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International Seminar on Social Security

Employees’ Provident Fund, Malaysia

 

National strategy for financial literacy and retirement savings:

The New Zealand experience

14 July 2010 Michael Littlewood1

   

 

Retirement Policy and Research Centre

Economics Department Business School The University of Auckland Private Bag 92019 Auckland, New Zealand www.rprc.auckland.ac.nz

                                                            1. Michael Littlewood is a co-director of the Retirement Policy and Research Centre, the University of Auckland. The opinions expressed in this paper are those of the author and not necessarily of the RPRC.

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Table of Contents

Abstract ................................................................................................................................................... 4 

1.  Introduction .................................................................................................................................... 5 

2.  The New Zealand pensions framework: ......................................................................................... 7 

2.1.Background ................................................................................................................................... 7 

2.2 New Zealand Superannuation ....................................................................................................... 8 

2.3 International comparisons ............................................................................................................ 8 

3.  KiwiSaver – tax concessions return ............................................................................................... 10 

3.1 Tax treatment of private provision ............................................................................................. 10 

3.2 KiwiSaver ..................................................................................................................................... 10 

4.  The implications of KiwiSaver on behaviour ................................................................................. 14 

4.1 Influence from the US behavioural studies................................................................................. 14 

4.2 KiwiSaver investment strategy: the default option .................................................................... 14 

4.3 Default strategy and the savings environment ........................................................................... 15 

4.4 Assumed need for intervention .................................................................................................. 15 

4.5 Mis‐application of lessons from studies on behavioural finance ............................................... 16 

4.5 Many more now have portfolio savings ..................................................................................... 16 

5.  The need for financial literacy in a retirement saving context ..................................................... 18 

5.1 The respective parties involved in New Zealand ........................................................................ 18 

5.2 Impact of KiwiSaver..................................................................................................................... 18 

5.2 The New Zealand government’s role ...................................................................................... 19 

5.2.1 Task Force’s report – 1992 ................................................................................................... 20 

5.2.2 Development of the Retirement Commission’s role ........................................................... 20 

5.2.3 Education initiatives ............................................................................................................. 22 

5.2.4 Regulation – disclosure ........................................................................................................ 22 

5.3 The New Zealand employer’s role .............................................................................................. 23 

5.3.1 Efficiency of Tier 1 ................................................................................................................ 25 

5.3.2 Making the communication programme work .................................................................... 25 

5.3.3 Promoting action ................................................................................................................. 25 

5.3.4 The employer’s role – summary .......................................................................................... 25 

5.4 The individual’s role .................................................................................................................... 26 

5.5 The role of the adviser ................................................................................................................ 26 

5.6 A future without sellers? ............................................................................................................ 27 

5.7 Overall implications of the New Zealand government’s involvement........................................ 28 

6.  The National Strategy – findings on literacy issues ...................................................................... 29 

6.1 The 2006 ANZ‐Retirement Commission Financial Knowledge Survey ........................................ 29 

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6.2 The 2009 Financial Knowledge Survey ........................................................................................ 29 

6.3  2010 Ngai‐Tahu Financial Knowledge Survey ............................................................................ 32 

6.4 Improved knowledge? ................................................................................................................ 32 

7.  Lessons from the New Zealand experience .................................................................................. 34 

Appendix 1: definitions ......................................................................................................................... 36 

References ............................................................................................................................................ 38 

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Abstract 

New Zealand has a relatively simple retirement income system that seems, on a number of measures to be working.

However, in the last three years, the retirement savings landscape has been made more complicated by the introduction of the world’s first national, auto-enrolment, opt-out savings scheme that also re-introduced tax incentives. This is, perhaps, an experiment that New Zealand did not need to undertake.

The regulatory landscape has also become more complex; again, probably unnecessarily.

These changes complicate the environment for financial literacy initiatives.

The roles of the respective parties that might be involved in financial literacy programmes (the government, employers, financial service providers and savers) need to be understood clearly.

New Zealand is at the forefront of national financial literacy programmes and, on the evidence to date those seem, tentatively, to be making some difference.

New Zealand offers an example to other countries in both what, and what not to do about retirement income strategies and how those can affect individuals when they decide whether, when and how to save for retirement.

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1. Introduction2 New Zealand has probably the simplest retirement income environment of any country. In brief, it comprises two major components:

• Tier 13: New Zealand Superannuation (NZS) is a relatively generous, universal, taxable pension payable from age 65 with modest residency requirements. Fuller details are in section 2.

• Tier 2 (there is no compulsory Tier 2).

• Tier 3: KiwiSaver aside, there are no tax subsidies or any required retirement savings. New Zealanders (and their employers) make their own arrangements about how, when and how much to save as a supplement to Tier 1’s NZS.

KiwiSaver can be seen as an exception to this ‘hands-off’ approach to public policy. It is the world’s first auto-enrolment, opt-out, national saving scheme. KiwiSaver forms part of Tier 3 because, despite the auto-enrolment process, it is essentially voluntary. Because KiwiSaver is a new (2007) and relatively important government initiative, it forms part of the pensions’ landscape that is relevant to issues surrounding financial literacy. Section 2 summarises the key features of KiwiSaver.

On the eve of the introduction of KiwiSaver in 2007, the Minister of Finance said:

KiwiSaver now presents the chance for a new beginning for New Zealand in terms of saving and investing. It is the individual’s equivalent to the New Zealand Superannuation Fund – the opportunity for greater security in retirement. At the same time it will significantly increase the flow of funds in New Zealand for investing both here and overseas. The effects of such funds can be seen in Australia. By some measures Australia is now the world’s fourth largest offshore investor. We, on the other hand, are one of the world’s largest borrowers relative to our size. (Cullen, 2007)

It is not appropriate for this paper to assess whether KiwiSaver might be ‘working’ as intended; suffice to say that the new initiative is an important part of New Zealand’s retirement saving environment.

By way of context, some key comparisons between Malaysia and New Zealand are given in Table 1.

                                                            2 Sections 1 to 3 draw on a paper from the Retirement Policy and Research Centre (S. St John, Littlewood, & Dale, 2010, forthcoming). 3 Appendix 1 is a glossary of expressions used with a particular meaning in this paper. They are used with capital initial letters in the body of the paper.

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Table 1 Malaysia and New Zealand comparisons

  Malaysia New Zealand

GDP per capita (US$) 2009 $6,8904 $29,500

Population (million) 28.31 4.36

Life expectancy: 73.3 years 80.2 years Pension funds in economy (% of GDP)

56% (2002)

11.3% (2005)

Unemployment rate % (Dec 09)

3.4%

7.1%

Sources: Perry (2009), OECD, (2009), (2006);New Zealand Life Tables: 2005-2007, Statistics New Zealand, Central Statistics Office 2009.

New Zealand has an ageing population and, as explained in sections 2-3, a relatively hands-off approach to retirement saving issues. Financial education has, therefore, a potentially more important role in helping individuals make ‘appropriate’ decisions about deferring consumption.

After setting the scene by describing New Zealand’s retirement income framework, this paper describes some of the initiatives that New Zealand has adopted to help its citizens decide what is in their best interests.

                                                            4 Department of Statistics: MYR23,567 accessed here; at 31 December 2009 exchange rate.

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2. The New Zealand pensions framework: The retirement income framework in New Zealand has, at its foundation, NZS, a flat-rate, universal, taxable benefit, which is paid out of current taxation. There is some pre-funding provided by the NZSF, as set out in the 2001 New Zealand Superannuation and Retirement Income Act. Until 2007, when KiwiSaver was introduced, New Zealand had been unique in offering little or no tax concessions for additional private retirement saving (S St John, 2005). Until then, only about 14% of the working age population was covered in traditional occupational retirement saving schemes that were subsidised by the employer (Government Actuary, 2008).

2.1.  Background New Zealand introduced the old-age pension in 1898 to provide some protection for the deserving poor aged over 65. Strict eligibility conditions included income and asset tests, good moral character and sober habits, and 25 years’ residency. Over the course of the 20th century, this pension was extended and by the early 1970s, there was a universal taxable pension payable from age 65, and a means-tested age pension payable from age 60.

Responding to concerns that occupational superannuation had very limited coverage, a state-run, compulsory, contributory, Defined Contribution5 savings scheme was set up in 1974. This was abandoned in 1977 in favour of ‘National Superannuation’, a more generous basic Universal state pension (Ashton & St John, 1988).

National Superannuation was a flat-rate, taxable benefit financed out of general taxation, payable from age 60, indexed to net average wages, with eligibility determined by age and residency. Originally set at 80% of the gross average wage for a couple, its generosity was reduced over time and in 1985 a surcharge was imposed on other income providing a de facto income test (Ashton & St John, 1988, p. 24).

Private superannuation schemes, largely the preserve of longer-serving, higher-income, male employees, remained tax-subsidised (Ashton & St John, 1988, p. 27). The favourable tax treatment of retirement saving was removed between 1987 and 1990, from which point, New Zealand became the first and only country to treat private retirement saving in the same way as other forms of financial saving (S St John, 2007).

Facing fiscal constraints in 1990, the then National government attempted to turn the Universal ‘National Superannuation’ into a fully income-tested, welfare benefit, clawed back under an income test that would have operated from relatively low levels of ‘other’ income. The resulting political backlash led to the establishment of the Task Force on Private Provision for Retirement to defuse the issue. The 1992 report (Task Force on Private Provision for Retirement, 1992) essentially supported the status quo with respect to public provision and also the ‘tax neutral’ approach to the treatment of private provision under the TTE arrangements. It opposed the introduction of a compulsory Tier 2 retirement saving scheme.

In 1993, the three main political parties signed an ‘Accord’ on retirement incomes policy, both public and private. The Retirement Commission was established and the basic pension renamed ‘New Zealand Superannuation’ (NZS). While the Accord did not endure,

                                                            5 Words used in a technical sense are defined in the glossary (Appendix 1).

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the basic parameters of NZS as set out in the legislation (New Zealand Government, 2001) retain broad political support.

2.2 New Zealand Superannuation 

The net rate of NZS for a couple is at least 66% of the net average wage (33% each for a married person). Indexation is annually via the Consumer Price Index until the floor of 66% is reached and then pensions rise with the net average wage. The dollar amounts are set out in Table 2. Only 10 years’ residence in New Zealand after age 20 are required, with at least five of those after age 50 (the ‘10(5) residency requirement’). The residence requirements can also be achieved after the State Pension Age of 65 years.

Table 2 New Zealand Superannuation rates at 1 April 2010

Category

Percentage of net average wage* Annual rate Annual Net Annual Net

NZ$ (gross) (Primary Tax) (Tax at 38%)

Single, living alone 42.9% $19,425 $16,542 $12,044

Single, sharing 39.6% $17,814 $15,270 $11,045

Married person or partner in a civil union or de facto relationship 33% $14,592 $12,725 $9,047

Married or in a civil union or de facto relationship, both qualify Total 66% $29,184 $25,450 $18,094

Each 33% $14,592 $12,725 $9,047 Source: Work and Income website: http://www.workandincome.govt.nz/. Note: supplementary benefits may also be paid to people receiving NZS, but they are income- and asset-tested as for other beneficiaries. *NZ $38,546 ($48,609 before tax). Note: 1NZ $ = MYR2.22 at 5 July 2010.

NZS is unique internationally for its simplicity and effectiveness in providing a basic standard of living to everyone over 65. It is payable to each pensioner in his/her own right (individual entitlement). Although there is a specified ‘couple rate’, each partner of a married couple receives an individual pension that is taxed along with other individual income.

NZS is neither earnings-related nor contributory and fulfils the role of a basic income. The Retirement Commissioner has described NZS as “a remarkably effective, simple and secure foundation for retirement income. It means that New Zealanders - and especially women – are less at risk of hardship in later life than people in many developed countries” (Crossan, 2007, p. 4).

2.3 International comparisons 

When compared with basic age pensions internationally, and with other welfare benefits domestically, NZS is relatively generous. As a consequence, New Zealand has very low rates of pensioner poverty and hardship in contrast to many other countries, and in New Zealand compared to those on welfare benefits (Perry, 2009b). Nevertheless, while low-income earners do well in an international comparison of public pensions, as shown in

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Figure 1, workers on average earnings or above have relatively low replacement rates (OECD, 2005).6

Figure 1 Net replacement rates at different earnings levels

 

Source: (OECD, 2005)

The replacement rates decline as income increases more quickly in New Zealand than in other countries including Australia.

It should be noted that Figure 1 reflects only the mandatory, state-provided pension arrangements at Tiers 1 and 2, ignoring any voluntary private provision at Tier 3 (including occupational retirement saving schemes). Also, the high replacement rates in countries at the top of the league are usually only for those with a full contributions record. Finally, generous tax concessions in both Tier 2 and Tier 3 of retirement provision are common in many countries but are not included as part of state pension expenditure covering the pensions illustrated in Figure 1.

 

                                                            6. The OECD takes the living alone rate for the NZ calculations. In fact, at 31 March 2010, 325,254 NZS

recipients (59.7% of the total of 545,014 recipients) were paid NZS at the couple’s rate.(Ministry of Social Development, 2010 Forthcoming)

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3. KiwiSaver – tax concessions return 3.1 Tax treatment of private provision 

For nearly 20 years until the advent of KiwiSaver, saving for retirement in New Zealand had been a voluntary, unsubsidised activity. The tax regime for private and occupational superannuation schemes was the same as for saving in a bank:

• contributions, whether by employers or individuals, were out of after-tax income (T);

• fund earnings were taxed at a rate that proxied the individual saver’s marginal rate (T), but

• withdrawals (benefits whether lump sums or pensions) were like a return of capital and hence tax-exempt (E).

This TTE tax treatment contrasts with the EET treatment (‘exempt’ contributions; ‘exempt’ investment income; ‘taxed’ benefits) that is conventional for retirement savings in other countries. Since 2000, there have been inconsistencies in this treatment but, until KiwiSaver, governments have broadly held the line on the TTE regime. For example, the Minister of Finance who was responsible for the introduction of KiwiSaver in 2007 said this in 2002:

The government is not considering upfront tax incentives. These are likely to have to be very large - with fiscal costs running to many hundreds of millions of dollars a year - before they have any desirable effect on overall savings. Their abolition in the mid-1980s represented sensible tax policy on both equity and efficiency grounds. (Minister of Finance, 2002)

By 2007, he had clearly changed his mind, influenced probably by the then large fiscal surpluses the government was experiencing.

There was still a concern that many workers did not have access to an occupational saving scheme and that New Zealanders were not saving ‘enough’. It was in this context that KiwiSaver, a contributory, employment-based, retirement-saving scheme, was conceived.

3.2 KiwiSaver 

KiwiSaver was announced in the 2005 Budget for implementation from 2007. The original incarnation involved a very modest, tax-financed subsidy for simple, ‘portable’ savings schemes. While employers could contribute, there was no compulsion to do so. The key premise of KiwiSaver was that people are more likely to commit to saving regularly if they are automatically enrolled when newly employed, rather than deciding whether to ‘opt-in’.

Originally, the only government subsidies were a flat $1,000 ‘sweetener’ (known as the Kickstart) paid on joining, and an annual fees subsidy of $40. These subsidies avoided the problems of the regressivity of tax concessions and left the TTE tax regime for saving unaffected. At this point, New Zealand looked like it was offering the world a natural experiment to ascertain the pure effect of an opt-out policy, uncomplicated by significant other incentives.

Without detailing the many changes that have occurred in KiwiSaver’s short life to date, Box 1 summarises its key features as at the date of this paper. While watered down from

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an intervening iteration, in 20 or so years, KiwiSaver may be an important component of retirement provision for many.

The scheme is open to all New Zealand residents under the age of 65 (3.7 million people), of whom about 1.7 million out of a total labour force of 2.29 million, are potentially entitled to tax-subsidised employer contributions. Those not entitled to that contribution include employees under age 18 and over age 64, temporary employees, domestic staff and some employees in seasonal agricultural work. The 31 December 2009 data shows that 35% of the eligible population (under age 65) have joined.

Table 3 shows that a significant proportion (37.4%) of the 1,369,6097 total members, net of opt-outs8, had been automatically enrolled. However, nearly one third of those who were automatically enrolled had opted-out during the 8 week opt-out period.

Table 3: Membership as at 31 March 2010

Method of joining KiwiSaver Members Percentage

Opt-in via provider (active choice) 649,745 43.2% Opt-in via employer 207,873 15.2% Automatically enrolled 511,991 37.4% Total membership (net of opt outs and closures) 1,369,609 100% Opt-out 240,559 Closed (left country, died, mistakenly enrolled) 112,092

Active contributions holidays (includes financial hardship holidays) 40,517 Source:(Inland Revenue Department, 2010)

Table 3 shows that of 752,550 members who were auto-enrolled on first starting work (or changing jobs), 240,559 (32%) opted out during the initial eight weeks’ membership.

At 31 March 2010, there were approximately 806,000 KiwiSaver members in respect of whom employers were contributing9, or 58.8% of all KiwiSaver members. The remaining 568,000 are children, individuals not in the workforce, self-employed or are in one of the exempt categories described above10.

                                                            7. Of these, 245,538 members are aged under 18. 8. See: http://www.kiwisaver.govt.nz/statistics/ks-stats-09-07-31.html. 9. Source: a private communication with the Inland Revenue. 10 This also includes members of alternative schemes etc.

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Box 1 KiwiSaver as at March 2010

KiwiSaver is a voluntary, work-based savings scheme, administered by the Inland Revenue Department using the existing PAYE (pay as you earn) tax system. Employees are automatically enrolled into KiwiSaver when they start a new job. They have the second to eighth week of employment to ‘opt-out’ and must advise their employer or the Inland Revenue of their decision. Having opted-out, they cannot be auto-enrolled again until they change jobs.

Scheme enrolment is not automatic for workers under 18 or over 64, or those employed less than 4 weeks, or for existing employees when KiwiSaver started in 2007. They may join if they wish. Self-employed people and beneficiaries and non-workers can also join but make payments directly to the scheme provider.

A maximum $20 a week matching subsidy is paid by the government for the member’s contributions.

An employee’s contributions start from the first pay day with an employer. Deductions from wages are at a rate of 2% of gross pay, unless the individual opts for the higher rate of 4% or 8%. If the employee contributes, the employer must match that to 2% of the employee’s pay but is not obliged to contribute more. Matching contributions up to 2% by the employer are deductible to the employer but are tax-free to employees.

Funds are held by the Inland Revenue for a new member for an initial three month period after auto-enrolment during which the employee can seek financial advice and select a KiwiSaver provider. Savers can select their own provider and can change, but can only have one provider at any time. Those who do not specify a provider will be randomly allocated to one of, currently, six default providers that have been chosen by the government.

Savings are ‘locked in’ until the age of eligibility for New Zealand Superannuation, currently 65, except in cases of: financial hardship, permanent emigration, serious illness or after a minimum of five years (for those first joining after age 60) or to contribute toward a deposit on a first home. However, after a minimum 12 month contribution period, employees can stop contributions for up to five years by applying for a ‘contributions holiday’. Contributions resume at the end of the five years unless the individual applies for a further contributions holiday. Individuals (including employees who are on contributions holidays) can contribute what they wish, when they wish.

Existing superannuation schemes may convert to KiwiSaver, subject to meeting certain requirements. Members of other schemes may choose to open a KiwiSaver account, instead of or as well as, their existing scheme.

The automatic enrolment provisions will not apply in workplaces where the employer is “exempt” i.e. running a scheme that is portable, open to all new permanent employees, and has a total contribution rate (employer plus employee) of at least 4%.

After three years’ membership, the government will also offer a first home deposit subsidy of $1,000 for each year of KiwiSaver membership, up to a maximum of $5,000 for five years.

Source: derived from http://www.treasury.govt.nz/kiwisaver/

As at March 2010, there was around $5 billion held in KiwiSaver funds (2.8% of GDP) and the annual inflow was around $2.8 billion, including the government’s contribution (1.6% of GDP). Table 4 provides the age profile of KiwiSaver members, which shows a surprisingly even spread of members across the age bands. However, there are substantial differences in membership as a proportion of age bands, as shown in Figure 2.

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Table 4: Age profile as at 31 March 2010

Age band Members % of total members

0-17 245,538 17.9

18-24 215,457 15.7

25-34 219,242 16.0

35-44 221,892 16.2

45-54 222,753 16.3

55-65 236,887 17.3

No Information 7,840 0.6

Total 1,369,609 100.0

Source:(Inland Revenue Department, 2010)

Figure 2: KiwiSaver membership as a proportion of age-group population

Source: derived from (Inland Revenue Department, 2010)

There are 245,538 members between the age of 0 and 17 (22.7% of all New Zealanders under 17). Given that only a small proportion would have part-time jobs or have left school by age 17, most of these members have opted in, or were joined up by their parents to KiwiSaver by active choice.

Children under 18 are not entitled to the member tax credit, but may benefit later from the housing subsidy and may be able to access their own saving in the scheme as a deposit for their first home.

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4.  The implications of KiwiSaver on behaviour 

4.1 Influence from the US behavioural studies  

KiwiSaver’s design was influenced by the results of studies from the US based on behavioural finance (see, for example, Mitchell & Utkus, 2003). These studies seem to show that most employees do not understand what decisions to make about retirement saving schemes: whether to join; how much to contribute; what investment strategy to choose.11 Too much choice is seen as preventing employees from making any decisions, let alone making appropriate decisions. The research typically shows higher rates of joining if employees are guided to join, and to pick a ‘realistic’ contribution level and an ‘appropriate’ investment strategy, but then given the opportunity to change those decisions. The research also shows that employees tend not to move away from the default selections.

Some of these studies were reviewed in the KiwiSaver design process12, but the direct applicability to New Zealand was unclear (Toder & Khitatrakun, 2006). In the US, it is not hard to demonstrate that an employee who fails to join a scheme will be worse off financially than one who does. That is particularly evident where the employer subsidises contributions to the scheme, as is often the case. If the employee did not join, s/he would miss out on part of the available remuneration and valuable tax concessions. Despite that, many appear to act against their own best interests and choose not to join or, more accurately, fail to make the decision to join.

KiwiSaver originally had none of the generous tax concessions available in the US, nor was it originally intended that it would be employer-subsidised. It was believed that the design of a savings scheme and the regulatory environment in which it exists can have a significant effect on both participation rates and the decisions that savers make during their membership.

One of the key concepts, particularly for an unsubsidised opt-out scheme, is that of the default settings – joining; contribution rate and investment strategy.

4.2 KiwiSaver investment strategy: the default option  

512,000 current members of KiwiSaver schemes did not actively join or choose a KiwiSaver provider (see Table 3). Most of those will also have made no decision about the amount they are contributing; nor about the investment strategy adopted for that part of their retirement savings. For the six ‘default schemes’, the government specified the default investment option (at least 15% but no more than 25% in share/property investments). Other schemes can set their own defaults.

In terms of the default investment strategy, there can be no single default setting that is appropriate for all. The issues are not clear-cut (Toder & Khitatrakun, 2006). The first observation is that the default option is bound to be the popular choice, for example see Beshears et al. (2006) and Madrian and Shea (2001). One possibility is to have a default option that is diversified across shares, property, bonds, and cash and where the proportion invested in 'riskier' assets (shares and property) automatically reduces with the member's age. In that way, savers who made no decision would be given a strategy

                                                            11 One of the reasons the decisions seem so complex in countries like the US is the plethora of rules created by increasingly complex tax and regulatory environments. 12 As described by a 2004 government-appointed group (Savings Product Working Group, 2004)

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that was at least age-appropriate. However, the issue is more complex than first appears as people differ in their risk aversion or exposure to human-capital risk.

This illustrates one of the difficulties with using behavioural research as a way of informing regulatory intervention: the intervention may be assumed to imply that the regulator (or employer, or scheme trustee, as the case may be) is effectively standing in the place of the investor and inevitably will be held responsible for the outcomes. Getting it wrong at least some of the time seems inevitable.

Despite the fact that, in most cases, investors can move away from the default settings, evidence shows that most do not even if moving appears in their best interests. The design of the default option is therefore important both in itself (its effect) and also for the 'signal' it sends members as to what might be a 'good' strategy (Tapia & Yermo, 2007).

4.3 Default strategy and the savings environment  

Specifically, it is clear that participation increases considerably if enrolment is made default and opt-out, instead of a non-participation default but with a choice to opt-in (Beshears, Choi, Laibson, & Madrian, 2006). But care is needed when transplanting ‘solutions’ that may be helpful in a US context (such as for 401(k) saving schemes) into an environment that has different economic drivers, such as tax and public pension provision.

The US regulatory environment for both public and private provision is very complex and the so-called lessons from behavioural research may be no more than an intervention that is really designed to help savers make sense of complexity. The regulators may be better served with policies that simplify the pension and saving landscapes.

4.4 Assumed need for intervention 

Implicit in the intervention characterised by KiwiSaver is an assumption that New Zealanders were under-saving for retirement or, alternatively, saving inappropriately.

Before KiwiSaver started, there were only 611,000 current members of formal ‘superannuation’ schemes in New Zealand. Of those, 301,000 belonged to workplace (occupational) schemes; that is, about 14.7% of the workforce (Report of the Government Actuary for the year ended 30 June 2006). However, looking at just the formal retirement saving schemes discounts most of what New Zealanders have chosen to do about saving for retirement.

In fact, after nearly 20 years of a tax-neutral, relatively level savings playing field, the available evidence, at about the time KiwiSaver started, tended to show that New Zealanders had been responding rationally to the need for retirement saving (Claus & Scobie, 2002; Le, Scobie, & Gibson, 2007; Grant Scobie, Gibson, & Le, 2004). Some commentators also worried that New Zealanders had too much of their retirement savings invested in housing, rather than ‘productive’ financial assets. Again, the available evidence tended not to support that concern (Grant Scobie, Le, & Gibson, 2007).

