KiwiSaver: what's it all about?

By Ian Pollock
BBC News personal finance reporter

KiwiSaver: nothing to do with preserving wildlife or fruit

Expect to hear more about Kiwis in the next few weeks.

But it won't be anything to do with long-beaked birds or exotic fruit.

It looks as if the government will soon be advised by Lord Turner to copy a new type of pension scheme that will be introduced in New Zealand on 1 April 2007.

It's going to be called KiwiSaver.

Simple idea

The plan was announced by the New Zealand government in its annual budget last May.

This is how it will work.

Whenever someone starts a job, they will - after eight weeks - be automatically enrolled into this additional version of the state pension scheme.

It won't quite be compulsory.

There will be a three-week window of opportunity to opt out.

After that, you will be in.

Workers will then be able to take their own personal KiwiSaver account with them from job to job.

Contributions, at either 4% or 8% of salary, will be deducted from salaries by the Inland Revenue, using the country's existing PAYE tax system.

The Revenue will keep the money for the first eight weeks during which time the saver can decide where the money should be invested.

People will be given a range of registered private investment schemes from which to chose.

There will though be no state guarantee in case the investment returns are poor.

Some people will not be automatically enrolled - those under 18 years old and existing employees.

However existing workers and the self-employed will be able to opt in.

Locked in?

The aim is to save for retirement, so funds will be locked in until the age of 65.

There will be some exceptions:

• financial hardship
• permanent emigration
• and a facility to withdraw funds after at least three years of contributions, to put down as a deposit for a first home

Introducing the idea, the finance minister, Michael Cullen, said:

"Our estimates are that KiwiSaver will enable around 3,000 households a year to realise the dream of owning their own home."

Savers will though be able to stop making contributions for up to five years at a time.

In theory they can ask for a series of contribution holidays, thus effectively opting out of the scheme.

Current pension schemes

Existing employer schemes will have the option of merging with the KiwiSaver scheme.

And members of occupational schemes will be able to choose to join KiwiSaver instead of, or in addition to, their current pension scheme.

However automatic enrolment will NOT apply to workers where their employer already provides a pension fund that is transferable to another scheme, open to all employees and has a total contribution rate of at least 4%.

Other contributions

The government will chip in something too.

There will be an initial contribution of NZ $1,000 (£400) for each person, which will be locked in for at least five years.

And after three years of saving, savers will be offered a deposit from the government to buy their first home, worth at least NZ $1,000 per year of saving, up to a maximum of NZ$5,000 for five years.

Employers will be encouraged to contribute to KiwiSaver accounts but will not be compelled to do so.

So the scheme has already been described as a home deposit saving policy with a retirement option attached.

Wrinkle

One wrinkle in this proposed scheme is that someone could join, get the government's "kick-start" payment of NZ$1,000 (though it will be locked in for five years) and then opt out through a perpetual contribution holiday.

In its analysis of the scheme, the Pensions Policy Institute (PPI) makes an interesting observation.

The KiwiSaver literature doesn't mention the word "pension" even once.

The NZ government's big aim is to encourage savings.

Even though the idea is that the savings should be taken at retirement, they will not have to be drawn down in the form of an annual pension, or annuity.

They could be taken simply as a lump sum, spent all in one go.

Is the scheme relevant to the UK?

The PPI points out that the NZ pension scene is very different to that of the UK.

There are few big companies, there are no tax advantages for occupational pension schemes, fewer than 15% of workers are in company schemes, and personal pension schemes have grown strongly.

The PPI concludes: "KiwiSaver is not trying to solve the range and depth of retirement income issues that concern UK policymakers today.

"Any features we copy would be only part of the solution."