Report Pages 2-7

Introduction and the 2019 Review’s Terms of Reference

Every three years, legislation requires the Retirement Commissioner to undertake a review of New Zealand’s retirement income policies. The last review was undertaken in 2016 and the next review is scheduled for release in late 2019.

The Retirement Commissioner’s disappointing 2016 Review prompted us, in 2017, to publish The Missing 2016 Review. The 2016 findings, cloaked in a jokey, cartoon-like presentation on the web site of the Commission for Financial Capability (CFFC - accessible here), amounted to a series of 34 recommendations and observations with little to no supporting evidence for most of them[1].

The terms of reference for the 2019 review are now out and the Retirement Commissioner is undertaking the research and work for that review. We would like to think that the 2019 Review will address the questions raised in The Missing 2016 Review. We are happy for them to be dismissed, if the evidence suggests that we were wrong, but let’s get the evidence. To help formulate the 2019 Review, we have updated our original report with the latest evidence available. We have called it Informing the 2019 Review.

The last government announced two changes to New Zealand Superannuation – an increase in the state pension age from 65 to 67 and an increase in the qualifying number of years of residence from 10 to 20 – both changes were to become effective in about 20 years.

Those decisions were reversed by the current government which has then gone on to make its own evidence-free decisions.

The Ministry of Social Development in a 2019 Budget-related publication announced three changes to New Zealand Superannuation. Two of those (ACC recipients and ‘non-qualifying partners’) were based on evidence-free recommendations from the Retirement Commissioner. The third (section 70 spousal deductions) was research-led but deals with only one of the many difficulties associated with section 70. We have more to say on these in sections 6 (Framing the debate on New Zealand Superannuation), 7 (Wind-up the New Zealand Superannuation Fund) and 8 (Overseas pensions and section 70).

Neither government’s decisions on the state pension age and residence period were founded on a proper, evidence-led policy-making process. Both governments chose just two of 13 possible changes that could have been made to the state pension with little to no justification for ignoring different possible reforms or even modelling the impact of the two reforms the last government chose. We explain in section 6 what should have happened – what best practice should look like.

Terms of reference for the 2019 retirement income policy review

The government has announced the terms of reference for the 2019 Review of Retirement Income Policies, as required under the New Zealand Superannuation and Retirement Income Act 2001[2]. As explained in section 21 (The Review process), we think the Retirement Commissioner (rather than the government) should set the terms of reference of each review with the government, perhaps, identifying some areas of particular interest.

The 2019 terms of reference (accessible here) follow in this section with our initial comments. We will deal with each topic in more detail in the appropriate section below. Suffice to say, at this stage, that the 2019 Review looks to be following the pattern established in the previous six triennial reviews. We are not encouraged by that.

Here is how the 2019 Review topics are introduced:

“Aspects of retirement income policies the review must address and the topics to be discussed in the Retirement Commissioner's 2019 report:”

Our initial comments: This introduction (and some of the topics listed below) follow the same formula as the Terms of Reference for the 2016 Review.[3] That raises an obvious point: The 2019 Review should address specifically the outcome of work done in previous reviews so that, amongst other things, we can assess that value of the triennial review process. We have more to say on this in Section 21 (The review process).

What follows are the eight topic areas described in the 2019 Terms of Reference and our initial comments.

  1. The request:

    “An assessment of the effectiveness of current retirement policies for financially vulnerable and low-income groups, and recommendations for any policies that could improve their retirementoutcomes.”

    Our initial comments: The emphasison low-income groups is new (compared with 2016). New Zealand’s retirement policy environment currently favours the “financially vulnerable” with a flat-rate, relatively generous, universal Tier 1 pension (New Zealand Superannuation – ‘NZS’). Section 6 below recommends a full, evidence-led review of NZS.

    For the reasons discussed in Section 9 (On tax subsidies for saving) and Section 14 (KiwiSaver in the new environment), we think the government should avoid direct, taxpayer-funded incentives to ‘improve’ levels of private provision, even for low-income groups.

  2. The request:
    “An update and commentary on the developments and emerging trends in retirement income policy since the 2016 review, both within New Zealand and internationally.”

    Our initial comments: The 2019 Review will be constrained by inadequate data on what’s happening in New Zealand. One of the reasons for our report (and its 2017 predecessor) was to gather all of the available, relevant evidence, on both local and overseas’ developments, into one accessible place and to suggest what other evidence was needed so an informed discussion could take place.

