KiwiSaver and the wealth of
New Zealanders
NZIER perspective on the joint agency evaluation report
NZIER report to the Financial Services Council
August 2015

 About NZIER
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Authorship
This paper was prepared at NZIER by Aaron Drew.
It was quality approved by Peter Wilson.

We acknowledge the financial support of the Financial Services Council in the
preparation of this report. The assistance of Sarah Spring is also acknowledged.

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 Executive summary
Since its inception in 2007, KiwiSaver has become by far the most widely-held
voluntary private savings vehicle in New Zealand. There are now over 2.5 million
individual members in the scheme, and three-quarters of the population aged 18 to
64 are members.
Prior to the introduction of KiwiSaver, coverage of New Zealanders in occupational
savings schemes was only around 15% of the workforce and on a declining trend. The
introduction of KiwiSaver was motivated by concern that many New Zealanders were
not preparing well for their retirement, owing to both an inadequate level of savings,
and potentially excessive concentration of wealth in residential property. This is
reflected in the legislative goals of the KiwiSaver Act, which are:
1.

to encourage a long-term savings habit and asset accumulation by
individuals who are not in a position to enjoy standards of living in
retirement similar to those in pre-retirement

2.

to increase individuals’ well-being and financial independence, particularly
in retirement, and to provide retirement benefits.

KiwiSaver take-up was encouraged by Government support of the scheme in the
form of direct payments to member accounts and subsidies for eligible first home
buyers. To date, the direct payments have been over $5.8 billion, comprising annual
“tax credits” and a one-off kick-start payment of $1,000.
Given the large level of fiscal support for the scheme and the important policy
purpose, annual reviews by government officials have been undertaken. In February
2015, a major summary evaluation report was published. While the report found
KiwiSaver has enjoyed high take-up and was well-managed, it also found it was only
marginally, at best, increasing net asset accumulation for its members. 1
This material was drawn upon by The Treasury to develop a Regulatory Impact
Statement (RIS) on KiwiSaver, and the kick-start payment in particular.2 The RIS
concluded that “KiwiSaver is a very costly voluntary savings scheme which has not
substantially increased savings despite encouraging enrolment of a large number of
individuals.” Given this conclusion, in the 2015 Budget the government reduced
some fiscal support for KiwiSaver by cancelling the $1,000 kick-start payment.
In this paper we review the evidence base used to support this policy change and
suggest conditions under which, in contrast, KiwiSaver will likely lift net wealth for its
members, particularly members on middle-level or lower lifetime incomes.
Our main concern with the evidence base is that it is too narrow, and applied over
too short a time frame, to assess whether KiwiSaver has met its policy objectives. In
particular, the main empirical evidence used to support the conclusion that KiwiSaver
has not lifted net asset accumulation was based on a survey of self-reported
household data of assets and liabilities that only ran to 2010, and hence empirical
1

2

Inland Revenue National Research and Evaluation Unit (2015) KiwiSaver evaluation: Final summary report: A
joint agency evaluation 2007 - 2014
See: http://www.treasury.govt.nz/publications/informationreleases/ris/pdfs/ris-tsy-rks-may15.pdf

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 analysis using the survey may have been significantly tainted by the impact of the
Global Financial Crisis (the GFC), which commenced in around 2008. A longer sample
is required to more cleanly dis-entangle the impact of financial market volatility from
savings behaviour. In addition, the evidence base could also have included an
assessment of the extent to which KiwiSaver has, or will, help diversify wealth for its
members.
We acknowledge the issue of savings and the role of government policy is a complex
area. There has been a huge amount of analysis undertaken to answer the questions
of what suite of policies and arrangements are best. While some themes are
consistently raised in the literature, no clear consensus has emerged. Rather than
“boil the ocean” and try and come-up with a definitive once-and-for-all conclusion
about the optimal policy-settings for KiwiSaver, we set out some uncontested facts
about savings and savings behaviour, and what set of beliefs would need to be true
to support the conclusion that KiwiSaver will likely lift net wealth for, if not all, at
least some of its members.
In terms of the facts, we show that the high take-up rates achieved include the young
and those on lower incomes. The New Zealand and offshore evidence base suggests
these groups typically do not participate in formal savings schemes. We also show
that at present there is a large concentration risk in financing retirement given the
composition of wealth in New Zealand (which for a significant group of people is
highly concentrated in real estate), which KiwiSaver will significantly ameliorate over
time given KiwiSaver portfolios typically include well-diversified global exposures to
equities and fixed interest.
Another key fact is that risky assets command a premium. As such, KiwiSaver
portfolios will likely earn a higher return than both the interest rate cost of Crown
contributions, and the growth in New Zealand labour incomes and associated New
Zealand tax base. This is the case up to the end of 2014, despite the impact of the
GFC.
In terms of beliefs, lessons from the behavioural economics and finance literature
strongly suggest that many individuals will not adequately save for their retirement,
or diversify appropriately or invest appropriately, given information gaps and various
behavioural “biases”. KiwiSaver is a mechanism that explicitly overcomes some of
these effects, for example, it overcomes the procrastination people display towards
getting started with a savings scheme via the automatic enrolment mechanism.
We observe internationally that governments tend to intervene in savings markets.
The biases and information gaps provide an evidence base for why public policy can
be justified that is aimed at: (i) creating a savings habit, (ii) making it easier for
individuals to save, and (iii) ensuring well-diversified financial products are available.
Given the facts and beliefs, we conclude that KiwiSaver is likely to lead to an increase
in net worth for members who do not already enjoy a high level of net worth or
financial capability. Middle and lower income KiwiSaver participants are the group
most likely to benefit and enjoy a standard of living in retirement that is both
superior to what they would be able to obtain without KiwiSaver, and closer to what
they are able to achieve pre-retirement. For people outside this group, i.e. very low
income people such as beneficiaries and people with high incomes and high net
worth, KiwiSaver is less likely to increase net savings. KiwiSaver should also lead to
more diversified portfolios in New Zealand, reducing downside concentration risks.
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 About the Authors
Aaron Drew is a Principal Economist and Head of the Auckland business of the NZIER.
Aaron joined NZIER in October 2014 from the New Zealand Superannuation Fund
where he developed a number of value-adding investment strategies and was a
member of the Fund’s Investment Committee.
He has consulted for the IMF, providing on-the-ground economic development
assistance at the Central Bank of Turkey (2002) and Morocco (2007), and has also
consulted for the New Zealand Treasury in the area of economic forecasting and
modelling.
Aaron worked 4 years as an economist at the OECD on a wide range of macro and
regulatory policy issues including: fiscal sustainability, economic integration,
productivity and innovation determinants, product and labour market regulation,
macroeconomic forecasting, and improving economic resilience.
Aaron has also worked at the Reserve Bank of New Zealand, managing the modelling
and research teams. He co-led a two year work program between the IRD, the RBNZ
and the Treasury on non-conventional policy options to improve macro policies in
New Zealand and reduce external imbalances. Some of these options have now
become public policy, for example, in the area of the RBNZ’s macro-prudential
regulation.

Peter Wilson is a Principal Economist in our Auckland Office.
He joined NZIER from the infrastructure sector, where he worked on commercial
strategy and a wide range of projects. Before that, he worked for over 25 years in
finance ministries in New Zealand and Australia, including being Director of Tax Policy
at the New Zealand Treasury.
His professional interests range over regulatory and public economics, local
government and planning to climate change and social policy. His publications
include articles on tax policy, New Zealand’s long-term fiscal position and climate
change.

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 Contents
1.

KiwiSaver overview ........................................................................................... 1

2.

The Joint Agency Report ................................................................................... 6

3.

4.

2.1.

Report summary ................................................................................ 6

2.2.

Caveats and areas of uncertainty ...................................................... 7

Investment facts and beliefs ............................................................................. 9
3.1.

KiwiSaver and savings facts ............................................................... 9

3.2.

KiwiSaver and savings beliefs .......................................................... 12

Conclusions ..................................................................................................... 17

References ................................................................................................................... 18
Appendix A ................................................................................................................... 20

Tables
Table 1 Major KiwiSaver changes since inception ....................................................................... 2
Table 2 KiwiSaver member characteristics .................................................................................. 3
Table 3 Contributions into KiwiSaver and funds under management ......................................... 4
Table 4 Tiers of retirement income ............................................................................................. 9
Table 5 Structure of household balance sheets in New Zealand ............................................... 11
Table 6 Departures from optimal savings and investment behaviour and implications ........... 14
Table 7 Characteristics of individuals most and less likely to benefit from KiwiSaver .............. 16

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 1. KiwiSaver overview
KiwiSaver commenced operation on 1 July 2007, following the passage of the
KiwiSaver Act 2006 in September 2006. KiwiSaver is a voluntary, contributory, longterm savings scheme.
Kiwisaver was designed to fit within the context of the New Zealand retirement
system that applied at the time of its introduction. That system was based on a nearuniversal publicly provided pension (New Zealand Superannuation) with no means or
asset testing and a voluntary private savings market with few explicit tax concessions.
Unusual by OECD standards was the absence of any compulsory or publiclysubsidised employment-based or income-related savings vehicle.3
Some of the key features of KiwiSaver are:


Everyone who becomes employed by a new employer is automatically
enrolled in KiwiSaver, but they can chose to not join (“opt-out”).



The private sector operates KiwiSaver funds, which are eligible to receive
contributions.



Unless they elect to take a contribution holiday, members must contribute
to their scheme.



Member contributions are matched by employer contributions.



The government provides tax credits for member contributions. (When first
established, the government also provided tax credit for employer
contributions and made a $1,000 kick-start initial contribution. The kick
start was abolished in the recent budget.)



After three years of contributions, individuals can withdraw contributions
for deposit on a first home. A first home deposit subsidy may also be
granted (subject to eligibility criteria).



Withdrawal of savings is not permitted until retirement from age 65 unless
in the case of financial hardship or permanent emigration. No adjustment
to New Zealand Superannuation is made because of the level of KiwiSaver
savings.

Major changes to KiwiSaver since 2006 are set out in Table 1.

3

The World Bank classifies savings vehicles into five “pillars”. See Holzmann, Hinz and Dorfman (2008). At the
base is a non-contributory pillar directed at alleviating poverty in retirement. Such schemes generally
provide a level of support that is not related to pre-retirement incomes. New Zealand Superannuation fits
within this classification. Next are two mandatory pillars, which are designed to facilitate income
replacement in retirement and both are explicitly or implicitly linked to pre-retirement incomes and are thus
directed at allowing people to continue to experience a standard of living in retirement that is
commensurate with their income in employment. Because of their link to income, pillars two and three are
often employment-based and involve employer contributions. They are compulsory and are often supported
by government (tax) subsidies. Before Kiwisaver, New Zealand did not have schemes in this category. The
fourth pillar is voluntary savings above the other pillars and usually does not involve government subsidy or
compulsion (but may be regulated). This was New Zealand’s system of voluntary savings. The final pillar is a
system of non-financial support for those in retirement.

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 Table 1 Major KiwiSaver changes since inception
Year

Changes to the scheme

2009

$40 fee subsidy cancelled and mortgage diversion option removed.
Minimum contribution rate reduced from 4% to 2%.

2011

Maximum tax credit halved from $1,043 to $521 (contribution required to achieve tax
credit stayed the same).

2012

Tax credit for children removed (April 2012).
All employer contributions made subject to tax applied at the employee’s marginal tax rate.

2013

Minimum employee and employer contribution rate increased from 2% to 3% of gross
income (April 2013).
Standardised Fund Management reporting introduced.

2015

$1,000 kick-start removed.
House price caps increased for first home buyer schemes and member tax credits now
eligible for withdrawal.

