UK's eyes are on KiwiSaver's launch

On 1 July, KiwiSaver is launched in New Zealand. As this pension scheme has many similarities with the personal accounts being introduced in the UK, its progress will be followed closely here. We explain how KiwiSaver works.

Key points KiwiSaver, a new retirement savings scheme that has many similarities with the UK's planned personal accounts, is being introduced in New Zealand on 1 July 2007. Employers must automatically enrol new employees aged from 18 to 65 into the scheme, although they can opt out after two weeks but before eight weeks has expired. Members must contribute 4%, 8% or more of gross salary, with most contributions being deducted at source by their employer. Employers can contribute, and from next year it will be obligatory for employers to do so. The government is offering an initial kick-start contribution, and matches member contributions. It also subsidises administration costs. Employees can choose their provider, but those who do not will be entered into a scheme chosen by their employer or, if one has not been chosen, into one of six default providers selected by the government. Employers can gain exemption if they offer a suitable alternative arrangement.

Kiwisaver is a voluntary, work-based retirement savings scheme that has been introduced by the New Zealand government. The money-purchase arrangement established by the KiwiSaver Act 2006 opens its doors to members from 1 July 2007 and offers an initial tax-free incentive to encourage take-up. There are a number of parallels with the UK's planned personal accounts, such as automatic enrolment, and its success or failure will be carefully monitored in the UK.

Unless employers have gained an exemption, they must offer a KiwiSaver scheme to all their eligible employees. They are obliged to enrol new employees automatically and to deduct and forward employee contributions at one of two fixed rates. Initially, they are not required to contribute, but they can do so and contributions become obligatory next year.

KiwiSaver is intended to top up the state pension (New Zealand Superannuation) and to encourage saving and investment in the New Zealand economy. The state scheme, which was until recently entirely pay-as-you-go, provides a pension of NZ$336.65 (about £129) per week for a single person living alone (slightly above the UK state pension). Supplementary schemes operated by employers are declining after the removal of tax advantages in the late 1980s, with only about 18% of the population covered and most schemes closed to new entrants. Supplementary schemes are generally money-purchase arrangements and provide a lump sum on retirement. However, those schemes that are effectively personal pensions are growing.

Options for employers

Employers have a number of options. The main ones are to establish their own KiwiSaver scheme, nominate their own preferred KiwiSaver provider (an "employer-chosen" scheme) from those on the market, allow their employees to be enrolled into one of six "default" providers' schemes, or seek exemption. Providers can negotiate with employers to become their "employer-chosen scheme". If employers do not gain exemption or choose one scheme for all their employees, their employees will be allocated to one of the default schemes, but employers will still have to provide new employees with information and deduct contributions from members' pay.

To gain exemption from the new requirements, employers must offer a retirement savings scheme that:

• is a registered superannuation scheme;
• is portable, so it will accept transfers-in and allow transfers-out;
• is open to all new permanent employees, including part-timers; and
• has a total contribution rate of at least 4% of an employee's gross base salary, including any employer contribution.

Eligibility and auto-enrolment

KiwiSaver is open to all New Zealand citizens and people entitled to live in the country permanently who are below age 65. This includes self-employed people and workers on a part-time or temporary contract.

From 1 July 2007, unless employers are exempt, they must automatically enrol eligible new employees who are aged at least 18 years and under 65 into a KiwiSaver scheme. Self-employed people and those under 18 can only join by contacting providers directly, although employers will subsequently deduct contributions from the pay of those who are employed. Existing employees and some temporary staff are not being enrolled automatically, but they can choose to join.

Those automatically enrolled and existing employees who opt in through their employer will be allocated to a KiwiSaver scheme of their choice. If they do not make an election they will be entered into their employer's chosen KiwiSaver scheme, if it has one, or, if not, to a default KiwiSaver scheme. Those allocated to a default scheme will be placed in one of the six schemes in rotation (so that each default provider has an equal number of default members) and their contributions invested in a "conservative fund". The six financial institutions appointed by the government to be default scheme providers for an initial period of seven years, following an open, competitive tendering process, are: AMP Services (NZ), ASB Group Investments, ING (NZ), Mercer Human Resource Consulting, AXA New Zealand, and TOWER Employee Benefits. These providers were selected on the basis of criteria that included administrative capacity, fee levels and investment capability.