The first pre-KiwiSaver data are now available from a longitudinal survey carried out by Statistics New Zealand13. Using SoFIE data, Scobie & Henderson (2009) have estimated

                                                            13 The Survey of Family Income and Employment (SoFIE).

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that, before KiwiSaver started in 2007, New Zealand households saved an average 16% of their gross incomes in the two years 2004-2006. Taking property revaluations out of that estimate reduced the saving rate to 5%. When the next tranche of SoFIE’s financial data is available from 2008, it might be possible to see if KiwiSaver has affected households’ saving patterns. However, separating out the specific impact of KiwiSaver is likely to be problematic, especially in times of changing economic conditions.

4.5 Mis­application of lessons from studies on behavioural finance 

Most of the research relating to behavioural finance focuses on the relationship between scheme members, their market incomes (usually just from the employer that sponsors the scheme), and financial assets directly invested in the scheme itself for retirement. It does not usually include other assets that a scheme member might own (such as housing, entitlements to the state pension and other assets, including direct investments and the household’s capacity to earn income during the period to retirement) all of which must have a significant bearing on a member's willingness (or need) to take on the risks associated with investing financial assets in shares and/or property in the particular savings scheme under review (or even joining the scheme at all).

Not all employees need to save for retirement; on the other hand, they may need to save for retirement but not now because they have more pressing financial commitments such as completing their education, starting a family, buying a house or paying off debt.

The lessons from behavioural finance do have direct implications for framing choices within complex saving schemes but what seemed like a 'simple' answer to the problem of, for example, investment choice for defined contribution scheme providers and sponsors may turn out to be simplistic.

From a public policy perspective, the question is whether governments should be designing a regulatory framework that influences private behaviour to save particular amounts of money for retirement at particular times and in a particular way.

It is one thing for the principles of behavioural finance to help employers, for example, to design a workplace retirement saving scheme and influence the choices the scheme offers. The employer’s saving scheme is part of its remuneration strategy and one of the employer’s objectives should be that the scheme’s design ‘works’ in the way the employer wants.

It is another step for governments to force employers to intervene directly in a particular way in the compensation framework offered to employees, as has been illustrated by KiwiSaver.

There is a final problem with the evaluation of soft compulsion: auto-enrolment is supposed to provide a nudge to assist people to behave in the ‘right’ way; in this case, to save more for their retirement. It is impossible to assess whether the ‘nudge’ has been successful if at the same time there are significant monetary incentives to change behaviour; or if the wider economic climate changes the environment in which those decisions are being made (or not made).

4.5 Many more now have portfolio savings 

Whether or not the public policy intervention that KiwiSaver represents could then (2007) or now be justified, from the statistics given in section 3, it is clear that many more New Zealanders (now 35% of every New Zealander under age 65) will have

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portfolio-based retirement savings than in the past. Even if KiwiSaver does not result in higher amounts of saving for retirement, members will need to address KiwiSaver saving levels and investment strategy from time to time. This presents potential challenges for those with an interest in communicating financial messages to New Zealanders.

In a Defined Contribution environment like KiwiSaver, where the benefits from a given set of contributions depend on the investment returns, it is almost inevitable that members should say where their money is invested. This implies that they should have the right to decide who manages that money. But too much choice in a small country can be costly for individuals, providers and regulators. The balance between individual choice and what is sensible and what is cost effective for New Zealand’s KiwiSaver has yet to be reached.

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5.  The need for financial literacy in a retirement saving context 

5.1 The respective parties involved in New Zealand 

KiwiSaver is a national arrangement that tends to transcend the normal provider/client, employer/employee relationships. KiwiSaver is, in the first instance, run and enforced by the Inland Revenue, the New Zealand government’s tax collection agency. Then there is the direct involvement of the government in the selection of the six default schemes. This process tends to distance the providers from their customers because it is the government they must satisfy in terms of performance of their statutory responsibilities.

KiwiSaver aside, there are normally three parties with an interest in the ‘sensible’ retirement behaviour by individuals. In ascending order by numbers involved, they are:

• The individuals themselves (and their families);

• Employers that may want, eventually, to see the ‘retirement’ of employees at an age when they can no longer perform the roles for which they have been hired;

• The government that has at least a residual obligation to old people who, for whatever reason, do not have enough to live on when they can no longer support themselves. This will also often include the provision of some form of sheltered accommodation when the old can no longer care for themselves.

The financial advisers also, arguably, have a stake in this process, if only to act as facilitators in helping individuals to understand the implications of the decisions they face. This section 5 looks at each of these groups in New Zealand in the context of the need to transmit useful, usable information. It also proposes a new potential delivery channel for information that will change the need for information and its format.

The delivery of financial information will be affected by these relationships. Financial education programmes need to recognise the different roles in the present and possible future environments.

5.2 Impact of KiwiSaver  

In New Zealand, KiwiSaver has changed the usual dynamics of the relationships described in the last paragraph for several reasons:

• Government mandated: KiwiSaver is a national strategy that was imposed on employers, employees and other individuals. In the past, employees and other individuals chose to save for retirement because their employer, an adviser or other personal contact suggested this was appropriate; or they themselves arrived at that conclusion. For employers, past practice usually required the employer to decide first whether it wanted to offer some form of retirement savings scheme. That no longer applies with KiwiSaver.

• Default providers: Six KiwiSaver providers were effectively handed business through the default provider process. At 31 March 2010, 37.3% of all KiwiSaver members had joined in that way. Default membership requires no active decision by the saver and so the providers can take a passive, compliance-based approach to communication.

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• Economics of KiwiSaver: At present, all KiwiSaver providers are recovering their establishment costs. These were substantially, adversely, affected by the last-minute changes to KiwiSaver. The fee structure was effectively driven down by the tender process under which the government chose the default providers. Those appointments were made in the early, ‘pared-down’ version of KiwiSaver and the providers were not given an opportunity to respond to the new ‘richer’ environment that was announced only six weeks before KiwiSaver started on 1 July 2007.

Providers will usually have difficulty in raising overt membership charges because of the ‘universal’ nature of the competitive KiwiSaver environment.

These cost pressures will probably limit the resources that providers are prepared to direct to educational initiatives.

That said, KiwiSaver will for many years comprise only a relatively small proportion of New Zealanders’ financial assets14. There remains the wider issue of educating New Zealanders about the financial provision for retirement, of which KiwiSaver will be a part.

5.2 The New Zealand government’s role 

Of the four potential parties with an interest in the savings behaviour of individuals, the government has perhaps the largest stake in the rational responses of its citizens to the need to make adequate financial provision for retirement. In a modern welfare state, the government stands as the provider of last resort with respect to both health and sheltered accommodation costs that tend to be at the most expensive in the last years of a retiree’s life.

The retirement income strategy also involves potential fiscal risks for the government. Based mainly on the relatively generous Tier 1 (NZS) described in section 2, New Zealand currently has one of the lowest poverty rates amongst those over age 65 who are retired (OECD, 2008). The OECD brackets New Zealand with the Netherlands and the Czech Republic as top equal in the mid-2000s amongst the 30 countries compared. While such comparisons need to be used cautiously, there is little doubt that NZS is an effective way of underpinning the current living standards of the retired (Perry, 2009a).

Demographic change implies that the cost of NZS in its current form will double over the next 40 years, from about a net15 4% of GDP to 8%. The costs of healthcare will also reflect the changing age structures of New Zealand’s population. Although there is currently no sign from the government that this is under consideration, given the contribution that taxpayers will be making to the accumulation of KiwiSaver benefits ($1.05 billion in the year ending 30 June 2010), it would seem logical that a future government might link NZS through a means test to KiwiSaver. A similar link applies in Australia to its equivalent of NZS, the ‘Age Pension’ (but applies to all assets and income, not just those derived from Australia’s compulsory saving scheme).

Even if that did not happen, if supplementary private provision, now including KiwiSaver, proved inadequate in the future to support a politically acceptable standard of living for the retired, a future government might be asked to increase NZS.

                                                            14 Net financial assets of New Zealand households in 2006 were $NZ131 billion (G. Scobie & Henderson, 2009) or 84% of 2006 GDP. By contrast, Kiwisaver had only $5 billion in total at 31 March 2010. 15 NZS is taxable income for the recipients. The net cost allows for recovered tax.

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New Zealand has suffered from 30 years of flux in public policy associated with the provision of both public and private retirement incomes. In 1991, a group was appointed by the government to investigate whether and how retirement income provision might be made sustainable. The government had been forced to recognise that New Zealanders needed more certainty in the pensions’ framework. They also needed better information about the things that mattered when they made their own retirement saving decisions.

5.2.1 Task Force’s report – 1992 For these reasons, the 1992 Task Force on Private Provision for Retirement stated:

“We also stress that improving public knowledge and understanding of retirement provision issues will be critical to the success of the approach we are recommending; simply changing disclosure and other regulations will not work. Poor public knowledge of the issues, lack of public trust in products, providers and advisers, and a widespread inability and/or reluctance to set personal targets for retirement income, consistently emerged as major barriers that must be removed if any policy is going to work well now, and last over coming decades.” (Task Force on Private Provision for Retirement, 1992, p. 12)

One of the recommendations from the 1992 Task Force was the establishing of what was then described as a “new, independent body – the Retirement Commissioner” that would, amongst other things, supervise “an independent public education activity backed by a public information process”. The Task Force saw this as an important part of support for the then recommended retirement income framework:

“It would be equally important to ensure that the Commissioner’s role is focused on the collection and dissemination of factual information. This would reinforce the idea of policy stability in the period between reviews, rather than the Commissioner being, or being seen as, an instrument of continual change.” (Task Force on Private Provision for Retirement, 1992, p. 93)

5.2.2 Development of the Retirement Commission’s role  The Retirement Commission (now so-named) has played an important role in the development of discussions on the Task Force’s “public education activity”.

The Commission’s web site (www.retirement.org.nz) describes its role as follows:

“The Commission's big goals for New Zealand are:

• New Zealanders are well educated in financial matters and can make informed financial decisions throughout their lives.

• The government's retirement income policies are effective and stable.

• The financial services sector is trusted.”

The Commission sees financial literacy as only one of many contributors to personal financial well-being, as illustrated by the following Figure 3.

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Figure 3: Contributors to Personal Financial Wellbeing

(Retirement Commission, 2008) A key part of the Commission’s work is the website ‘Sorted’ (www.sorted.org.nz) that aims to improve New Zealanders’ understanding of all kinds of financial issues, including saving for retirement. Sorted lets users set goals (short- and long-term, budget incomes, plan short or long-term savings, understand KiwiSaver, manage debt, mortgages, insurance, investing, retirement, trusts and fees. There is also an associated suite of printed booklets and seminars with the Sorted brand.

The Sorted web site has a consistently high visitor count. Based on the Commission’s research:

• “Overall, usage of sorted.org.nz increased from 19% (2006) to 28% (Dec 2009) of the New Zealand population.

• Usefulness of sorted.org.nz for visitors has increased from 50% (2007) to 65% (2010).

• 93% of visitors have taken action after visiting sorted.org.nz (May 2010).” (Retirement Commission, 2009, p. 12 updated with personal communication)

As part of its educational role, the Retirement Commission leads a formal ‘National Strategy for Financial Literacy’ with its own web site (http://financialliteracy.org.nz/)

The ‘New Zealand Network for Financial Literacy’ describes its role as:

“The strategy, one of the first in the world, sets a direction and indicates a range of tactics for improving financial literacy in New Zealand. Its focus is on developing quality, through extending delivery of financial education, and sharing what works in order to achieve the outcome of a financially literate population.”

The Network, although led by the Commission, comprises a group that introduces itself as follows:

“Aiming to build a financially literate population is a hugely ambitious goal. This outcome cannot be achieved by one organisation alone. The involvement of the

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public, private and voluntary sectors is necessary for implementation to be successful. Many organisations have endorsed the Strategy, and support working together to achieve the Strategy's mission statement that:

New Zealanders are financially well-educated and can make informed financial decisions throughout their lives.” (http://financialliteracy.org.nz/)

Section 6 looks at the results of recent work done by the Commission and as part of this National Strategy.

5.2.3 Education initiatives  In New Zealand, the government controls the curriculum in schools so the Retirement Commission’s work extends to programmes that are aimed at young New Zealanders. The Commission suggests that the young must make “...financial choices early in life which call for a degree of financial knowledge and skill that most don't have the opportunity to learn at school. The Retirement Commission is partnering with others to offer new approaches to help young people adapt to the major changes that have occurred over the past few decades so that they have money skills for life.”16 The Commission also provides Industry Training Organisations and employers with material that is suited to workplace training and education17. Section 5.3 below comments on the employer’s role. In addition, the Commission also makes teaching and learning resources available through its web site www.financialliteracy.org.nz for tertiary education providers and for learners who want to follow a more formal path.

5.2.4 Regulation – disclosure  Another thing that only a government can undertake is responsibility for the regulatory environment in which retirement saving and other financial decisions are made. Despite the relatively simple pension environment in New Zealand that sections 2 and 3 describe, the last ten years have seen a considerable growth in the complexity of the regulatory and tax environment (Chamberlain & Littlewood, 2010). New Zealand still remains relatively simple by comparison with most developed countries where tax incentives create a need to erect regulatory ‘fences’ around preferred saving vehicles. It is perhaps unsurprising to see an intervention emerge like KiwiSaver that is founded on the principles of behavioural finance as a way of ‘helping’ savers to negotiate the regulatory minefields.

In New Zealand, the regulatory requirements with which the promoters of financial services must comply leave much to be desired.

“The poor-quality information provided by the market – either through product disclosure or professional financial advice – makes it tough for retail investors to make wise investment decisions. It is difficult for relatively unsophisticated investors to find and understand the key information they need, let alone compare products in order to make a discerning choice.” (Capital Market Development Taskforce, 2009)

The Capital Market Development Taskforce recommended “...simplifying and standardising product disclosure so that investors have clearer knowledge of what they

                                                            16 http://www.retirement.org.nz/what-we-do/schools; www.financialliteracy.org.nz//financial-education 17 See http://www.retirement.org.nz/what-we-do/workplace; http://www.retirement.org.nz/life-stages/at-work/info-for-employers

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are investing in (such as through short, prescribed, plain- English documents and an explicit warning on complex products).”(2009, p. 13) Financial education and the skills needed to make ‘appropriate’ decisions are significantly simplified when individuals do not need to turn to expensive professional advice. Also, arrangements that seem to be needed in the context of behavioural finance principles may indicate a need to simplify the regulatory environment.

5.3 The New Zealand employer’s role 

As already stated, KiwiSaver has intervened in the relationship between employers and their employees. From a retirement saving perspective, some employers may now see the issue of the financial preparation for retirement as a government responsibility. With a sustainable safety net at Tier 1 along with a supportive information and education programme of the kind described in the last section 5.2, it could be appropriate to question why governments need to be concerned about what employers think or do about their employees’ retirement income provision at Tier 3. Shouldn’t employers be left to get on with the business of being an employer: to make money, provide a service, keep their owners happy or whatever their raison d’être might be?

To understand how the interests of employers can be served under the banner of public policy, we first need to understand why employers are directly involved at all in retirement saving and how they express their interest in the financial welfare of employees.

Employers have a demonstrated interest in helping their employees provide for periods of financial dependency. The fact that many employer-sponsored retirement income schemes started in New Zealand and then survived the withdrawal (during 1987-90) of tax incentives seems, at least anecdotally, to support the idea that tax-avoidance wasn’t the real or only reason for their existence. In some ways, it is remarkable that employment-related schemes still exist in New Zealand, given the constant, disruptive and expensive changes they experienced between 1975 and 1995. KiwiSaver could well prove the final straw.

Table 5 shows membership statistics of New Zealand work-based Tier 3 schemes over the 1990-2008 period.

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Table 5 Ratio of Tier 3 occupational scheme members to workforce Year Private &

government members (in ‘000’s)

% change Labour force (in ‘000’s)

Members as % labour force

1990 333 1,480 22.6% 1992 n.a. 1993 334 1,475 22.6% 1994 317 -5.1% 1,532 20.7% 1995 312 -1.6% 1,608 19.4% 1996 302 -3.2% 1,670 18.1% 1997 296 -2.0% 1,731 17.1% 1998 283 -4.4% 1,732 16.4% 1999 271 -4.2% 1,741 15.6% 2000 263 -3.0% 1,766 14.9% 2001 263 nil 1,806 14.6% 2002 260 -1.1% 1,870 13.9% 2003 268 3.1% 1,929 13.9% 2004 280 4.5% 1,988 14.1% 2005 301 7.5% 2,055 14.7% 2006 283 -6.0% 2,108 13.4% 2007 278 -1.8% 2,144 13.0% 2008 270 -2.9% 2,139 12.6%

Derived from the annual reports by the Government Actuary18

Table 5 does not prove that KiwiSaver has had a direct effect on membership numbers of private occupational schemes but it does seem at least coincidental that the downward trend in member numbers since 199019 had steadied and then turned around in the 2000-2005 period but resumed its downward trend when KiwiSaver was first discussed in 2005. The point of Table 5 is to demonstrate possible early indications of the inter-connectedness of public policy and private responses. We can probably expect employers to withdraw from the provision of separate retirement saving schemes. Once that process is complete, KiwiSaver schemes could be the only occupational retirement savings schemes. On public policy grounds, this would not be a positive outcome.

From an employment perspective, there are three main reasons for an employee's becoming financially dependent: death, disability, and retirement. Financial dependency can also follow the loss of a job through redundancy or following the employer’s bankruptcy.

An employer often has programmes that help its employees provide for these dependencies, even though they may seem the employee's private concern. The reasons for the employer's traditional involvement included concepts such as being a ‘good’ employer, competitive pressures, maximising value through group purchases and the like. For retirement, however, there is the very real advantage of helping to implement a retirement policy; of being able to part with employees, knowing that they can have a reasonable standard of living in retirement. If the employer knows that an employee can afford to retire, the decision to part company is easier and cheaper, at least at the actual retirement date.

                                                            18 Available here: http://www.isu.govt.nz/templates/StandardSummary____22379.aspx 19 By when the full tax changes to private superannuation schemes had become effective.

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There seem to be several public policy reasons for the government and employers to co-operate. Such a relationship can operate to their mutual benefit to achieve three main public policy objectives.

5.3.1 Efficiency of Tier 1  The government wants people to understand how its Tier 1 scheme fits into the retirement plans of its citizens. It also wants employees to have confidence in the sustainability of the overall regime. Employees are probably the best placed to do something about their own retirement savings and the government should want to help them make the best economic decisions for themselves at Tier 3. With New Zealand’s relatively hands-off retirement income strategy (described in sections 2 and 3), the aggregate decisions of all employees may also be in the best economic interests of the country.

5.3.2 Making the communication programme work    Employees receive a lot of economic information from their employers, either directly or indirectly, and not just about saving issues. They are more likely to trust information provided by their employer relating to their retirement income decisions compared with information from self-interested providers of financial services, or from politicians whose main objective may be re-election.

The retirement income regime will be more credible if employers supported it; also, the cost of getting that information to its ultimate consumers (savers) would be significantly lower because there are many more employees than employers. Adding employees’ families to the potential audience further improves the efficiency of that information channel.

5.3.3 Promoting action  It is easier to persuade employees to do something about any need identified in the national information and education campaign if they can be convinced to divert some of their pay before they actually receive it. It is also more efficient and cheaper to tap into the flow of money between the employer and its employees in the same way as we have deductions at source for income tax and social security contributions. Governments have learned the lesson on mandated collections; the same principle applies to voluntary ones. In most developed countries, employers play an important role in helping their employees save for retirement. A successful private Tier 3 (employer-sponsored scheme) can help create a sustainable retirement income system and governments can help build that Tier 3. Those successful arrangements will also wash over into other Tier 3 savings as employees’ knowledge and demands for more and better information is fostered and then rewarded.

KiwiSaver’s introduction has probably stifled that particular information channel. Employees no longer deal with the employer’s own scheme but rather with the purely commercial, ‘public’ KiwiSaver providers.

5.3.4 The employer’s role – summary 

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Changes in employment patterns and in employer/employee relationships contribute to a need for change in approaches to compensation. A ‘total remuneration’ approach20 provides a simplified environment in which the employer and employee agree on the total price that is to be paid for a job and where the employee decides the ratio of cash to benefits (including retirement savings) in which payment is received.

The employer is also in a position to provide a means of communicating with employees and an efficient point for the collection of contributions, and can provide group schemes that have the advantage of scale. These are both valuable roles in ensuring the success of private, non-KiwiSaver, Tier 3 retirement saving arrangements.

KiwiSaver has intervened significantly in the traditional employer/employee relationship in this connection. That relationship will probably be supplanted by a direct connection between KiwiSaver providers and members. Changes in the relationship between employers and employees will lead to a change in the focus of policy-makers and advisers, as the employee becomes the primary customer for information on savings and retirement income policies. The risk New Zealand runs is that KiwiSaver will be seen as the only way in which public policy is brought to bear on the retirement saving issue.

5.4 The individual’s role 

The focus of all this attention is ultimately the individual saver who will need to depend on the Tier 1 or Tier 3 retirement income provision. The next section 6 will examine the evidence as to how individuals have been coping in New Zealand in the last 3-4 years.

5.5 The role of the adviser 

Financial advisers have a generally poor reputation in New Zealand, particularly following the recent collapses in finance companies (unrelated to the Global Financial Crisis). A recent (unscientific) survey21 asked members of the public to rank 40 occupations in term of trust-worthiness. It placed financial planners at number 32, followed by occupations like tow truck drivers (34), real estate agents (36), car salesmen (37), politicians (39) and telemarketers (40).

For the last two years, the government has been attempting to introduce legislation to impose rules as to how individuals and firms can operate in the provision of financial advice. The latest changes were passed in June 2010:

“The Financial Service Providers (Pre-Implementation Adjustments) Bill is – as the name implies – the latest chapter in what has become a legislative saga of epic proportions. The two founding pieces of legislation – the Financial Advisers Act (FAA) and Financial Service Providers (Registration and Dispute Resolution) Act (FSPA) – were enacted two years ago and have been subject to an almost continuous process of fine-tuning ever since.” (Chapman Tripp, 2010)

                                                            20 Where the employer agrees a total amount of pay and allows the employee some ability to choose how to receive that: so much in direct taxable pay with the balance in retirement saving contributions, vehicle allowance, costs of insurance etc. No matter how the remuneration is structured, the total cost to the employer is unchanged. The more traditional ‘pay + benefits’ approach has direct, regular pay plus a suite of subsidised benefits that may require co-contributions by the employee. The total compensation received by the employee will depend on the optons that the employee takes up. 21 Reported in The New Zealand Herald, 29 June 2010.

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It remains to be seen whether the required trust can be restored to an industry that has such low public regard. That is an important consideration when the government decides how to implement and maintain an information programme.

5.6 A future without sellers?  

As long ago as 1994, the then Chairman of Bankers Trust, Mr Charles Sanford, predicted the empowerment of individual savers at the expense of the traditional banks, planners and other financial intermediaries (like actuaries, lawyers and accountants)22. He thought that computer programs might sort useful from useless information and deliver it directly to the person who really matters: the saver. It has not happened yet but there is considerable potential for the development of a future without human sellers. The costs of the alternative, more personal electronic attention will be substantially less (despite its tailored nature) than the sales force-driven distribution system that tends to characterise the retirement saving industry in most developed countries; and it will be a lot less than the main-street money shops of the traditional banks.

In due course, savers won't need to understand how the whole electronic network works; they won’t need to know, for example, whether they’re dealing with an investment bank or a commercial bank. They will have the equivalent of financial ‘private eyes’23 looking out for and after their individual interests, reporting back to them when there is a decision to be made and guiding through that decision.

At present savers face a real danger of information overload. There is so much that might be relevant to our needs. We therefore need the help that tailored technology can give us. Personalised software will act as a filter and could even be sensitive to users’ difficulties in understanding what they're being told. That could call up a simpler explanation of the issue or could go back and start again.

That should be the preferred future scenario. Governments should stop directly subsidising ‘appropriate’ behaviour (such as through tax incentives) and instead help to open up the information channels. We have seen only a fraction of what computers can do to the financial services industry. They will pierce the veil and put money managers, wherever they are based, directly in touch with savers. Governments could facilitate that process by opening up the regulatory channels and then stepping back. They should then stand on the sideline, acting as touch judges, rather than joining the players on the now level playing field as referees.

All this is in the best interests of today’s and tomorrow’s governments (and their taxpayers). While some of the current ‘deep’ welfare programmes may have delivered their philosophical underpinnings from myopia, information gaps and insurance inadequacies, the products of the information age can provide a realistic way of helping savers step over the problems.

In the new environment contemplated here, there will still be a need for a human interface between the saver and the financial service provider. This could be through the employer-employee relationship but could also be in a fee-for-service setting. Here the medical profession might offer a useful analogy. The general practitioners are the medical ‘front line’ who tend to see all patients and deal with the needs of most. Where particular skills are needed, the general practitioner will refer the patient on to a

                                                            22 The Economist, 26 March 1994. 23 The computer industry’s jargon for this is an “agent”. It is software that helps people and acts on their behalf after the user tells it the parameters it has to work under.

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specialist who is usually chosen by the GP.

So it could be for financial advice: armed with appropriate technology, the High Street shop-based facilitator will show most of those needing financial advice how to access appropriate, unbiased help and what steps they need to take. This process would effectively be teaching customers how to use the technology and would be on a fee-for-time basis that might cost as little as $100-200 (for 1-2 hours of the facilitator’s time).

