PensionReforms' summary and comments
This report from Mercer New Zealand, a financial service provider, is based on an international report for the World Economic Forum that Mercer's parent organisation helped write.  PensionReforms will be looking at that here.  This one applies some of the international report's conclusions to New Zealand's own situation.

The report summarised New Zealand's recent history of public provision (PensionReforms notes that this summary is not fault-free) and the recent chequered history of KiwiSaver, an auto-enrolment, opt-out Tier 3 savings scheme that, since first being proposed in 2006, is now already into its fourth iteration.  The report describes this as "Pillar 2".  Given that KiwiSaver is not compulsory, PensionReforms prefers to categorise it as Tier 3.  New Zealand does not have a compulsory Tier 2 scheme.  The report comments on the most recent changes made to KiwiSaver - generally negatively as they have reduced the value of members' saving incentives.

The report first described the usual data - the "challenges of an ageing population".  It then notes the three phases of most individuals' retirement experience - "active", "passive" and "frail".  These are relevant to solutions as:
"Structuring a retirement income to meet the needs in each of the stages can be difficult for individuals as there is a degree of uncertainty involved in the length of time a retiree will spend in each phase as well as the time spent in retirement as a whole.  Ensuring flexibility and security in any retirement income system is therefore essential."

The report notes the following challenges that New Zealand faces and suggests options for public debate:

-   Funding pressure on the cost of the PAYG, Tier 1 "New Zealand Superannuation"
The State Pension Age should increase and should increase with improving mortality.  Alternatively, the annual cost should be a "fixed percentage of GDP" (and will therefore probably fall in real terms at an individual level).  The pension should be income-tested.  Workers should be allowed to defer receiving the pension (to no later than age 70) and get an increase later.

-   Enhance KiwiSaver
In addition, KiwiSaver should be enhanced.  According to the report "Under the current tax structure, New Zealanders will pay more tax on investment earnings over the term they invest in KiwiSaver than the sum of all government incentives they receive to join and remain in KiwiSaver."  PensionReforms notes that this may be true mathematically but is not relevant.  The appropriate counterfactual is the difference between investing in KiwiSaver and in an alternative 'unfavoured' vehicle like a bank account.  The report's recommended "break even tax rate" (11.5% - 15% depending on investment strategy) needs more to justify it than the report explains.  It assumes the government needs to deliver a savings incentive but doesn't explain why that might be needed.

The report then suggests that KiwiSaver should be compulsory "for employees in high income brackets".  The explanation for this seems to be that compulsion won't be popular for most; higher paid employees need to save anyway (and may, presumably, not miss the KiwiSaver contributions) and New Zealand needs the investment capital.  PensionReforms thinks these justifications are modest in the extreme.  It would be nice to see the evidence first, that there is a problem and secondly that the report's suggested solution will fix the problem.

The report then suggests that employers should be encouraged or forced to pay more to KiwiSaver for their employee members (after the Australian model) perhaps also with lower "front end" taxes on those.  Somehow (the report doesn't explain why) this will be more acceptable than requiring employees to give up direct remuneration.  It again assumes, without evidence, that employees aren't saving enough already.

PensionReforms notes that the report is written by a significant KiwiSaver provider.

-   Improving mortality rates run the risk that retirees will run out of money
New Zealand's annuity market has essentially disappeared in recent years.  The report thinks New Zealand needs an annuity market to enhance retirees' income security.

The report noted a lack of decumulation options in New Zealand and raises a number of possible options.  These include home equity release, what it calls "NZ Super Plus" (voluntary enhancements to the Tier 1 pension), life annuities, variable annuities, allocated pensions, deferred annuities, "pooled survivor payments" and long term bonds (the longest currently available government bond is only ten years).  The government could even arrange a "macro swap" to buy protection "for the longevity risk based on the mortality experience of a broad population".

-   Low levels of financial literacy
Unless New Zealanders understand the options that are available to them during the accumulation and decumulation phases, the report suggests that they will find it "difficult to know the amount of capital that will be required and therefore the appropriate investment strategy to pursue..."

-   "Decentralised and non-consolidated governmental management"
The report suggests that all the various departments of government should be looking at the "issue of ageing ... holistically rather than piecemeal by each area separately."

"We believe a holistic and multi-layered solution is needed to improve our retirement income system if we are to increase the likelihood that all New Zealanders will be able to retire with dignity, and a sense of security, and be better prepared for retirement risks in the years ahead."

PensionReforms has difficulties with a key underpinning assumption of the report - that New Zealanders aren't saving 'enough' for retirement.  There is actually no evidence of that - quite the contrary in fact.  There are several reports suggesting that New Zealanders have behaved rationally - see here,  here,  here, and here for more on this.  None of these gets an airing in the report.

The other key underpinning thesis is that New Zealand cannot afford the age-related impact on the increasing costs of its Tier 1 New Zealand Superannuation.  This topic has been aired in detail in several major national reports of 1992, 1997, 2003 and most recently in 2007 (see here for more on this most recent one).  The cost will double, as noted in the Mercer report itself from a now-expected net 3.4% of GDP to a net 6.9% by 2050.  That will mean higher taxes but any international comparison (not given in the report) would show this to be a relatively modest cost.  That is not to say, however, that New Zealand should simply accept the current design of the Tier 1 pension.  It simply means that there is no compelling fiscal pressure to reduce its value.  However, PensionReforms agrees with the Mercer report that a debate should begin now on what Tier 1 might look like in 20 years.

PensionReforms welcomes the report's emphasis on the debate New Zealand needs to have on the design of decumulation products and the need for improved financial literacy.  However, New Zealand can safely skip the recommendations on further tax breaks and "targeted compulsion" for private provision.  The international evidence that either of these actually increases national saving seems lacking (and isn't offered in the report).  There is actually a strong case to get rid of the tax incentives now available (see here for more on this). (File size 4.2 MB; 40 pp) 320