What can KiwiSaver teach the UK?

Automatic enrolment into pensions – due to kick off in the UK from October this year – is one huge social experiment. The sad truth is that despite spending the last eight years planning it, no-one really knows what will happen. Will employers know what to do? How many will simply ignore it? Will people stay in or opt out? How much will they save? And will it all be worth it in the long run - or will many walk away in 30 years’ time with a pittance and still have to rely on the State for the vast majority of their retirement income?

Some of these questions can be answered by looking at the economic environment. The unemployment rate, recent pay rises (if any), interest rates, the housing market. And some can be answered by looking at how automatic enrolment is being portrayed. What your employer says, what the media says, what the government says, and most important, what your mate Bill says down the pub on a Saturday night.

However, we can get an insight by looking at what has happened in other countries – and the Pensions Policy Institute (PPI) has produced an impressive paper that examines the lessons we can learn from New Zealand. NZ is one of only a few countries so far to dabble with automatic enrolment; KiwiSaver was launched in 2007.

It’s different from the UK’s version. Lower contribution rates, only one KiwiSaver per person (meaning you can carry it around with you), fixed tax relief that’s more beneficial for anyone earning below about £32,000 and a £500 one-off incentive when you take it out, and a lot more flexibility (you can get the money out in dire circumstances or first-time buyers can use it to fund their house purchase). This means it will always be difficult to do a direct comparison. But the paper draws out two important lessons on opt-out rates and contribution rates.

The opt-out rates for KiwiSaver started at 34% but dropped to 28% last year. Will the UK’s be higher or lower? On the one hand you could argue it will be lower. KiwiSaver only auto-enrols people taking on a new job and 18-year-olds. Everyone else has had to opt in. If we assume new jobholders are generally younger, then we might also assume fewer will stick with saving. Auto-enrolling everyone (as the UK will do) may gather up the 30-somethings and 40-somethings who have been in their job for several years. These people may be more likely to want a pension. Interestingly, 63% of the KiwiSaver total membership opted in – they actively chose to save – so current jobholders didn’t want to lose out.

But on the other hand, if a current jobholder is automatically enrolled they will see an immediate pay cut. And the UK version just isn’t as appealing as KiwiSaver. Less free money from the Government as an incentive, and your money is tied up for the next 40 years. So maybe the opt-out rate will be higher.

The other interesting find is the low contribution rates. Over 90% of employers are only contributing 2% (but there again they don’t receive tax relief on the contributions). If UK employers react in the same way, and just go for the bare minimum, then levelling down will be a certainty.

Individuals also tend to start contributing at the minimum level – which started at 4% but fell to 2% for new joiners after April 2009 – and stay there. Even out of those who started at 4%, only 33% have reduced to 2%, the rest have mainly stuck at 4%.

So, will all this talk of ‘get people in and then increase contributions beyond the 8% minimum’ simply fall on deaf ears? It appears so. Once they’ve made the decision to save, and at the lowest rate, it doesn’t look like there is much chance of budging them. And that makes the current discussions about ‘auto-escalation’ or ‘Save More Tomorrow’ or whatever you want to call it, even more important. We have to get people to sign up on Day One to the idea that they will (automatically) up the contribution at some later date, because otherwise they will be stuck at 8% of band earnings for ever more.

And that means the social experiment may go horribly wrong. And the chance that people will ‘walk away in 30 years’ time with a pittance’ becomes much more likely.