Source: IRD and various

Since its inception in 2007, KiwiSaver has become by far the most widely-held
voluntary private savings vehicle in New Zealand. There are now over 2.5 million
individual members in the scheme. Take-up for members between 18 and 64 is
around three-quarters of the eligible resident New Zealand population. This is also
one of the highest rates of take-up for supplementary (i.e. non-compulsory)
retirement savings in the world.
For every dollar a KiwiSaver member contributes, 50c is matched by the government
up to a limit of $521 per annum (under current policy). The approach of providing
some level of matching government contribution into publicly-sponsored private
pension scheme has been adopted in a growing number of high-income countries. A
recent World Bank report argues these provide incentives that are more tangible for
individuals to participate in pension funds than the more traditional approach of
mandating participation and providing preferential tax treatment, especially for low
income groups and individuals who may not participate in the formal labour force,
and therefore receive no advantage from tax-based incentives (Rashbrooke 2012).
The proof is in the pudding. Around half of KiwiSaver members are aged between 18
and 44, and hence have at least 20 years work life yet until being eligible for New
Zealand Superannuation. In addition, around half of KiwiSaver members are in
incomes at or below average levels ($20,000-$60,000). In contrast, in most countries
of the world, under half of working-aged adults are in a formal pension scheme and
before the implementation of KiwiSaver only around 15% of New Zealand’s labour
force was in a scheme.

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 Table 2 KiwiSaver member characteristics
Date

Members (active
and provisional)

Members over 18
as percent of
population 18-64

Number of
members on
incomes from
$20,000-$60,000

% members who
opt-out of
KiwiSaver

June 2008

716,600

23.7%

293,875

19.2%

June 2009

1,100,500

34.5%

429,381

20.1%

June 2010

1,459,900

44.4%

551,690

16.8%

June 2011

1,755,900

53.6%

634,693

14.2%

June 2012

1,966,400

60.8%

708,821

13.0%

June 2013

2,146,800

66.7%

765,044

11.6%

June 2014

2,350,600

72.3%

825,422

10.3%

May 2015

2,519,814

76.5%

..

9.3%

Source: KiwiSaver annual statistics, Inland Revenue Department and Statistics New Zealand

The high level of take-up no doubt reflects the financial incentives (including housing)
that are offered by the government for its members. But other design choices are
also likely important. It is seen as a good and easy way to save by members, and
employers find it administratively simple and cheap (IRD 2015).
While voluntary, the scheme captures many members through its “soft compulsion”.
The percentage of members who choose to opt-out is a modest (around 10 percent)
and declining share of the total KiwiSaver member base. The World Bank report
mentioned attributes of the very large share of membership amongst people aged 24
to 35, who typically have a low probability of contributing to retirement saving
schemes internationally, to the impact of the automatic enrolment (rather than, say,
the subsidy on first homes).
The total level of member (employee, voluntary and employer) contributions to
KiwiSaver has been on a broad uptrend as the membership base has grown. Crown
contributions have become a declining share of the total as the impact of the initial
“kick-start” payment has worn off, and as the level of Crown tax credits have been
reduced. Net Crown contributions would be even lower given tax paid back to the
Crown from member accounts.
Since inception, the scheme has had over $15.5 billion paid into it and as at
December 2014 the amount of Funds Under Management (FUM) (net of fees and
taxes) was about $26.5 billion, around $11 billion ahead of the level of contributions.
To date, KiwiSaver has been a very good deal for members – on average for every
dollar put in by an individual over five dollars have been accrued through employer
and government contributions, as well as investment returns. Returns have also been
healthy since markets have recovered from the GFC, compounding at around 7.9%
per annum (net of fees and taxes), or 2.9% ahead of average (gross) government
bond yields over the period and across KiwiSaver as a whole. This also implies

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 KiwiSaver returns have healthily outperformed the interest rate cost of the
government financing its contributions.4
Table 3 Contributions into KiwiSaver and funds under management
Date

Employee
and
voluntary
contributions
($M)

Employer
contributions
($M)

Crown
contributions
($M)

Crown share
of annual
contribution
(%)

Funds under
management
($billion as at
December)

2008

71

64

572

80.9%

2.2

2009

361

355

839

54.0%

5.1

2010

634

626

962

43.3%

8.3

2011

756

740

999

40.0%

11.3

2012

882

866

1,044

37.4%

15.3

2013

856

833

677

28.6%

20.1

2014

1,308

1,277

737

22.2%

26.4

Total contributions
($billion )

4.9

4.8

5.8

15.5

Funds Under
Management less
contributions
received

10.9 billion

Simple
average
annual
compounding
net return

7.9%

Excess return
to 10 year NZ
bonds

(4.5% GDP)

2.9%

Source: KiwiSaver annual statistics, IRD, RBNZ and NZIER calculations

Prior to the introduction of KiwiSaver, coverage of New Zealanders in occupational
savings schemes (provided by government and the private sector) was low at only
around 15% of the workforce and on a declining trend. The introduction of KiwiSaver
was motivated by concern that many New Zealanders were not preparing well for
their retirement, owing to both an inadequate level of savings, and excessive
concentration of wealth in residential property and other New Zealand assets.
Much of the debate leading up to its introduction (and the New Zealand
Superannuation Fund) was also concerned with the low level of national savings in
New Zealand – lifting the savings of individuals should, all else equal, lead to a higher
level of savings and net worth at the national level.
These concerns are reflected in KiwiSaver’s primary legislative goals, and at face
value these objectives appear to have been well met. The level of take-up is very
high, including for young New Zealand workers and for those on lower incomes.

4

This is a necessary but not sufficient condition for assessing the broader question of whether KiwiSaver has
been good value for money (offered a high benefit compared to its cost).

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 The high take-up is despite a fair degree of “tinkering” of the scheme since inception,
and a generally weakening of government subsidies into member accounts, with the
most recent Budget serving to reduce incentives for joining further (particularly for
under-18 year olds not in employment). On the other hand, the incentive for joining
to help meet the cost of purchasing a first home has increased (Table 3).
Take-up has coincided with a large level of fiscal support, at around $5.8 billion
(gross) from inception to the end of 2014. As discussed in the following section, a
recent inter-governmental department study concludes that the success of KiwiSaver
in meeting its primary legislative objectives based on evidence of its early years of
operation is marginal, at best, because while savings in the scheme have been
increasing, these have largely displaced other forms of savings and debt reduction
(IRD 2014). In other terms, value-for-money on the contributions made by
government has not been compelling.
In this paper we discuss why we think the policy assessment of KiwiSaver
effectiveness is premature, likely tainted by the GFC period, and probably overreliant on the empirical approaches employed.
We present investment facts and investment and behavioural finance “beliefs” to
motivate reasons we should be more confident that the scheme will deliver its
primary goals over the longer run.

