June 2008

It should pay to save

The UK Government is taking on a huge social experiment with the introduction of auto-enrolment into pensions and the creation of the personal accounts scheme. It therefore seems sensible to look at how other countries have taken on this challenge.

New Zealand is a good example; the KiwiSaver scheme launched in summer 2007. In less than eight months 500,000 people have joined, investing over NZ$600 million. This far exceeds expectations - the New Zealand government predicted 250,000 people would join within 12 months. Even better, one in five savers is aged 25 or under, showing that it is possible for young people to save for their retirement.

On the surface, the KiwiSaver looks a lot like the UK plan. From 1 April 2008, people will be auto-enrolled into their employer's pension scheme and the employer has to contribute for them. They have the ability to opt out if they want to, and others can opt-into a KiwiSaver if they so choose. For example, the self-employed, unemployed, or those aged under 18. So far, all the members have voluntarily joined the scheme, and it will be interesting to see how many people opt-out once auto-enrolment has really kicked in.

Before we get carried away, it's worth pointing out that the KiwiSaver programme is not exactly the same as the UK pensions reform agenda. There are some interesting differences.

One of the major differences is the strength of the New Zealand state scheme. Its slogan of '65 at 65' is famous the world over, and the promise of 65% of an average income at age 65, with no means testing or asset testing, means savers are assured they will be better off for every dollar they save. In the UK, the spectre of means-testing in retirement is still threatening to derail the main message that it pays to save.

New Zealanders are encouraged to save for retirement through tax credits. The New Zealand government will pay a NZ$1,000 (about £400) incentive in the first year, and will match contributions up to NZ$1,042 (£415). It will even subsidise the fees of the plan by NZ$20. Paying people to save is a powerful message and a big motivator.

Importantly though, there have been no administrative teething problems and the system has, generally, worked from the start. That's because the KiwiSaver accounts are administered through the private sector. Rather than adopting the UK position of building a brand new scheme to administer these new pensions, the KiwiSaver has used the already established expertise of the private sector to get a running start, and, importantly, to create confidence in the system.

So, what can the UK Government learn from our antipodean cousins? The New Zealand government has dedicated resource and effort to marketing the schemes and the vital message it pays to save. The UK Government should realise that using good communication techniques to change the culture surrounding saving will be instrumental in whether people save or not.

The acid test for KiwiSaver is only just beginning. The next few months, following the introduction of auto-enrolment into an employer's scheme and payment of mandatory employers' contribution, will be telling. It's also worth remembering that not only are individuals encouraged to save through monetary incentives, employers will also receive tax credits.

Finally the UK Government should seriously consider now - while it still has the chance - whether it wants to continue dedicating extensive resource and government manpower to creating a brand new pension scheme, rather than harness the resources and expertise within the private market.

Maybe the UK Government should watch and learn.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable