Parenting, unemployment and saving suspensions were the main reasons for non-contributions.
Photo: 123RF
Tough economic times may be affecting KiwiSaver members’ ability to get the full potential of the retirement savings scheme.
While most New Zealanders are members, a growing and significant chunk are not contributing, the Financial Markets Authority’s (FMA’s) latest annual report on the scheme shows.
Although contributions were at a record level overall and funds delivered strong returns in the year, 30 percent of KiwiSaver members aged 18-65 were classed as non-contributing in the year, compared to 20 percent in 2010.
Overall, 40.6 percent were not contributing, including the 11 percent aged over 65 or under 17.
The FMA said that could reflect general economic conditions and other factors.
“There are kind of three particular reasons,” said chief executive Samantha Barrass. “There’s parenting, so when people take time out to spend time bringing up their children, but two others that do cut to the heart of the economic times that we are in are being unemployed and saving suspensions.
“Those three reasons – parenting, unemployed and saving suspensions – are all the three main reasons behind non-contributions.”
She said, as individual circumstances improved, the challenge would be to encourage members to restart contributions when possible.
“The challenge will be for all of us to work together – we as the regulator, the industry, politicians, everyone to work together to make sure that our non-contributing members restart their contributions and develop that savings habit again, which is so critical to support long-term security in retirement.”
About eight percent of non-contributing members were on a savings suspension.
The 1375 members not contributing was up six percent on the year before. The scheme now has almost 3.4 million members in total.
The percentage of non-contributing members was higher in default funds, which people can be placed in, when they join KiwiSaver, without making an active choice.
There, 55 percent were not contributing or were on a savings suspension.
“Not including section 104 savings suspensions, this is the first year in which over half of default KiwiSaver members are not contributing,” the FMA said.
FMA director of markets, investors and reporting John Horner said providers had a role to play in lifting the number of contributing members.
“Default KiwiSaver providers have obligations to engage with default members at certain points, including during times of volatility and near the end of a member’s savings suspension,” he said. “Sharing information with members about the contribution options and planning tools available better enables members to plan their long-term retirement goals.”
Barrass said it was concerning, because there could be a long-term opportunity cost to those who did not make retirement contributions nor receive employer of government contributions.
“If this trend continues, we risk a stark inequality between the contributing and non-contributing members of our national retirement scheme.
“The rising number of these non-contributing members may well reflect the economic headwinds currently impacting New Zealanders. The rise in hardship withdrawals is also noticeable. “
During the year, total contributions to KiwiSaver funds from all sources reached an all-time high of $12.2 billion, up 8.8 percent on the previous year and 8.2 percent above the previous peak of 2022. The total of KiwiSaver funds under management hit $123.1 billion.
Members contributed $7.8 billion themselves, up 13 percent.
“There is probably no other financial product that is so closely associated to the future financial wellbeing of New Zealanders as KiwiSaver,” Barrass said.
“This year’s annual report shows KiwiSaver has become a trusted scheme that is firmly recognised as the primary retirement savings strategy for most New Zealanders.”
Investment returns contributed $6.4 billion to balances this year.
The FMA noted returns had been positive in eight of the past 10 years.
“This underscores the value of staying invested and the power of long-term compounding.”
Barrass said: “It’s clear from these results that KiwiSaver remains resilient amidst economic volatility and uncertainty.”
She was encouraged to see that just under half of all KiwiSaver members were now invested in growth funds, which tend to be a better choice for people with a long investment horizon. Growth funds were 28.3 percent of funds in 2015, but 47.5 percent this year.
Some providers have launched new, higher-risk growth funds in the year. The proportion of conservative funds had contracted from 40.4 percent in 2015 to 16.5 percent.
Withdrawals reached their highest level to date in the year, at just less than $6 billion. About half of that went to people aged 65 and over, who could withdraw money as they liked, $1.8b for first-home purchases and $400m for financial hardship.
Barrass said she hoped to see that number come down, as the economy improved.
“There’s a process that they have to go through in order to pass the hurdle to make a hardship withdrawal,” she said. “I think the hardship withdrawals reflect the difficult times that New Zealanders are in.
“There are choices that are being made over putting people’s food on the table, paying your mortgage, paying the rent and meeting unexpected costs, such as your car breaks down. These are the things that we would expect to see in difficult economic times, but those figures are quite high for hardship withdrawals and I think we must look to see those come down.”
The FMA also looked at how providers tried to find members who were 70 and over, and not engaged with their funds. It worked with six default providers last year to review their systems, particularly for people who had not made a contribution in five years.
“The default providers were also asked whether they had transferred unclaimed monies to the Crown in accordance with section 125 of the KiwiSaver Act 2006.
“At the time of that review, there were 364 default members over the age of 70 who were uncontactable [excluding deceased members] and a further 122 deceased default members who would, if alive, be over the age of 70. In most cases, the providers had not been notified of executor/administrator details to enable payment of the death benefit.
“We consider that most default providers are making efforts to locate and engage with this cohort of members.”
There was $868.5 million paid in fees, up 10 percent year-on-year, but the FMA said that was stable as a percentage of balances.
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