PROPOSALS FOR WORKPLACE SAVINGS SCHEME BADLY FLAWED Tony Sage
PROPOSALS FOR WORKPLACE SAVINGS SCHEME BADLY FLAWED
Treasury is currently reviewing the Savings Product Working Group’s proposals for the workplace savings scheme to be introduced in the 2005 Budget. Those proposals involve inflicting on savers the retail savings industry’s failed and outdated high-cost savings scheme model.
The publication of Gareth Morgan’s thoroughly documented demolition of the industry and of the results of recent research by the Consumers Institute on the same subject have therefore been most opportune. The industry’s responses are just standard PR waffle.
Assisting savers to avoid the burden of providers’ fees should have been a first priority. The Working Group’s recommendations to the Minister of Finance read however as if their brief had been to design a bonanza for the banks and insurance companies and the companies that sell their savings schemes on commission.
Thanks to Gareth Morgan and the Consumers Institute the stage is now set for a very simple exercise in driving down providers’ costs. And the benefits of competition amongst providers could be retained.
That the workplace savings scheme should proceed on the basis of the Working Group’s proposals is unthinkable.
Following the downturn in the American stock market and erosion of savers’ accumulations in mutual funds, the funds’ fees have been under pressure. Some of the larger funds no longer actively promote themselves or pay commissions to intermediaries. Investors’ funds flow to them on the basis of their reputations and the low fees they charge.
The key to driving down our workplace savers’ costs in the same way lies with the Guardians of New Zealand Superannuation, managers of the "Cullen fund".
The Guardians’ do not exist to generate fees from percentages of capital and income or from churning investments. Their responsibility is for orthodox financial management in the public interest. The purpose of the existing fund is and would remain, solely the support of New Zealand Superannuation.
Other fund managers have multiple funds and a second fund for workplace savers would be a logical extension of the Guardians’ activities. They could use identical investment criteria and patterns to those already established. Although the Guardians would be in competition with existing providers, no sales effort or commission payments would be necessary.
New Zealanders can have confidence in the Guardians. Workplace savings would just flow to them because of their objectivity, reputation and low fees.
Even the Savings Product Working Group, heavily biased towards existing providers, admits that a central fund (such as a second fund managed by the Guardians) would not incur any selling costs. The Guardians would not however require a monopoly. Market forces could still prevail, with an even playing field and no bar to entry by the institutions.
Some of the institutions might accept the challenge. High-pressure selling tactics, the confusing number of their offerings and the gobbledygook used to sell them would give way to attracting savings on the basis of actual performance and low fees.
The risk of perception of a Government guarantee of the integrity of savings managed by the Guardians can be completely discounted.
The Working Group’s proposals give employees the right to opt out at inception of their workplace schemes or to cease contributing at any time thereafter. On a change of employment they can opt out of joining any scheme at their new workplace. It could be made clear to employees at all stages that there was no Government guarantee and that the choice was theirs whether they saved at all and if so whether they chose the Guardians’ fund or some other.
Involvement of the Guardians would have other advantages also.
80% of employers are reported as being concerned about the prospect of having to assume the moral responsibility for choice of employees’ investment vehicles. The Guardians could become the default provider with employers able to opt out of the decision-making process. In those cases the Guardians would automatically become the provider.
A separate scheme for each workplace choosing the Guardians as provider would be unnecessary. Savings could flow direct through the IRD and clearing-house to the Guardians. The employees of firms with less than six employees, at present intended to be excluded, could readily participate.
The Business Roundtable’s and its Treasury cohorts’ latest excuse for opposing any intervention to assist savers is that New Zealanders are saving enough already.
No credible evidence is advanced to support the contention and the huge household debt overhang that is a constant danger to the health of the economy is ignored.
The contention is backed merely by blind faith that a Treasury and Statistics New Zealand project will produce some statistical evidence in about eight years’ time.
It is to be hoped that in refining the proposals for a workplace savings scheme Treasury can overcome its neo-conservative Stalinist inclinations for the economy as a whole and concentrate instead on what is best for individual New Zealanders. Tony Sage is an Auckland Chartered Accountant. Auckland November 2004