New employees can opt out by telling their employer, but only after being employed for at least two weeks and fewer than eight. Thereafter they would need to contact the Inland Revenue to opt out. If employees do not opt out they have three months in which to seek financial advice and actively select their own provider before the enrolment is finalised.

Contributions

KiwiSaver members can choose to contribute precisely 4% or 8% of their gross salary (including bonuses, commission, extra salary and overtime). They can also choose to contribute more than 8%, but these contributions would need to be paid direct to the provider. A default rate of 4% will be applied to employees who do not specify a contribution level.

Members can switch between contribution rates. They can also make one-off lump-sum payments at any time.

The government will provide each member with what is being called a kick-start, a $1,000 (about £380) tax-free contribution. It will also pay a tax credit of up to $1,042.86 a year, matching the contributions made by members who are aged between 18 and the age of eligibility to withdraw their KiwiSaver funds. In addition, the government subsidises members' scheme fees.

Employers can make regular contributions, which can currently count towards the employee's minimum contribution of 4% if the employee so chooses. Employers can also make lump-sum payments. Their contributions are exempt from specified superannuation contributions withholding tax up to a maximum of 4% of the employee's gross pay.

The government announced in its 2007 Budget on 17 May that, from 1 April 2008, employers will be required to match employee contributions to KiwiSaver. This is to be phased in over four years, starting at 1% and rising to 4% by 1 April 2011. Once these begin, employer contributions cannot count towards the minimum 4% for new KiwiSaver members. Employers will receive a matching tax credit for up to $1,040 a year per contributing employee to cover (except for higher paid employees) the cost of the 1% compulsory contribution in the first year. This is intended to allow employers time to prepare for the increase in employer contributions in subsequent years. These changes have still to be approved by parliament.

Employees can take a contributions holiday of between three months and five years, although they can ask for an extension. A holiday will only be permitted within the first 12 months in cases of financial hardship.

Those who do not have contributions automatically deducted, such as self-employed people, can make regular contributions at a rate agreed with the provider.

Administration

Unless an employer has an exemption, it must check whether new employees should be automatically enrolled into KiwiSaver and, if so, give them the government's information pack. If there is an "employer-chosen" scheme, new employees must be given a written statement about that scheme and its investment statement.

Employers must deduct KiwiSaver contributions and forward them to the Revenue by the due date along with pay-as-you-earn (PAYE) tax. They must also make adjustments if employees choose to take a contributions holiday.

KiwiSaver is different from other New Zealand pension arrangements in that the Inland Revenue administers the collection of contributions from the employer through the PAYE tax system and then forwards them to the relevant provider. KiwiSaver scheme providers will allocate and invest contributions, meet reporting requirements and have the primary relationship with members. The default providers and those that are employer-chosen providers are required to accept all members allocated to them.

Accessing savings

Savings are locked in until employees reach the age of eligibility for New Zealand Superannuation (currently 65), or for five years, whichever is later. Savings are then paid out as a lump sum. If KiwiSaver members die before they reach 65 their savings will be paid to their estate.

Members may be able to withdraw their savings earlier:

• after three years to buy their first home (excluding the government kick-start and member tax credit);
• if they experience significant financial hardship (excluding the government kick-start and member tax credit);
• if they experience serious illness (excluding the government kick-start but including the member tax credit); or
• if they emigrate permanently (including the government kick-start but excluding the member tax credit, which is paid back to the government).

Our research This feature is based primarily on information available on the following websites: www.ird.govt.nz/kiwisaver, www.kiwisaver.com, www.isu.govt/nz and www.sorted.org.nz. We also drew on information provided by Mercer Human Resource Consulting and Towers Perrin about existing pension provision. There is a useful briefing note on KiwiSaver on the Pensions Policy Institute's website (www.pensionspolicyinstitute.org.uk), but this was prepared in June 2005 and a lot of the detail has since changed.