  3. The request:
    “An assessment of the impact that the following will have on government retirement income policies, including KiwiSaver and New Zealand superannuation:

    a. The changing nature of work, including the increasing number of people who are self-employed and/or working in temporary and flexiblejobs;”
    Our initial comments: Section 16 (When do New Zealanders retire?) summarises what we already know on this. As we say, however, we need more, better data on this topic before New Zealand can answer the questions we identify in Section 16.

    b. The request:
    “Declining rates of home ownership; and”
    Our initial comments: As we explain in Section 12 (Housing and home ownership) we do not know that home-ownership rates are falling. Census data on this important topic are deficient and, based on the questions used in the 2018 Census, it looks as though those information gaps will widen, when (if) we finally see the 2018 numbers.

    Section 12 suggests the questions that New Zealand needs answering on issues associated with home ownership before we need to wonder whether whatever is happening has public policy implications.

    c. The request:
    “Changes in labour market participation of those 65 years and older.”
    Our initial comments:This is part of the same topic that is covered in 3a above.

  4. The request:
    “Information about, and relevant to, the public’s perception and understanding of KiwiSaver fees,including:

    a. The level and types of fees charged by KiwiSaver providers; and”
    Our initial comments: “We expect that KiwiSaver members will know very little about the different ways that fees for KiwiSaver schemes are calculated and applied, even to their own KiwiSaver accounts. We discuss aspects of the new disclosure requirements in Section 18 (Disclosure – both initial and ongoing). We think that 2019 will be too soon to judge the impact of the recent disclosure changes to the public’s “perception and understanding” of fees.

    b. The request:
    “The impact that fees may have on KiwiSaver balances.”
    Our initial comments: It is difficult to see what the 2019 Review might reveal as a result of this particular request. Everyone knows that fees have a significant impact over the long term. Whether the “public’s perception and understanding” of that obvious detail is complete will not tell us any more than the results of the “information” obtained from answering point 4a.

  5. The request:
    “Information about the public’s perception and understanding of ethical investments in KiwiSaver,including:

    a. The kinds of investments that New Zealanders may want to see excluded by KiwiSaver providers; and

    b. The range of KiwiSaver funds with an ethical investment mandate.”
    Our comments: One of themes in this and our 2017 predecessor report is that asking people what they think about retirement saving issues (the ‘when?’, ‘how?’, ‘how much?’ type of question) is much less interesting than finding out what they actually do. In this particular case, (so-called ‘ethical investments’) public ‘perception’ is further complicated by differences in values: what amounts to one saver’s ‘unethical investment’ will almost certainly not be an issue for another saver. Given that KiwiSaver funds are always ‘collective investment vehicles’, arriving at some form of collective agreement on what is ‘ethical’ and what is ‘unethical’ is virtually impossible.

    Much has been written on this topic – here[4], for example, is a proponent of ‘ethical investments’ with a suggested requirement that KiwiSaver’s ‘default funds’ should be forced to invest in ‘socially responsible investments’ and here[5] is an answer (or series of answers). Even agreeing on a definition of ‘ethical investments’ or alternative descriptions like ‘socially responsible investing’, ‘sustainable’, ‘socially conscious’ or ‘ESG’ (environmental, social and governance’) seems too difficult with too many boundary issues.

    We think the 2019 Review will waste precious time and resources on this section of its Terms of Reference. Finding out the “public’s perception and understanding” of this issue will result in pointless virtue-signalling. We think it would be more productive for the 2019 Review to concentrate on the disclosure questions we identify in Section 18 (Disclosure - both initial and ongoing).

  6. The request:
    “An assessment of the impact of current retirement income policies on current and future generations, with due consideration given to the fiscal sustainability of current New Zealand superannuation settings.”
    Our initial comments: We think this is a vital topic that should be central to any discussion of New Zealand’s retirement income framework. We devote three sections of this report to associated issues: see Section 3 (On claims against the economy), Section 4 (How much will New Zealand Superannuation really cost?) and Section 5 (Is New Zealand Superannuation ‘sustainable’?).

    We conclude that New Zealand Superannuation is clearly ‘sustainable’ now and into the long-term but that it should not continue unchanged. For example, we recommend that the New Zealand Superannuation Fund be dismantled – see Section 7 (The place of the New Zealand Superannuation Fund). Also, we recommend the reform of section 70 of the Social Security Act 1964 – see Section 8 (Overseas’ pensions and section 70 deductions). Much more needs to be done than those two particular things.

