Kiwisaver and Shamrocksaver

Nov 18, 2019

Sunday Business Post, 17 November 2019

In New Zealand, parliamentarians must stand for election every three years. That three-year interval was the quid pro quo for the abolition of the New Zealand upper house of parliament almost seventy years ago.  If an upper house wasn’t going to scrutinise lawmakers, then the voters should have the opportunity to vote those lawmakers in or out more often.  Or so the logic went.

Aside from that, the New Zealand parliamentary system is strikingly similar to our own.  Much of the active parliamentary work is done in committees.  Part of the fallout from the awful shooting atrocity in Christchurch earlier this year was dealt with by the New Zealand Finance and Expenditure Committee.  That's because restricting gun licenses and sales has a fiscal impact.  Another issue they are examining at present is the pension system.

Unlike Ireland, New Zealand has had an “opt-out” style of pension contribution for employees since 2007.  The system, known as KiwiSaver, ensures that all employees and employers pay a fixed percentage contribution into a pension fund unless they opt out of doing so.  Contributions are modestly topped up each year by government.  The concept is not unlike the one currently being promoted by the Minister for Employment Affairs and Social Protection known as Auto Enrolment. 

Like Kiwisaver, Auto-Enrolment means you automatically save for a pension, unless you choose not to do so. As employers and employees alike consider the financial implications of Auto Enrolment for Ireland, the New Zealand experience is instructive.  How would a ShamrockSaver compare to KiwiSaver?

The key difference between the New Zealand pension regime and the Irish pension regime is that the New Zealand pension regime is tax neutral.  Here, one of the best forms of tax relief for employees are personal pension contributions.  Most amounts contributed to a pension fund in Ireland earns a tax deduction at the employee’s top rate of tax.  Putting €100 into a pension fund in Ireland only costs €60 to an employee paying tax at the top rate.  For the Kiwis, that's not the case as the employee gets no tax break for the contributions made.

But the converse is also true.  In Ireland, pensions are taxable.  In New Zealand, the amount of pension savings crystallising on retirement can be drawn down tax free, more like a savings account then a pension fund. 

Perhaps the most critical difference between the Irish system and the New Zealand system is how the funds which are invested are taxed.  In Ireland, the pension fund does not pay tax year by year as it gathers value.  In New Zealand, the investment returns in the fund are taxed each year.  This can make a huge difference to the amount finally available on retirement.

New Zealand Treasury officials sometimes make the point that supporting personal pension funding through tax incentives tends to benefit the higher paid rather than the lower paid.  They also point to the non-means tested government pension, payable to all New Zealanders when they reach the age of 65.  I gather that in practice, many New Zealanders use funds which accumulated in the Kiwi Saver account to finally pay off their mortgages, and some continue working either in full or part-time employment beyond pensionable age to supplement their public New Zealand pension.

All this suggests that the ShamrockSaver Auto-Enrolment system now being proposed for Ireland must preserve tax relief for contributions.  At least as important, it should preserve the tax free status of earnings within the pension funds themselves.  Unless it does so, it will be little more than a dilution of the current pensions regime for private sector workers.  These aspects must not fall off the table as the development of the scheme progresses

Less clear is who will actually carry out the administration of the Irish Auto-Enrolment system.  In New Zealand, the job falls to their tax authority, the Inland Revenue Department.  From speaking to tax officials there, one of their main challenges in running the system are to ensure that employers collect the appropriate amounts from savers who are enrolled in the system. 

More significantly, the Inland Revenue Department to ensure that contributions which are collected are properly paid over by the employers to the appropriate pension funds.  It should not be assumed that this enforcement is best left to the Revenue Commissioners here. 

Overall, the direction of pension policy travel with auto-enrolment is correct.   Far too many of us are reliant on the state's own system of pension provision, and personal levels of contribution have to improve.  The Minister has claimed significant support for the proposals from unions and employer groups alike.  Auto-enrolment has worked in countries like New Zealand.  As we introduce the idea, we must not drop the better aspects of the pensions system we already have.

 

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland