Labour shows up National on retirement savings issue
Come on National, you can do better. In less than a year, the first New Zealanders will gain access to their KiwiSaver money to spend in retirement. They need help with how to handle that money.
In most cases, we’re not talking about vast sums. But as Savings Working Group member Paul Mersi said at a recent one-day forum, some people will feel like Lotto winners. “They’re going to have more money than they’ve ever seen before.” And retirement totals will keep getting bigger over the next few years.
The Savings Working Group, like the Capital Market Development Taskforce before it, urged the government to look into this issue. I was a member of both groups, and one of the “urgers”. Specifically, we asked for support for New Zealand’s failing annuities market.
What’s an annuity? Well, you give an insurance company a lump sum, and in exchange you get regular payments, usually monthly, for the rest of your life. It’s like insurance against outliving your savings — the big worry of many retirees.
Annuities come with bells and whistles. For example, you can get steadily increasing payments to take inflation into account, or a couple can get payments until the second person dies.
A decade or so ago, about a dozen New Zealand companies offered annuities. Now only Fidelity Life does. The others have dropped out for various reasons, including tax problems and a shortage of suitable investments for annuity money.
These are issues the government could address — and that’s hardly a new idea. Almost exactly three years ago, I quoted then finance minister Michael Cullen in this column. “The annuities market in New Zealand is pretty underdeveloped by international standards. But we’ve got time to think the thing through. Nobody is retiring on KiwiSaver for the next four years.”
However, time is now running out, and Labour seems to be aware of that. At the recent forum — which was run by Workplace Savings NZ — finance spokesperson David Cunliffe said there’s a gap in the annuities market. “We would like to work with the industry on how to fill the gap.”
On the other hand, associate minister of commerce Craig Foss made no mention of annuities in his forum speech. And that seems consistent with the government’s response to both the working group and taskforce’s recommendations about annuities. It amounted to: “Some time, when we get round to it.”
The lack of enthusiasm may stem partly from the fact that annuities are far from perfect products.
Said Tower Investments boss Sam Stubbs at the forum, “The problem with annuities is the only ones who take them out are people who expect to live for a long time,” so the insurance company loses out.
He’s right. Annuities don’t appeal to people in ill health. But that can be helped to some extent by guarantees that payments would continue for, say, ten years. If the person died sooner, payments would go to their estate.
Another solution, as Stubbs observed, is to make annuities compulsory — perhaps for a portion of KiwiSaver savings. But I don’t like that idea, mainly because people have gone into KiwiSaver expecting to be free to do whatever they want with the money in retirement.
I would far rather see people choosing annuities because the government — of whatever colour — has changed the environment to make them attractive.
What’s in it for the government apart from the obvious — pleasing voters? The more people refrain from blowing their retirement savings on spending sprees or bad investments, and instead spread the money over their lifetimes, the less pressure there will be on NZ Super.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.