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 2. The Joint Agency Report
2.1.

Report summary

Over the period from 2007-2014 a joint government agency KiwiSaver research and
monitoring program was implemented. The purpose of this activity was to gather a
body of information and evidence to evaluate KiwiSaver against its legislative
purposes. A final summary report was released in February 2015. Some key findings
are:


The implementation of KiwiSaver has been well managed. Employers
reported low compliance costs, and members find it an easy way to save
money. A 2010 survey found this was the main reason people joined
KiwiSaver, followed by government and employer incentives.



KiwiSaver is providing an important platform for employees to save and it is
becoming less common for members to opt-out.



Knowledge of KiwiSaver amongst the member base increases with assets
under management, and there is evidence of their increasing engagement.



A large majority of members contribute at the default contribution rate.



KiwiSaver is providing an ongoing stimulus to New Zealand’s financial
sector, though the impact is assessed to be small given the small size of
accumulated FUM to date and the amount of assets held offshore.



Using a measure of savings flows, the estimated level of additional savings
(i.e. KiwiSaver contributions that were additional savings rather than
substituting from other forms of saving) was 36%.



In contrast, studies using a survey dataset of family income and
employment (SoFIE) find that KiwiSaver has not been successful in
improving the accumulation of net wealth of its members (Law and Scobie
2014).



Accumulated wealth has come at a significant cost to the Crown. For each
dollar of government contribution to KiwiSaver additional savings for the
estimated “target group” (i.e. individuals who are not in a position to enjoy
standards of retirement similar to those in pre-retirement) ranged from
only $0.20 to $0.38. However, the trend has been improving as the level of
government contributions have dropped given fewer new enrolments and
policy changes that reduce government costs.
While KiwiSaver has been unambiguously popular and evidentially well-managed, the
report concludes it has only marginally met its key policy objectives of encouraging
net asset accumulation and financial independence for members. The report also
cautions, however, that this is based on evidence primarily collected over the first 3.5
years of the scheme.

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 2.2.

Caveats and areas of uncertainty

Along with the short evaluation time frame, the joint agency evaluation report
provides the following caveats and limitations to its findings:


Much of the data collected and analysed about retirement income
expectations and living standards in retirement was self-reported, meaning
that people were asked to provide details of their current income and
savings without reference to independently verifiable records.



The evaluation of the importance of KiwiSaver for the first-wave of retirees
may not be as relevant to future retirees, who will build-up a much more
significant pool of assets in the scheme.



The difficulty of determining causality in a complex environment.



The possible influence of other factors (e.g. the Global Financial Crisis) on
the outcomes (e.g. data and behavioural responses).

 The small sample sizes in some of the qualitative work.
To elaborate further on the caveats, we note that KiwiSaver was barely one-year old
when Lehman Brothers declared bankruptcy in September 2008, bringing the GFC to
a head and causing asset prices to plummet. Annual returns to risky asset classes
such as equities and corporate bonds were the worst seen since the Great
Depression in the 1930s, and equity benchmarks such as the US S&P500 and NZ50
did not recover back to pre-GFC levels until over 5 years later in early 2013.
The GFC environment did not just, of course, impact asset prices. Unemployment
rates rose as business were forced to lay-off staff. Spending reduced as households
reacted to the heightened uncertainty by increasing precautionary savings rates,
which often took the form of reducing levels of household debt.
One of the key pieces of evidence used to support the conclusion that KiwiSaver has
not increased net worth is the study by Law and Scobie (2014). Their analysis of
household survey data (SoFIE) collected between 2002 and 2010 suggests that nonKiwiSaver members accumulated more net worth than KiwiSaver members (after
controlling for various other effects).
Given SoFIE data is only available to 2010, analysis using this can only consider the
first 3.5 years of KiwiSaver. This is a fundamental problem. KiwiSaver balances were
still very small in 2010, yet the impact of the GFC, which was not controlled for, was
very large. Changes in net worth due to financial asset price movements need to be
clearly distinguished from changes in net worth due to individuals increasing savings
(sacrificing consumption). It is unclear, therefore, that we can or should generalise
their findings to the future.
In relation, self-reported data can produce unreliable results, as people do not always
have up-to-date figures about their assets and income to hand when they are asked
to complete surveys. Experience with the New Zealand SoFIE survey was that some
participants reported large changes in their financial position between surveys that
were not consistent with other data sources, leading to concerns over data reliability.
This also effect interpretation of the empirical modelling and the reliability of the
estimated coefficients, as discussed in Annex A.
As discussed in Guest et al. (2014), another potentially serious problem with the
inference that can be drawn from the Law and Scobie analyses is the choice of nonKiwiSavers as a benchmark to compare KiwiSaver performance.
NZIER report – KiwiSaver and the wealth of New Zealanders