  7. The request:
    “Information about the public’s perception of the purpose and principles ofNew Zealand superannuation.”
    Our initial comments: Again, as with item 5 above, the “public’s perception” is a slippery concept about which we suspect the inevitable opinion survey will reveal little useful information. Finding an opinion poll audience that can even explain the details of the current NZS pension will be an initial challenge.

    Having said that, we agree that consensus about the size and shape of New Zealand Superannuation (political, institutional and public) is an essential component of any re-shaping of the state pension. However, that should be an outcome of the research-led debate that we suggest in Section 6 (Framing a debate on every aspect of the NZS benefit design), rather than a specific objective.

    As we suggest in Section 15 (Households’ financial position – a proper longitudinal survey needed), New Zealand needs to understand how the “purpose and principles of New Zealand superannuation” actually work for New Zealanders. What New Zealanders think of that is another, much less interesting topic.

  8. The request:
    “An assessment of decumulation of retirement savings and other assets, including how the Government can ensure New Zealanders make the most of their money in the decumulationphase.”
    Our initial comments:We pause at expressions like “the Government can ensure”. No matter how well-intentioned this request might be, we think it’s an impossible objective. The request begs the question because it assumes the government has a role to “ensure New Zealanders make the most of their money in the decumulation phase”. We think that position needs to be established first before venturing into ways that governments might “ensure” a ‘better’ outcome than presently prevails.

    Without undertaking the research that this request implies, we can suppose that the financial service providers already provide facilities that retirees can use to allow the “decumulation of retirement savings and other assets” and that there is no particular case for direct government-led intervention. We suggest that the 2019 Review’s first task should be to establish that initial case for intervention.

What’s missing from the 2019 Terms of Reference

As we have already said, we were disappointed to see that the 2019 Terms of Reference is in the same timid mould as its 2016 equivalent. Some of the wording from the eight topics would allow the Retirement Commissioner to broaden the scope of the 2019 Review but the Retirement Commissioner will have neither the time nor resources to do the job that needs to be done.

What follows in the next 22 sections of our report lists all the topics and questions that New Zealand needs answers to. Those questions must eventually be answered but that seems unlikely in 2019.

If nothing else, it would be good to see a recommendation that the Commission for Financial Capability is resourced so that between 2020 and 2022 when the next review is due, it can put in place the processes to gather the data required.

Overall observation on state-led initiatives

In this and our earlier report, we conclude that, with respect to retirement income policies:
- There is a range of things that only the government can do – it should do those things.
- There is another range of things that, based on the evidence, the government seems unable to do - it should stop doing those or not try to do them.
- Finally, there are things that the government is doing but, based on the evidence, seem not to be effective – it should also stop doing those.

This is evidence-based policy-making - if it works, based on the evidence, then do it; if it doesn’t work, stop doing it. If we do not know whether it works, gather the evidence before deciding what to do. For New Zealand, this approach to policy–making on retirement incomes would be a change but it’s time New Zealand tried it. Before that process can even start, there is a lot of information to gather.

The Retirement Commissioner’s 2016 Review was a wasted opportunity; an evidence-free zone[6]. Asking people what they think about retirement and saving issues is particularly unhelpful; finding out what they do is much more important. That requires the gathering of evidence. Unless evidence-gathering is at the heart of the 2019 Review, we are pessimistic about its contribution to needed debates on all aspects of New Zealand’s retirement and retirement income frameworks.


Michael Littlewood
E MichaelR.Littlewood@gmail.com
P +64 9 5200 367
M +64 21 677 160

Michael Chamberlain
E Michael@mcanz.co.nz
P +64 9 930 7772
M +64 21 890 999

A footnote about this report: Whoever runs the research-led, national discussion that we think is a necessary next step, should address the 133 questions that we identify in this report. As new evidence emerges, or additional issues arise, those 133 questions will need updating. This report will be a living document and will be updated by that new information.


[1]A written version of the report (to “satisfy the requirements of the New Zealand Superannuation and Retirement Income Act (amended 2005))” is here.

[2]Section 84 of the Act, accessible here.

[3]The Terms of Reference for the 2016 Review of Retirement Income Policies are accessible here.

[4]Making responsible investment the new standard in KiwiSaver, Matheson Russell, Retirement Policy and Research Centre, 2015.

[5]Default ‘socially responsible investment’ for KiwiSaver? An alternative view, Michael Littlewood, Retirement Policy and Research Centre, 2015.
M.

[6]The last government responded to the 2016 Review. In a letter to the Retirement Commissioner of 7 June 2017 (accessible here), it rejected many of the Review’s recommendations in an evidence-free kind of a way. We will comment on those at the appropriate points later in this report.