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By Mary Holm, Financial Writer
Just as New Zealanders have got used to KiwiSaver being part of our financial landscape, changes may be on the horizon. Mary Holm has her say on the plans.
I’m in two minds about whether we should give KiwiSaver members more choices.
The Commission for Financial Capability (CFFC) recently came up with eight ideas on how the KiwiSaver retirement savings scheme could be altered (see next page). Most of these proposals have merit, but I do have a couple of reservations:
• KiwiSaver has been tinkered with too much already – it has changed in about 20 ways since it was launched in 2007. Many people are saying enough is enough.
• Several of the ideas introduce new options. When people are given lots of choice, they tend to put off making a decision, and end up doing nothing.
Still, two of the suggested changes are particularly appealing – partly because they nudge people into saving more.
Turbocharge your savings
The first idea I like is an option to automatically increase your contribution rate by 0.5 per cent or 1 per cent every year.
For example, your contributions might rise from
3 per cent of your pay this year to 3.5 per cent next year, 4 per cent the year after, and so on. You could put in place a maximum, such as 8 per cent or 12 per cent.
I suspect this stepped increase in contributions would only have wide appeal if you could pull out; if, for example, you lost your job and were having trouble finding another, or your new job paid less. Of course you can already pull out of KiwiSaver by taking a contributions holiday. However, you might want to keep contributing, but switch back to a lower rate.
The beauty of this idea is that people are more willing to sign up to a ‘Save More Tomorrow’ type plan than to saving more now, according to research conducted in the US.
Save More Tomorrow
Professor Richard H. Thaler is one of the researchers and architects behind the Save More Tomorrow programme. He explains: “Given the option of going on a diet three months from now, many people will agree. But tonight at dinner, that dessert looks pretty good.”
Thaler and his colleague got people to sign up to increasing their savings rate when they got a pay rise. This is different from the CFFC proposal. But perhaps KiwiSaver providers could line up their increases in contributions to coincide with expected pay rises.
In most of the Save More Tomorrow trials, employees dramatically increased their total savings. The idea works so well because “inertia is powerful”. Once people enrol in the plan, few will ever get around to opting out, the research found.
Thaler adds: “We knew people intended to save more, but never got around to it because of inertia. So we thought, let’s build inertia into the plan and make it work for us.”
I’m sure that’s behind the thinking of the CFFC.
KiwiSaver holiday cap
The other idea that I particularly like is reducing the maximum contributions holiday.
For now, any employee who has been in KiwiSaver for at least one year can suspend their contributions, for between three months and five years.
It’s easy to apply for a contributions holiday and you don’t have to give a reason. You can restart contributions at any time during a holiday. And you can keep reapplying for holidays – all the way to retirement.
Around 5 per cent of the total 2.6 million-plus members of KiwiSaver are on contributions holidays. And of those, 83 per cent are on a five-year break, says the CFFC.
This feels wrong. Most people can’t accurately predict their financial situation a year from now, let alone five years. Many of the 83 per cent would be able to start contributing again before the five years is up. Often, it will be a case of simply not getting around to it – or as Thaler might put it, inertia.
If, instead, they had to fill out a new form after one year, that might prompt many to climb back on the KiwiSaver wagon.
Use the power of inertia
KiwiSaver already factors in inertia – by automatically enrolling people when they start a new job. Instead of having to get around to joining the scheme, they have to get around to pulling out.
These two new ideas – enabling contribution increases to ‘just happen’, and nudging people to end contributions holidays – leverage inertia and encourage more saving.
Sure, the sign-up to increase contributions would add complexity. But with the right messaging, I think many New Zealanders would welcome the option.
The second change might annoy some contributions holidaymakers, but as long as it’s easy to reapply after a year, they shouldn’t be too upset. In the long run, I reckon many would be glad they were nudged back into saving again.
Eight ideas for KiwiSaver
The Commission for Financial Capability is seeking comments on the following ideas:
1. The ability to contribute to KiwiSaver at other rates – for example, 5 per cent or 10 per cent of pay. (Currently you can contribute 3 percent, 4 per cent or 8 per cent of pay.)
2. The option to automatically increase contributions annually.
3. The option to contribute just 1 per cent or 2 per cent.
4. Make it mandatory for providers to show their fees in dollars.
5. Reduce the maximum contributions holiday from five years to one year.
6. Allow over-65s to join.
7. One-off enrolment of non-members, who could still opt out.
8. The ability to join more than one scheme.
For more information and to comment, go to www.tinyurl.com/ideasNZ