Only the complex cases would be referred on by the facilitator to specialists for help. With technology’s help, the facilitator could deal successfully with all the cases that might involve:

- decisions about how much to save for retirement, choice of provider and investment strategy;

- whether insurances (death, disability, medical, general) are needed, how much and choice of provider;

- a specific saving project such as a first home deposit, a replacement car etc.

- budgeting today’s income to achieve the customer’s objectives.

In a technology driven environment, the architecture of financial literacy programmes will need to change. Keeping information up to date and delivering targeted messages is ideally suited to a networked information system. Once savers are used to the idea that they can, by themselves, make these kinds of decisions, they can be made anywhere; not just at the facilitator’s office.

5.7 Overall implications of the New Zealand government’s involvement 

As already stated, the New Zealand government has a long-term, financial stake in the collective decisions by all New Zealanders with respect to financial provision for retirement. However, one implication of a relatively generous, effective Tier 1 pension (NZS) is that the retirement income needs for many towards the bottom end of incomes in their working lives are largely taken care of by the state. New Zealanders still need to understand what NZS means when they are making saving decisions but, for many, a modest lump sum might be all that is needed from personal provision at Tier 3, as long as they have a mortgage-free home to live in during retirement.

Financial literacy initiatives have, therefore, a wider role in New Zealand than being focussed just on retirement income provision. As the discussion in this section has shown, New Zealand’s programmes extend into all aspects of financial knowledge. Section 6 looks at how New Zealanders have fared to date.

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6.  The National Strategy – findings on literacy issues 

It is a well-known principle that, in order to manage something, it is first necessary to measure it. The corollary is also true, if it is not possible to measure something, it is not possible to manage it.

So when New Zealand’s Retirement Commission took on the task of ensuring that “New Zealanders are well educated in financial matters and can make informed financial decisions throughout their lives”, it had first to understand how much they already knew about these issues.

6.1 The 2006 ANZ­Retirement Commission Financial Knowledge Survey 

According to a report prepared for the Capital Market Taskforce (O’Connell, 2009), New Zealand is one of the few countries to have completed a survey of financial literacy levels in the population.

The 2006 national survey, the first in New Zealand, aimed to measure New Zealanders’ levels of financial literacy. The findings were generally more positive than many might have expected:

“The 2006 ANZ-Retirement Commission Financial Knowledge Survey found that many New Zealanders feel confident about managing their financial affairs, and many actively plan for retirement. Low financial literacy levels are found at all levels of income and education and knowledge would be of particular benefit to Pacific people, especially in South Auckland, to assist them in their dealings with ‘loan sharks’ and with their remittances to the [Pacific] Islands. There seem to be good reasons and enough scope to extend and improve financial information, based on better understanding of where and how to target it effectively.” (Retirement Commission, 2007, p. 5)

Detailed findings from this 2006 survey are used in the next section as comparatives for the 2009 update.

6.2 The 2009 Financial Knowledge Survey 

The second national survey of New Zealanders’ financial knowledge was carried out in 2009 as a follow-up to the 2006 work.

“Key objectives of the 2009 survey are:

• to identify areas of low financial literacy (either by topic or by population) and therefore assist educators improve financial literacy in those areas

• to assist the financial services industry identify where products or services are misunderstood or confusing to consumers and thus be able to improve design or communication

• to measure changes in financial knowledge levels since 2006 in order to adapt education programmes and the design or communication related to financial products and services

• to measure any link between financial knowledge and financial behaviour, especially indebtedness

• to measure the link between financial knowledge and expectations related to longevity and financial knowledge.” (Colmar Brunton, 2009, p. 13)

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The report looked at the first three of these; the last two objectives are the subject of separate research.

The face-to-face survey of 850 people was carried out in early 2009, after the recent recession had started in New Zealand and when the effects of the Global Financial Crisis had become clear. Each interview took about 60 minutes and there was a 62% response rate.

The results are based on a “knowledge score” based on the respondents’ answers to about 100 questions. They were, as in 2006, placed in three approximately equal groups based on their individual scores – “Low”, “Medium” and “High” knowledge. A subset of the last group was called “Advanced”; and of the first group, the “Lowest”.

Of the maximum possible score of 58.5, the “Low” score in the 2006 Survey was set at less than 37.25 points; the “Medium” group scored 37.25 to 44 points and the “High” 44 to 58.5. The issues measured covered:

• mathematical and standard literacy;

• financial understanding;

• financial competence, and

• financial responsibility. The 2009 survey found generally improved scores when compared with 2006:

“There has been a significant improvement in New Zealanders’ overall financial knowledge. An increase of 10 percentage points in the size of the High knowledge group means that 43% of New Zealanders are now scoring highly in respect to financial knowledge. Of particular interest, the Advanced knowledge group, that in 2006 was measured at 15% (1:7 New Zealanders), has increased significantly to 20% (1:5 New Zealanders). However, whilst the overall improvements are positive, the Lowest knowledge group (measured in 2006 at 9%) has not changed significantly (10% in 2009).” (Colmar Brunton, 2009, p. 2)

According to the report, most of the changes can be explained by improved results for numeracy skills in relation to financial services.

Figure 4 plots the distribution of the overall results for both the 2006 and 2009 surveys.

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Figure 4

(Colmar Brunton, 2009, p. 13)

The more that the plot for the 2009 results is to the right of the 2006 plot, the more that indicates an improving level of knowledge over the three years.

“In the 2006 study, disparities in financial knowledge were identified. The communities whose financial knowledge was significantly lower (such as females and low income households) are among the groups that have had the most significant improvements in their financial knowledge for 2009. Pleasingly, in the 2009 study the disparities are much less significant.” (Colmar Brunton, 2009, p. 11)

Specifically, the report noted significant changes in knowledge over the inter-survey period as follows:

• 45-64 year olds (up 10 percentage points, from 75% to 85%)

• Māori (up 14 percentage points, from 57% to 71%)

• Pacific peoples (up 24 percentage points, from 53% to 77%)

• Primary or basic secondary education (up 10 percentage points, from 60% to 70%)

• Home owners (up 6 percentage points, from 77% to 83%)

• Not in paid employment (up 9 percentage points, from 63% to 72%)

• Rural residents (up 10 percentage points, from 76% to 86%)

• Household income less than $20,000 (up 12 percentage points, from 58% to 70%)

• Household income between $50,000 and $100,000 (up 13 percentage points, from 78% to 91%). (Colmar Brunton, 2009, p. 47)

Most of the respondents (51%) look primarily to their banks for financial information. That was followed by personal contacts (35%), the Retirement Commission’s web site ‘Sorted’ and then the media. 21% of respondents had sought no help in the 12 months before the survey.

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The survey also found changes over the 2006-2009 period in the way New Zealanders are doing things. Specifically:

- New Zealanders, especially those in the “Low” knowledge group, had less insurance cover;

- While there was an increase in the use of both personal loans and high interest call accounts, leasing and hire purchase arrangements had fallen;

- Internet banking had increased from one in three to one in two New Zealanders;

- There were improvements in financial knowledge. With specific regard to retirement saving:

“There have been no major changes in knowledge around retirement planning. There have been some shifts around the things that New Zealanders feel that you need to consider for your retirement. However, two out of three New Zealanders still do not know the approximate amount that a single person living alone will receive from New Zealand Superannuation. And whilst there have been significant improvements in knowledge around whether or not New Zealand Superannuation is either income tested or asset tested, there are still New Zealanders approaching retirement (10 years out) who are unaware. .... “Large numbers of people do generally understand about risk, return and diversification. Significant changes in knowledge since 2006 appear to reflect a greater uncertainty about the risk of investments, a likely effect of the problems at a number of financial institutions since 2006 and the current recession.”(Colmar Brunton, 2009, p. 5)

29% of survey participants had joined KiwiSaver. As expected the “Advanced” knowledge group had a higher participation rate (40%) than the “Low” (19%).\

Returning to reports that have looked at New Zealanders’ retirement saving preparations and expectations (see section 4.4), it might perhaps be expected that, as a group, New Zealanders have that under control, even if two thirds could not correctly identify the fortnightly instalments payable under NZS.

6.3  2010 Ngai­Tahu Financial Knowledge Survey 

The Retirement Commission, together with a significant Maori group (Ngai-Tahu) recently launched a targeted version of the national Financial Knowledge Survey to test whether different groups have different needs. The data collection was carried out during March and April 2010 and results are expected towards the end of July 2010. It is called the ANZ Ngāi Tahu Financial Knowledge Survey.

6.4 Improved knowledge? 

The two surveys represent two ‘slices’ through New Zealand in two months, three years apart. Care needs to be taken in explanations around changes identified over the three years. It will probably be possible to be more confident in identifying trends at the next equivalent survey.