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 One of key objectives of the Act is to encourage asset accumulation by individuals
who are not in a position to enjoy standards of retirement similar to those in preretirement. That is, individuals who presumably would not contribute, or not
contribute soon enough, to a regular savings scheme. As we noted above, this group
is mostly comprised of people in employment on middle to moderate incomes, with
lower levels of financial capability. Scobie and Law did find weak evidence of net
worth accumulation by 25-34 year olds, a group that traditionally does not regularly
save for retirement (see Section 3). As such, it could be argued there is some
evidence that even after the very short 3.5 year period of their analysis that
KiwiSaver is working where it should.
Regardless of the source of potential problems, the key point is that evaluation of a
long-term savings vehicle like KiwiSaver ideally requires a long-period of time in
which the impact of market dynamics versus savings behaviour can be cleanly disentangled.
An alternative approach, that overcomes some of the issues of examining KiwiSaver
over a short period that could have been taken is to examine KiwiSaver adequacy (for
cohorts and overall) through the lens of forward-looking Monte Carlo analysis. This is
the industry standard approach for analysing pension systems, and its omission from
the evidence base used by the joint agency is striking. The method was employed by
MacDonald (2010) to analyse KiwiSaver, and it is the approach taken, for example, by
the New Zealand Superannuation Fund in both deciding upon its benchmark, and
evaluating long-run performance (Drew 2010).
In brief, Monte Carlo analysis enables the projection of the distribution of potential
outcomes under differing assumptions on returns, asset allocations, and fiscal
parameters such as the kick-start. It would likely show that as balances grow the net
Crown contribution into the scheme would fall and at some stage turn negative
under present policy settings – the Crown will eventually take more out through
taxes than it puts in through the member tax credits (and the kick-start). It would
also likely show that KiwiSaver may help reduce the concentration risks inherent in
the way retirement is financed in New Zealand.
Finally, as discussed in the following section, the evidence base used to evaluate the
kick-start and KiwiSaver might also have made more reference to (i) the behavioural
finance and economics literature, given this provides a further basis for believing
policy intervention and support of savings vehicles can be justified, and (ii) research
on the composition of wealth in New Zealand, and the extent to which KiwiSaver may
reduce concentration risks.

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 3. Investment facts and beliefs
In this section we frame the debate on whether KiwiSaver is likely to meet its policy
objectives in term of the facts around wealth, savings and investment in New Zealand
and the beliefs one would need to hold to support the view that KiwiSaver is likely –
over a longer time period – to lead to substantive wealth accumulation and better
prepare New Zealanders for their retirement.
The facts we look at include information around the structure of savings in New
Zealand. By beliefs we mean propositions that are informed by empirical evidence
and theory. They are not mere opinions, but unlike a fact there is still uncertainty and
hence room for disagreement among informed parties.

3.1.

KiwiSaver and savings facts

New Zealand effectively operates on a 2-tiered retirement income system. New
Zealand Superannuation is designed to meet basic retirement needs, whilst KiwiSaver
and other forms of private savings provide an asset base that can be drawn upon to
supplement income from New Zealand Superannuation (NZ Super).
Table 4 Tiers of retirement income
Tier

Role served by

Purpose

(1) Mandatory
public financing

New Zealand Superannuation.

Universal basic retirement income.

Funded by taxes currently, i.e. pay-asyou-go or PAYGO system.

Helps insure that New Zealanders
who do not build-up adequate private
savings are still able to enjoy a
retirement where basic needs can be
met.

In the future the NZ Superfund will
partially meet NZ Super costs.
(2) Mandatory
private savings

Compulsory savings accounts.

Provides supplementary income for
retirees over any public support.
New Zealand does not have such a
scheme.

(3) Voluntary
private savings

KiwiSaver.

Provides supplementary income for
retirees over any public support.

Other private savings (housing,
business equity, other financial assets,
etc.).
Source: NZIER

Historically and today it is a fact that New Zealanders rely heavily on a relatively
narrow pool of assets and income sources to meet their retirement needs. In
contrast, best-practice portfolio management and theory stresses that diversification
is essential to: (i) improve returns per unit of risk, and (ii) limit the risk that a portfolio
suffers a long-lasting or permanent negative “shock”.
The level of income from New Zealand superannuation depends entirely upon wages
and salaries in New Zealand given it is indexed to the average wage. In turn, the
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 financing of this payment and the ability of this Crown to meet the present level of
support depends entirely on its taxation revenues (and spending choices). The risk is
that New Zealand suffers a relatively poor period of economic performance in the
future (for whatever reason), which at the very least leads to a lower level of New
Zealand income growth, taxation revenues and hence superannuation payments
than would otherwise have been enjoyed.5
The historical record shows this is at least a possibility – New Zealand is still yet to
recover back to upper OECD income levels following the initial “shock” of losing
preferential trade access to the UK in 1973. New Zealand had one of the highest percapita incomes in the OECD, it now ranks 24th and this position has not materially
changed over the past two decades. If we were back at upper-income OECD levels,
New Zealand Superannuation would be 30% higher, all else equal.
A poor period of performance or a large “shock” (e.g. another natural disaster or
international financial crisis) could also be large enough that a government chooses
to change entitlement to NZ Super to meet its fiscal constraints.
Even absent any such “shock”, or period of poor performance, there is nothing
preventing a government from changing NZ Super’s parameters. As New Zealand’s
population ages the cost of NZ Super will rise (as a percentage of GDP), which all else
equal implies that taxes will need to rise. A future government may decide it is
preferable to change, for example, the age of entitlement higher, or the level of
entitlement lower, or means-test, rather than increase taxes to meet increasing NZ
Super costs. We note this has not happened yet – there is a high historic resistance to
changing NZ Super parameters – but this does not mean the parameters will never be
changed.
Along with the New Zealand concentration risk that the New Zealand Government
faces paying for NZ Super, there is a similar concentration risk many New Zealanders
face in the asset base they used to finance retirement over the level of support
received from NZ Super.
Compared with many OECD countries, private wealth in New Zealand tends to be
highly concentrated in New Zealand assets, in particular residential property. RBNZ
household balance sheet data presented in Table 5 suggests that only around 5% of
assets in New Zealand are held offshore. As a consequence, retiring New Zealanders
wanting to boost incomes over the level they receive from NZ Super rely more
heavily on releasing equity from their properties and other New Zealand assets.
Note that in the table KiwiSaver asset will be part of the equity and investment funds
categories.

5

The New Zealand Superfund reduces some of this risk because its asset base (and the derived income flow) is
from its investments in global markets, but the level of risk mitigation is modest because the Fund will be
only a small part of financing future NZ Super payments under present policy settings. There is an
established literature that argues save-as-you-go (SAYGO) systems are much better value-for-money
ultimately than pay-as-you-go (PAYGO) systems owing to their higher returns and lower concentration risks.
Coleman (2014) also argues that the transitional costs of establishing a SAYGO system in New Zealand are
outweighed by the benefits.

