Although the increase in hardship withdrawals is significant, only a small proportion of members access their funds early. About 1.7% of KiwiSaver members made hardship withdrawals in the year to April. The total amount withdrawn represents a fraction of overall KiwiSaver assets.
The impact on the overall funds being saved remains limited. Hardship withdrawals are not yet large enough to threaten KiwiSaver’s wider role as a long-term savings vehicle. However, for the individuals making those early withdrawals, the consequences can be substantial.
Hardship withdrawal is a feature of KiwiSaver. The voluntary retirement savings scheme was designed so that people can access funds when they are in dire financial circumstances. Scheme members can also withdraw savings for a first-home purchase.
Dr Michelle Reyers, policy lead at the Office of the Retirement Commissioner, says the bigger question is not whether KiwiSaver is working as intended, it is, but what rising hardship withdrawals reveal about wider financial pressures across New Zealand society.
There is a clear tension between retirement savings and immediate need. Reyers says of the withdrawals: “It’s money that’s not there to compound over time. That will clearly have an impact.
Dr Michelle Reyers, policy lead at the Office of the Retirement Commissioner.
“The way the legislation is written, the way that it is enacted, is that hardship withdrawals have to be a last resort for these individuals. They can’t just access their money for any reason, there has to be an actual financial need attached.”
Some people are clearly sacrificing future retirement wealth, but there’s a recognition that financial survival today can outweigh financial security decades from now.
Reyers says officials don’t know all the specific characteristics of the people accessing their savings or the reasons why they make withdrawals.
That’s in part because when people make hardship withdrawals, the requests go through their fund provider’s statutory supervisors. “They hold more of the richness of the data. The Public Trust is doing some work to understand more about what hardship withdrawals look like.
“The other angle is that some people who apply for a hardship withdrawal don’t necessarily get approval. There are checks and balances in the system.”
“Inland Revenue data tells us that about 70% of those who make hardship withdrawals are on incomes that are lower than the median,” says Reyers. “We know that it’s predominantly people in the 25 to 34 age bracket; about half of all hardship withdrawals come from that group.
While people in that group can lose out on decades of compound interest by making withdrawals, they at least have time to rebuild their savings before retirement.
Hardship withdrawals are one option for KiwiSaver members facing financial difficulties, but Reyers says there is another option. Because KiwiSaver is essentially a workplace-based scheme, people in paid employment who face hardship can go on a savings suspension, where they temporarily stop making contributions.
“When we look at the numbers for suspensions over the years, we see that these have reduced over time. At the moment, there are about 80,000 people who are on a savings suspension. That’s less than 5% of the salary and wage earners who are KiwiSaver members.”
Reyers says the figures suggest many hardship withdrawals may come from people outside stable salary and wage employment, including the self-employed and those in more irregular forms of work, including the gig economy. “If you’re not in stable employment, then having money to put food on the table now is more important than something that sits in an account for you at age 65.”
The FMA’s Horner says what the FMA is most concerned about is that those who are entitled to an early withdrawal can get it and can get it quickly.
If you’re not in stable employment, then having money to put food on the table now is more important than something that sits in an account for you at age 65.
Dr Michelle Reyers
“You’ve got someone in financial distress, so chances are they’re in distress generally, because they’re in a difficult part of their life. So, you don’t want to introduce friction. But where it’s inappropriate – and particularly where there are frauds and scams involved – you want to create as much friction as possible to the point it comes to a grinding halt. That’s the balance you need to strike.”
One trend that has emerged on social media is in videos that coach people on how to withdraw KiwiSaver funds in circumstances that don’t necessarily meet either the first home purchase or the hardship criteria.
“I am aware of advisory firms out there supporting people in times of hardship who would be able to provide advice on whether or not they can access their KiwiSaver, and my message to them is that’s perfectly legitimate, but where it’s illegitimate, that’s where we would be concerned.”
The FMA is investigating fraudulent withdrawal applications. Horner says he can’t talk about these investigations because they are active – “whether we’ve seen the tip of the iceberg or not is something we continue to be concerned about.
“It’s actually informing our regulatory priorities for the 12 months starting June. We’ve got a particular focus on fraud and scams in that first-home withdrawal space, rather than the hardship withdrawal space.”
Hardship withdrawals raise another question. If members are taking money from KiwiSaver during periods of economic uncertainty, they need confidence that the value attached to their investment accurately reflects the underlying assets in the fund.
The issue becomes more important as KiwiSaver funds increase their exposure to unlisted assets such as infrastructure, private equity and commercial property where market prices are not always immediately visible.
Horner says: “When you buy into a fund, you want to be confident you’re buying in at the right unit price. If providers are not valuing their assets accurately, then the chances are somebody’s buying in too cheap or too expensive, and the seller is on the opposite side. That’s inequitable treatment between investors.
He says private assets can be difficult.
“The beauty of being listed on a public market is you’ve got that pricing just inherently built in.”
When private assets are a small proportion of an overall fund, the impact of any incorrect valuation is likely to be small for an individual investor. However, across the wider fund, misvalued commercial property or tech startup investments add up.
Unlike listed securities, private assets don’t have a market price. Some degree of valuation imprecision is inherent. Horner says the FMA’s interest is in ensuring fund managers handle that complexity rigorously and that when they get it wrong, the impact remains manageable.