That aside, it is not possible to say that any particular initiative has affected the changes noted by the 2009 survey. It is possible that the favourable shifts noted were provoked

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by the changed financial environment. New Zealand was already in recession and the effects of the Global Financial Crisis were already well signalled by early 2009 when the field work for the survey was carried out.

It is important to emphasise that, in New Zealand, the government is not the only body involved in the provision of financial education. The Retirement Commission operates a ‘stocktake’ of providers that, to qualify for inclusion must offer a programme that meets certain standards and that offers:

“...up to date, accurate independent with no ‘sales pitch’, and of good quality with peer-reviewed material and, where applicable, training, and a Code of conduct for presenters. The most recent stocktake found around 55 programmes from over 30 providers.” (O'Connell, 2009, p. 12)

The programmes are provided by financial institutions, government agencies, not-for-profit organisations, education organisations, media and financial coaches/presenters.

In summary, while it must be important to know what consumers know about financial issues and whether financial literacy programmes are effective; also to track whether individuals are acting on that knowledge, it is another step to suggest that public policy should act directly on the survey’s results. Such a reaction would be in a similar category to public policy formation based on the principles of behavioural finance: see section 4.5 above.

Based on international comparisons, it seems that what New Zealand does stands up well against the relatively small number of other countries’ initiatives (O'Connell, 2009). But the result seems so far to be that, in New Zealand, it may be too early to tell whether the current initiatives are ‘working’. It seems they should be continued at least in their current form and perhaps expanded. However, it also seems reasonable to observe that they need to be constantly watched and justified. In order to see the long-term impact of these initiatives, a robust monitoring and evaluation system is required with the outcomes being regularly reported and ‘good practice’ models shared.

On the other hand, if there has to be a way to signal a government’s public policy intentions with respect to retirement savings and the choice is between expensive, complex, regressive tax incentives (or even compulsory retirement saving arrangements at Tier 2) and an education programme of the kind that New Zealand runs, there should be no doubt as to the preference. The education programme should `be the first thing to try (and measure).

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7.  Lessons from the New Zealand experience 

New Zealand has done more than most other countries about addressing the financial literacy issue (O'Connell, 2009). However, despite the improving data that is now available in New Zealand on financial literacy issues, it is inherently difficult to show that one initiative is better than another; even that the overall programme represents value for money.

This paper has discussed a number of public policy issues with financial literacy at their heart. In New Zealand, it is becoming an issue of national significance.

There are several lessons for  other countries in New Zealand’s experience. The government’s public policy role on financial literacy should not be confined to education and training initiatives. In fact, in an ideal world, these activities should be arguably the last step in a process that starts with ‘fixing’ pensions generally. This is on the premise that a simple pension system (both public and private) is easier to explain than a complex one.

Of the following suggested, potential public policy initiatives, most are not directly connected to financial literacy issues:

• Tier 1: The state-provided pension at Tier 1 should be Universal, simple and effective (protecting the economically vulnerable against poverty in old age). A simple Tier 1 pension makes retirement planning decisions easier24. It also provides a level of protection from the inevitable mistakes that will be made when citizens take personal responsibility for saving decisions. An adequate but sustainable Tier 1 provides a base from which other, personal decisions can be taken.

• Tax incentives: Tax breaks for retirement saving need to be justified. Before that can happen, they need first to be counted. Only a handful of countries publish data on the cost of tax incentives for retirement income provision25.

The international evidence is that tax incentives for retirement saving tend to be expensive, complex, regressive and inequitable. However, worst of all, there seems to be no clear evidence that they ‘work’ (that they raise national saving). Again, planning for retirement is considerably simplified in a tax neutral environment.

Currently constrained governments might welcome the saving in expenditure from levelling the tax playing fields, as happened in New Zealand between 1987-1990. However, the previous paragraph describes why the current arrangements need changing in nearly all countries26.

• Compulsory Tier 2: Compulsory Tier 2 retirement saving arrangements are very complicated and, again, the evidence as to their effectiveness is mixed.

                                                            24 It is useful to test the simplicity of a country’s Tier 1 by writing down its rules in a way that ordinary citizens might understand it. New Zealand’s Tier 1 (New Zealand Superannuation) can be summarised by the slogan “65 at 65”. The married couple’s pension is a net 65% of the national average wage, payable from age 65. Each of the couple receives half of that. A single person receives 60% of the married couple’s rate. 25 The United Kingdom, Australia and Ireland are the only ones known to the author. 26 New Zealand’s taxpayers would have saved about $1 billion in 2009/10 (0.6% of GDP) if KiwiSaver had not been tax-favoured.

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• Defined Benefit schemes: Except at Tier 1, Defined Benefit schemes of all kinds (public and private) are very complex. Defined Contribution schemes are much simpler for savers to understand. They are also more adaptable.

• Total remuneration: A ‘total remuneration’ environment (where employees decide how to receive their pay) simplifies the employee benefit environment and also gives certainty to employers as to the total cost of paying employees. Again, planning is easier for employees when they make their own decisions between immediate and deferred pay rather than have employers make those decisions for them27.

• Information needs: Savers need relevant, unbiased information that helps them to make decisions about their retirement saving needs, of a scale and in a manner that meet their own circumstances. Those requirements will generally preclude the involvement of the providers of saving products as the primary source. They have a financial stake in the sale of those products.

• Education initiatives: Financial education of the kinds discussed in this paper is necessary; it also has uses that extend beyond decisions about saving for retirement.

New Zealand offers examples of both how, and how not to do things. Our retirement income history is littered with mistakes. Perhaps other countries do not need to learn the same lessons in the same way as New Zealand.

                                                            27 A possible consequence of abolishing tax incentives for retirement saving is that employers might do one of two things: they will simplify occupational schemes at Tier 3, probably switching from Defined Benefit to Defined Contribution. As already mentioned, that is likely to be a positive move anyway. The other possibility is that they will shift from a ‘pay + benefits’ environment to ‘total remuneration’. In other words, they will no longer pay employees more if they save for retirement. That is also a positive change. Both have been the New Zealand experience.

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Appendix 1: definitions 

Glossary of terms In this paper, some words are used with the particular meanings set out below. As a ‘marker’ in the text of the paper, they have capital initial letters. Defined Benefit (DB) A retirement benefit plan (usually a pension) that

promises benefits defined on the basis of earnings and/or membership before retirement. The earnings could be in the years just before retirement or even over a working life.

Defined Contribution (DC) A retirement benefit plan that provides benefits based on individual contributions (from the member, employer and/or government) plus the investment returns.

EET, TET, TTE etc. The taxonomy of retirement saving treatment is summarised by three letters with some combination of “E” (exempt from tax or, in the case of contributions, fully deductible from other income and, therefore, from pre-tax earnings), “T” (fully taxable or, in the case of contributions, paid from after-tax earnings) or “t” (partially favoured under the tax regime).

The first letter describes the way contributions are treated; the second letter the investment income in the savings plan and the third letter, the way benefits are taxed. The common international treatment of retirement saving is EET (Exempt contributions; Exempt investment income and Taxable benefits). Benefits can be described as “tax neutral” under the normal income tax treatment if they are TTE. By contrast, EET can be seen as “neutral” by reference to an expenditure tax regime.

Means-Tested Pension Benefits targeted to the poor, or that exclude the wealthy, by making payment conditional on earnings, income, or assets – separate tests of this nature are sometimes called Income-Tests or Asset-Tests.

Pay-As-You-Go (PAYG) Method of financing in which current benefits are paid out of current revenues, often revenues from earmarked taxes (sometimes called “contributions”), and most often from payroll taxes.

Pillars (Tiers) of pensions Of many definitions, this paper prefers the three defined by the World Bank in its 1994 study (World Bank, 1994): (1) basic pension (DB), (2) earnings-related pension (DB or DC or a Notional Defined Contribution, public or private, pre-funded or PAYG) with mandatory contributions, (3) voluntary retirement savings either

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workplace-related or individually arranged (and not just traditional pension schemes).

State Pension Age The age from which the “normal” state pension becomes payable and without adjustment for early or late retirement.

Tiers of pension As between the seemingly interchangeable Pillars and

Tiers, this paper prefers to use Tiers as this more naturally fits the way that entitlements arise. Hence:

- Tier 1: the basic pension, payable by the state.

- Tier 2: an earnings-related pension with mandatory contributions by employees, employers or both.

- Tier 3: all other voluntary savings whether through the workplace (DB, DC, Pre-funded or PAYG, pension or lump sum) or directly; whether through formal saving plans or by direct investment. In New Zealand’s case, this includes KiwiSaver.

Universal Pension Pensions paid solely on the basis of age and citizenship

(or residence), without regard to prior work history, earnings or contributions (known also as a citizen’s pension or demogrant).

 

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