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 Table 5 Structure of household balance sheets in New Zealand
Asset

Asset value ($M)

% of total assets

As at Dec 2014
Equity and investment funds

396,546

33%

NZ listed shares

28,438

NZ unlisted shares

142,398

Equity in unincorporated NZ businesses

170,335

Overseas listed shares

6,736

Cash management trusts

8,220

Other investment fund shares

37,419

NZ registered bank and other deposits

137,017

12%

Other financial assets (insurance reserves etc)

84,756

7%

Housing and land values

580,821

49%

% total assets held offshore

5.1%*

% financial assets held offshore

9.9%

Source: RBNZ and NZIER calculations

* Assuming half of other investment shares and other finical assets are offshore exposures. Note the
calculation of NZ assets only accounts for where an asset is domiciled. The true NZ economic exposure
will likely be lower because offshore conditions will impact on NZ businesses and funding conditions.
The point remains, however, that offshore assets remain a small fraction of NZ household wealth.

A shock that negatively affects the Government’s ability to finance NZ Super would
also likely negatively affect property values and NZ businesses. In addition, while
residential property and land price gains in New Zealand have been solid over the
past few decades we cannot be assured that future gains will be as large. Two
headwinds include:
I.

The fact that New Zealand’s population is ageing and many regions of
New Zealand will face flat or declining population levels over the next few
decades according to Statistics New Zealand projections, reducing the
demand for housing (particularly traditional family-sized homes).

II.

The widely-held view that house prices in New Zealand are over-valued,
particularly in Auckland given the decline in rental yields to very low levels
(under 3% gross) and the large increase in house price-to-income ratios
(from around 4 a decade ago to over 8).

Note we are not predicting that residential property will necessarily suffer a poor
long-term return; rather we stress the fact that reliance on a single risky asset or

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 country carries concentration risk and higher potential for poor outcomes compared
to a more diversified portfolio. The pain that the finance company collapses caused
for retirees with a large exposure to their issued debt is but one recent example of
this.
These facts at a national level imply that there is potentially a large vulnerability in
financing retirement. This would suggest that it is not the level of savings that is the
only issue, but the form is also important.
Most KiwiSaver accounts are broadly diversified portfolios of domestic and foreign
assets, with the level of foreign assets (and expected long run returns) increasing as a
portfolio’s risk profile is increased given the greater exposure to international
equities. As such, KiwiSaver is a mechanism to reduce the financing risk and achieve
the benefits of portfolio diversification (a higher return per unit of risk). As KiwiSaver
portfolio balances grow with time, this benefit will also rise.
To some extent the “home bias” observed in NZ wealth is a function of the fact that
people’s investment decisions are affected by tax rules. Since tax rules distort New
Zealander’s investment decisions towards housing and land, one effect of the
KiwiSaver subsidies is to redirect asset allocations back to financial assets, particularly
international assets. By this metric, the KiwiSaver subsidy is likely a small fraction of
the other investment tax distortions in the economy, and the KiwiSaver it can be
interpreted as a means of offsetting the other investment distortions.6
In short, given the facts around the current structure of balance sheets and
retirement income financing, KiwiSaver arguably increases the likelihood of financial
independence of individuals, in line with one of its two key legislative purposes.
The facts do not, however, explain why KiwiSaver is needed as a policy instrument in
the first place. Why do we see concentrated portfolios that potentially do not
compensate holders for this risk? And why is it that individuals potentially do not
save enough to meet their retirement income aspirations? To answer these
questions we turn to beliefs around investing and savings behaviours.

3.2.

KiwiSaver and savings beliefs

People save for their retirement because they foresee that unless they build up an
asset base they will probably not be able to enjoy as high a standard of living when
they retire. At a bare-bones level this description is consistent with the standard
theoretical life-cycle model of savings behaviour. In this model, people form rational
expectations of income over their entire lifetime, and make optimal consumption
and savings decisions based on that long term expectation.
One implication of this model is that (on average) individuals will save at a level that
maximises their expected lifetime consumption streams. They will not suffer regret
6

The tax system favours owner-occupied residential property by virtue of the fact that imputed rent of
owner-occupied property is not taxed (this is likely to be much higher than the often cited non-taxation of
capital gains). The tax system also allows owners of income-earning property (landlords) to deduct their
interest expenses against other income (“negative gearing”). While this is not a direct tax subsidy – income is
taxed net of business expenses in New Zealand, it does mean that those with significant other income can
more easily participate in the housing market. It can also be argued that the tax relief from negative gearing
would be lower (and the tax imposed on saving would also be lower) if tax was applied on a real rather than
nominal basis (abstracting from any implication to the overall tax take).

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 from under-saving through their working years. Another is that individuals will likely
hold broadly diversified portfolios, whose risk characteristics match their risk
tolerances and related investment time horizons. They will not be anchored in their
investments by what is familiar, or by what has provided a good past return.
If we believe this model approximates how savings decisions are made by different
groups in society (e.g. different age or income cohorts), and across society as a
whole, then there is no obvious public policy rationale for a government sponsored
vehicle like KiwiSaver.
There is a large literature that suggests, in contrast, that individual savings and asset
allocation behaviours rarely conform to this model due to various “biases”
(compared to the rational formation of expectations) and informational gaps.
Behavioural finance and economics is based on the alternative notion that savers and
investors, or at least a significant minority of them, are subject to biases that imply
savings and investment decisions can be less than fully rational. Evidence of these
biases has typically come from cognitive psychology literature, and has then been
applied in a financial context. A review of what the literature suggests is the
implication for savings in the New Zealand context is provided in Coleman (2011).
Table 6 over the page provides some of the key findings of this literature and their
implications. Overall, the thrust of the research and evidence suggests that many
individuals may both not save enough, and diversify appropriately.
We observe internationally that governments tend to intervene in savings markets.
The biases and information gaps provide an evidence base for why public policy can
be justified that is aimed at: (i) creating a savings habit, (ii) making it easier for
individuals to save, and (iii) ensuring well-diversified financial products are available.
The key belief that follows is that a scheme such as KiwiSaver should – in time –
meaningfully lift net wealth for its members, in particular for members who would
not otherwise have set aside funds in a long-term savings vehicle, or would have
procrastinated in starting savings to their later regret.

