Lifting financial capability critical to retirement readiness
By Martin Lewington, Mercer Managing Director
New Zealand is not immune from the global macro trends that will reduce the chances of many of us enjoying a comfortable retirement.
The provision of financial security in retirement is critical for both individuals and societies and New Zealand, like most countries, is now grappling with the social, economic and financial effects of an ageing population driven globally by increased life expectancies and declining birth rates.
Increased life expectancy and more time in retirement increases longevity risk - the risk of outliving our retirement savings. We’re living longer but retiring earlier than we expect, which means more years to fund in retirement and less working years to save for it. This disconnect could leave a gaping hole in our hip pockets in our golden years.
Compounding the threat of longevity risk and the challenge to improve our chances of a comfortable, and sustainable retirement, is the low level of financial capability in New Zealand, particularly among young workers for whom retirement simply isn’t top of mind. While KiwiSaver has become part of the national consciousness since its inception in 2007, knowledge remains low and New Zealanders are the poorer for it.
Last year’s Mercer KiwiSaver Sentiment Index study showed that, just 20% of working New Zealanders rated their knowledge about saving for retirement highly, while more than half wanted to increase their knowledge. These figures, although slightly improved over time, have been worryingly low since the biennial study was first held in 2007.
This knowledge gap plays out in a number of ways that seriously reduce the ability of workers to grow their nest eggs. For example, according to the index only 31% of New Zealanders understand KiwiSaver’s member tax credit benefit, and more than half incorrectly believe employers will automatically contribute to KiwiSaver when they change jobs. These are missed opportunities.
And when you consider that 53% of people were not confident their savings would afford them the retirement lifestyle they desire, it is clear that expectations are wildly out of synch with reality. It’s not that people are dissatisfied with KiwiSaver; on the contrary, 94% believe KiwiSaver will be beneficial in helping them personally fund their retirement.
We can’t afford to underestimate the scale of this issue. Figures from the New Zealand Society of Actuaries show that the number of New Zealanders aged over 65 will increase from current levels of around 650,000 to 1.2 million in 20 years’ time, representing 22.3% of the population. In other words, when our children are say 35, there will be more than 1 in 5 who are 65 or older.
This has widespread implications for New Zealand, most obviously to the economy, particularly the ability of the government to fund savings, health and elderly care.
New Zealand Superannuation is a vital safety net for our nation’s pensioners but if we are to truly meet our expectations of quality of life in retirement, the challenge lies squarely with KiwiSaver.
Even though New Zealand’s private pension system is not as mature as those in countries such as Australia and Denmark, which have larger balances and a greater volume and availability of post-retirement income products, KiwiSaver has the fundamental characteristics required to tackle longevity risk.
While having the core elements of a sound private pension system is well and good, the challenge lies in providing the incentives, tools and knowledge to KiwiSaver members to help achieve better retirement outcomes.
The New Zealand Government has long recognised the importance of financial capability and one of the steps it has taken is to require default KiwiSaver providers to meet strengthened regulatory requirements to enhance communication with members by December 2016.
Mercer welcomes this initiative - this week becoming the first KiwiSaver provider to make the transition to the strengthened regime – and believes the industry stands ready to deliver on the government’s intention.
As our KiwiSaver index findings show, there’s some way to go until we can begin to see a meaningful lift in financial capability among KiwiSaver members but there is enormous potential to start shifting the dial now.
For instance, the government’s requirement to offer investor education to default members who are less likely to consider savings options beyond the default conservative option, which is expected to result in lower returns particularly for younger members. Making members aware of all investment options to suit the different stages of their life should lead to improved results.
There are also simpler ways of improving financial capability - and retirement savings – such as educational campaigns to remind members of the contributions needed maximize the tax credit part of their savings, and other such quick wins.
Education needs to be an ongoing concern. As the regulatory and industry landscape evolves, regular information is critical in educating KiwiSaver members with a ‘set and forget’ mentality.
Inoculating against longevity risk requires more than increasing financial capability – saving incentives, flexible retirement ages, increasing KiwiSaver coverage and contributions all play a part – but it is essential that we act now.
See the article at NZ Herald