complement existing superannuation funds rather than replace them. In July 2007, existing superannuation funds had the option to:
- Apply for an exemption from automatic enrolment and act as a substitute to the KiwiSaver scheme. An employer can apply for exemption if the scheme is open to all new permanent employees, if accumulated assets could transferable to other schemes and if the combined minimum contribution is at least 4%.
- Fully transform to a KiwiSaver scheme.
- Establish a KiwiSaver section within the scheme.
- Make no major changes to the scheme. In this case, the employer would be required to meet KiwiSaver obligations outside the scheme.
Every employer has to verify the costs with regard to the above-mentioned options. Employer-sponsored schemes that already fulfil the exemption from automatic enrolment specified in the KiwiSaver Act could benefit from reduced administrative effort because they do not have to meet all the employer responsibilities associated with the KiwiSaver. On the other hand, employees are not eligible for the governmental one-time kick-off contribution.
Tax treatment of contributions and benefits
Before July 2007, long-term retirement savings to workplace superannuation schemes were not tax-favoured compared to other saving forms. This changed with the introduction of the KiwiSaver scheme. The favourable tax treatment of KiwiSaver schemes was also extended to registered superannuation funds to assure a level playing field and to prevent existing employer schemes from being terminated to the benefit of the KiwiSaver.
As of July 1, 2007, employer contributions to registered superannuation schemes will be tax-exempt up to the lesser of the employee’s contribution or 4% of the employee’s gross earnings. Investment earnings are taxed at a rate of 33% and benefits are tax-exempt. The old taxation rules still apply to unregistered superannuation funds. That is, employer contributions to unregistered superannuation schemes are subject to the Specified Superannuation Contribution Withholding Tax (SSCWT) at a rate of between 19.5% and 39% depending on the employee’s earnings.
Outlook
Before the introduction of the KiwiSaver scheme in mid-2007, the government expected 25% of the workforce (675,000 employees) to initially choose to participate in the KiwiSaver scheme. In November 2007, 317,000 New Zealanders had already joined with the take-up predominately being amongst younger individuals. Nevertheless, New Zealand officials declared themselves satisfied with the initial figures, which they see as quite encouraging for future development.
The incentives that apply since July 2007 are intended to develop a long-term savings habit in New Zealand so employers contribute to attaining a satisfying level of supplementary pension coverage. The significant wealth accumulated in Australian superannuation funds has served as a role model for the development of the KiwiSaver scheme