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 Table 6 Departures from optimal savings and investment behaviour and implications
Departure

Biases shown and evidence

Impact and implications

The information required to save “optimally” is daunting.
Knowledge of taxes, relative risks and returns, and
strategies to prepare for unforeseen costs and disasters
are all specialist fields.

People tend to use “rules of thumb” and rely on what is
familiar given the informational gaps and difficulty in
forming long-term expectations.

Lack of diversification and poor investment choices.

Life expectancy is highly uncertain at both an individual
and society level. It is not known how long any particular
cohort will live with certainty given continual advances in
medical technologies.

Evidence points to a large home bias,7 over-estimation of
future returns, and under-estimation of life expectancy
and adverse shocks to incomes and wealth.8
People prefer less rather than more options when making
choices.9

Savings level inadequate for life expectancy.
Public policy intervention may be required to encourage
savings and portfolio diversification.
Take-up may be higher with a limited range of choices, as
recognised in the design of KiwiSaver.

Savings and consumption preferences are not stable – the
consumption sacrifice an individual is prepared to make
may change with age, level of income, financial education,
or family formation. In general, evidence suggests
preferences are not “time consistent”.

Procrastination.
Survey evidence suggests people experience regret from
not having saved enough earlier in life (see ASB 2012, Law
et al. 2011 and Financial Services Council 2012).

Compulsory or soft-compulsion saving schemes such as
KiwiSaver will raise the welfare of people who otherwise
haven’t figured out how to overcome time-inconsistency
issues.

Consumption “habits” are not consistent with the life cycle
model. People do not like cutting back consumption and
tend to tie consumption patterns to others – a “keeping up
with the Joneses” effect.

When a bad “shock” to incomes occur people will tend to
run-down savings to maintain their lifestyle, even if over
the longer-term this leaves them much worse off.

People will have less exposure to risky asset classes
because they are over concerned that they may lose
money they once had.

People will form mental and actual savings accounts for
funding different purposes (e.g. an annual holiday account,
an account for long-term savings, an account for large one-

Spending and saving depends on whether income is placed
into one account or another – funds are not perfectly
substitutable.10

7
8
9
10

KiwiSaver may lead to better diversification of wealth.

Stratman (1999) and (2004).
O’Connell( 2010) and Financial Services Council( 2012).
Sethi-Iyengar et al ( 2004).
Barberis and Thaler (2003).

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People will tend to not offset funds put into a long-term
savings account by running down savings elsewhere.

 Departure

Biases shown and evidence

Impact and implications

off costs, etc.).
The investment choices people make are often
inconsistent with maximising long run returns given risk
preferences.

KiwiSaver may lead to an increase in net worth because it
will be treated as a separate mental account.
Along with home bias, people have portfolios that are
concentrated in a small number of assets (e.g. rental
housing in New Zealand).

Savers take portfolio risks that both may not be
compensated for and are not justified by their risk
appetites.
KiwiSaver, by being professionally managed at armslength, may help savers form portfolios that better balance
risk with return objectives.

Source: NZIER

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 In Table 7, we draw out what the implication of the behavioural literature at the
extremes – people who are most and least likely to benefit from KiwiSaver. We
suggest KiwiSaver is most likely to benefit individuals who have low levels of financial
capability, incomes, and net worth. These individuals can potentially benefit from,
first, using KiwiSaver to establish a savings plan; second to make the leap from
renting to home owning; and third to building up a retirement nest egg. A savings
habit is established over both phases.
In contrast, individuals who already have high levels of financial capability and net
worth are less likely to increase net worth via KiwiSaver beyond which is incurred
through direct fiscal support. Such individuals are also most likely to offset wealth
accrued in KiwiSaver through running down assets (or increasing debt levels)
elsewhere. In reality, most people are somewhere in between the two extremes
outlined in Table 7. In particular, survey evidence suggests that financial capability –
especially to the level required to save optimally – is not widely held regardless of
income and wealth levels and most people under-estimate longevity. The implication
is that KiwiSaver will not necessarily just better prepare the young and those on
lower incomes for their retirement.
Table 7 Characteristics of individuals most and less likely to benefit
from KiwiSaver
Most likely are individuals who

Least likely are individuals who

Have low levels of financial capability : lack of
understanding of compounding returns,
investment and financial planning options,
awareness of longevity risks, awareness of
income protection risk products, awareness of
levels of capital required to support retirement,
etc.

Have high levels of financial capability and seek
expert financial (tax, legal, estate) planning
assistance.

Are liquidity constrained, i.e. they are not able to
use financial assets to support consumption when
this is needed.

Are not liquidity constrained.

Have relatively low levels of net worth and are
unlikely to yet own a home.

Already have built up significant net worth in
housing and other assets.

Have relatively low incomes.

Are on relatively high incomes.

Find it hard to form and carry-out a savings plan.

Are good financial planners and implementers.

Have a low tolerance for risk (even when it is
matched to reward).

See risk as a way of achieving reward.

Find it hard to defer gratification (“money burns a
hole in my pocket”).

Are “future focussed” and see deferring
immediate gratification as a way of achieving
even higher returns in the future (“no pain, no
gain”).

Source: NZIER

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 4. Conclusions
Based on our reviews of savings and investment facts and beliefs we conclude that
KiwiSaver is likely to lead to an increase in net worth for those people to whom the it
is targeted, that is, members who do not already enjoy a high level of net worth and
financial capability. Middle and lower income KiwiSaver participants are the group
most likely to benefit and enjoy a standard of living in retirement that is both
superior to what they would be able to obtain without KiwiSaver, and closer to what
they are able to achieve pre-retirement. For people outside this group, i.e. very low
income people such as beneficiaries and people with high incomes and high net
worth, KiwiSaver is less likely to increase net savings.
KiwiSaver should also lead to more diversified portfolios in New Zealand, reducing
downside concentration risks.
While our conclusions are essentially forward-looking, they are grounded by the
current structure of wealth in New Zealand, long-term investment return patterns,
and an established evidence base on savings behaviours.

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 References
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http://www.scoop.co.nz/stories/BU1206/S00354/kiwisaver-contributions-short-ofretirement-savings-goals.htm
Barberis, N, and R Thaler (2003) A Survey of Behavioral Finance. In Handbook of the
Economics of Finance. Edited by G. Constantinides, M. Harris, and R. Stulz.
Amsterdam, Holland: Elsevier/North-Holland.
Coleman, A (2011) Behavioural Economics: Implications for the Savings Literature,
MOTU Note #7, June 2011.
Coleman, A (2014) To Save or Save Not: Intergenerational Neutrality and the
Expansion of New Zealand Superannuation, New Zealand Treasury Working Paper
14/22
http://www.treasury.govt.nz/publications/research-policy/wp/2014/1402/twp14-02.pdf
Drew, A (2010) Asset Returns Modelling for the 2010 Reference Portfolio Review
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Financial Services Council (2012) Pensions for the Twenty First Century
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lication%2017%20June%202012%20copy.pdf
Guest, R, K MacDonald, M Drew and R Bianchi (2014) KiwiSaver Conclusions Report:
An independent review of the NZ Treasury Draft Paper KiwiSaver and the
Accumulation of Net Wealth https://www.ird.govt.nz/resources/1/5/156ee2c0-680e44e9-9ec0-22db836111c5/ks-conclusions-report.pdf
Holzmann, R, R Hinz and M Dorfman (2008) Pension Systems and Reform Conceptual
Framework, Social Protection Discussion Paper No. 0824, World Bank.
IRD (2015) KiwiSaver evaluation: Final Summary Report. A joint agency evaluation
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Kahneman, D and A Tversky. (1979) Prospect Theory: An Analysis of Decisions under
Risk. Econometrica, 47(2) (March):263-291.
Law, D and G Scobie (2014) KiwiSaver and the accumulation of net worth, New
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Law, D, L Meehan and G Scobie (2011) KiwiSaver: An evaluation of the impact on
retirement
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Treasury
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from SoFIE, New Zealand Economic Papers, 43(1): 3-19.
MacDonald, K, L Bianchi and M Drew (2014) Equity risk versus retirement adequacy:
Asset allocation solutions for KiwiSaver. Discussion Paper Series in Finance, Griffith
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 University.
https://www120.secure.griffith.edu.au/research/file/3a2d99df-8c084d91-8f8d-b2a5e5c3964d/1/2014-02-equity-risk-versus-retirement-adequacy-assetallocation-solutions-for-kiwisaver.pdf
Madrian, B and D Shea (2001) The power of suggestion: Inertia in 401(k) participation
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of Population Ageing, September 2011, 4(3): 185-201.
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R. Hinz, R. Holzmann, D Tuesta and N. Takayama. The World Bank, Washington D.C.
Sethi-Iyengar, S, W Jiang, and G Huberman (2004) How Much Choice Is Too Much?
Determinants of Individual Contributions in 401(k) Retirement Plans. In Pension
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 Appendix A
As discussed in Section 2, a study by Law and Scobie (2014) is one of the key pieces of
evidence used to support the conclusion that KiwiSaver has not increased net worth
for members.
To elaborate further on the short time frame issue and the impact of the GFC, Guest
et al. (2014) suggest that due to household deleveraging during the GFC individuals in
the SoFIE survey may have decided to “save” in a different way (e.g. retire debt or
support their business) rather than join KiwiSaver. Households who made this choice
would have generally fared better than households who participated in KiwiSaver
given the large decline in listed asset prices.
In addition, given the self-reported nature of the SoFIE dataset, it is possible that
asset values reported were “stale” for private markets asset classes that nonKiwiSaver members (e.g. business owners) may have had a relatively higher exposure
to. In the GFC period, commercial and residential property, farm and general
business sales transactions dried up, limiting the observed fall in their prices. The
“true” marked-to-market price of these assets, however, would have been similar
(possibly even lower given the blow out in illiquidity premiums) to the prices
observed for listed counter-parts. This problem may have led to an over-reporting of
the value of assets for non-KiwiSaver members (and wealth overall).
In general, self-reported data can produce unreliable results. Experience with the
New Zealand SoFIE survey was that some participants reported large changes in their
financial position between surveys that were not consistent with other data sources.
This is partly explained by the way SoFIE was conducted, in that participants were not
shown their previous survey returns and ask to update them. Rather, each time they
were surveyed, they were asked to report their income and savings from scratch.
Based on discussion with officials our understanding is that SoFIE was not extended
beyond the 2010 interview “wave” because there was concern it was not delivering
reliable (longitudinal) data on income and wealth changes for households sampled.
The errors in measurement of the wealth data also affect interpretation of Law and
Scobie’s empirical results. Law and Scobie recognise that the errors are large – they
discuss in their paper “transition matrices” between wealth levels which puzzlingly
show that a large number of people are in the lowest quintile of wealth one period,
but middle wealth the next; and a large number of people in the highest wealth
quintile one period have low wealth subsequently – but the effects of potential
measurement error on their estimates is not corrected for.
These measurement issues potentially impact on empirical results and coefficients in
non-intuitive ways. For example, it is found that differences in the changes in wealth
for KiwiSaver members and non-members are highest for highly educated men, and
are also much greater for women than for men. It is not clear why this should be the
case. In addition, the fixed effect regression results have a very large statically
important negative coefficient on the previous wealth variable, implying that
previous wealth is a negative predictor of changes in wealth. Again this is a nonintuitive results – wealth accumulation in one period should not lead to a run-down
in wealth the next. Overall, this raises concern over whether there may be other
specification problems that affect the confidence we can have in the inference we
can take from the modelling in general.
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