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“Demographic Trends and Implications for Retirement Savings” from the FSC Report

“Demographic Trends and Implications for Retirement Savings” from the FSC Report Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders by Peter Neilson, CEO, Financial Services Council Presentation to Workplace Savings NZ National Conference

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“Demographic Trends and Implications for Retirement Savings” from the FSC Report

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  1. “Demographic Trends and Implications for Retirement Savings” from the FSC Report Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders by Peter Neilson, CEO, Financial Services Council Presentation to Workplace Savings NZ National Conference “How Much is Enough” 1.05pm Friday 17th August 2012 Pullman Auckland Hotel Auckland

  2. Findings • Longevity is increasing faster than most of us have expected. • The combined impact of the baby boomers retiring and the growing length of our lives after 65 will make NZS unaffordable unless we move out the age of eligibility beyond 65 by indexing the age of eligibility with longevity. (The alternative of lowering the level of NZS is unlikely to be acceptable to most New Zealanders.) • If we want to retain the option to retire at 65 and have a higher income than just NZS we will need to save more to fund our own pensions to fill the gap between when we want to retire and when we will be eligible for NZS. • To do this we will need to start saving more soon to reach the 10% - 12% of incomes necessary to not only fund the gap but also to give us a chance of achieving a comfortable retirement. We propose that this phase-in last ten to twelve years to make it affordable. • We suggested NZS should remain as is without an income or asset test. • We would require New Zealanders to purchase a fixed term pension to pay at least the equivalent of NZS between the age of 65 and when you became eligible for NZS, if you wanted to retire prior to the age of eligibility for NZS. What the Report is Not About How we will provide retirement incomes in the next 20 years so if you are already retired or soon will be, it is not about you. Relitigating the debate about National Savings. 2

  3. If We Are to Achieve Our Own Desired Retirement Income? We need to know: How much we will need to live on for the retirement we seek (income adequacy). What we can reasonably expect from the Government (retirement income policy). How long we are going to live in retirement (longevity). How much we will need to save to achieve a level of income (returns on savings). What sort of plan we need to get there (savings plan or habit). 3

  4. NZ Superannuation has been a very successful policy in: • Eliminating absolute poverty for the aged provided they own their own accommodation by the time they retire and not providing any barrier to continued employment or the accumulation of assets. • There are some other issues with current income policy: • The current level of benefit is inadequate for a comfortable income in retirement , whether funded from taxation or savings. • Funding from taxation is relatively inefficient compared with funding from savings. • On current longevity trends the cost of paying NZS at 65 will grow from 4-5% to 12% of GDP later this century. • As we have relatively free movement with Australia, as their Superannuation Guarantee Scheme matures there will be a growing pension gap with Australia. An incentive for our highest potential earners to move countries. • Eventually the mature compulsory retirement income policy in Australia (the Aged Pension and Superannuation Guarantee) will provide much higher retirement (2 x or more) incomes than New Zealand at modest additional cost (less than 50% more as a percentage of GDP). 4

  5. Number of New Zealand Live Birth 1935-1979 Source: Infometrics from Statistics New Zealand 5

  6. Average Life Expectancy in New Zealand at 65, 1898 - 2011 Source: Infometrics from Statistics New Zealand 6

  7. Actual over 65 Population Compared to Statistics NZ Series 5 projections by year Source: PwC from Statistics New Zealand 7

  8. We have no argument with Statistics New Zealand’s Projections • Statistics New Zealand prepares many projections: • These very long term projections are very hard to get right because we are predicting what will happen to people over the next 100 years of their potential life, in some cases people who haven’t been born yet. • Unfortunately, most users pick the mid-series assuming it to be the most likely outcome and also it avoids the need to do your own projections • Most developed countries’ mid-range projections have underestimated the improvement in longevity after 65. • A default “naive” projection assuming the past long-term trends (30 to 50 years) are maintained, might be a more useful anchor projection for most users. Statistics NZ has recently produced such a projection, the 2011 Very Low Mortality projection, that we would recommend forecasters and planners use in place of the Series 5 projections that most people have previously defaulted to. 8

  9. Source: Infometrics from Statistics New Zealand 9

  10. Source: NZ Stats • Statistics NZ Series 5 - 1 extra year of life after each decade • FSC “Lancet” Projections – 2 extra years of life after 65 each decade • Recent NZ 1996-2066 Trend (ELL) – 3 extra years of life after 65 each decade 10

  11. Source: Infometrics 11

  12. Underestimating Longevity • Last year the FSC asked Horizon Research to ask New Zealanders of all ages how long they expected to live past 65. The results below indicate that most people are likely to be underestimating their likely life expectancy past 65. The estimation gap is largest in those age groups where they are most likely to be able to save for retirement. The same research indicated that most people had an understanding of what they would need to be comfortable in retirement but most people could not make a good estimate about how long it would take to double their money from a certain interest rate and keeping the interest in the account to earn interest on interest. Other research undertaken internationally reveals that most people have difficulty understanding what size of retirement savings pot would be needed to fund a level of pension. Source: FSC Horizon Research Dec 2011 12

  13. Source: FSC Lancet Projections and Horizon Research Dec 2011 It is notable that the underestimation of longevity is currently greatest for those furthest away from retirement when saving would be most effective in boosting retirement income. 13

  14. Are you currently saving enough to retire on a comfortable income? Source: FSC Horizon Research Dec 2011 14

  15. Source: AMP Capital 2011 from Pensions at a Glance OECD 2009 *Replacement rates are the percentage of pre-retirement income represented by the retirement income 15

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  17. The Pension Gap with Australia in 2055 Assuming No New Zealand Policy Change • *This table compares the compulsory retirement systems in both countries. Australia has its age pension and its Superannuation Guarantee whereas New Zealand has New Zealand Superannuation and no compulsory retirement savings scheme. • **The ratio of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since 1990. • Source: Coleman (2012) • Source: Australian Treasury 17

  18. The relative size of SAYGO and PAYGO pensions when rates of returns and productivity change.* 18

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  20. * Costs of funding NZS from Tax No Change (Redline) versus from Savings (Green Line) (including the cost of NZS recipients that have already retired) as a percentage of GDP (FSC “Lancet” Longevity) 20

  21. * Note: The blue line is funding retirement pensions considerably higher than the NZS pension funded by the red line of costs 21

  22. Why Now? • There is still time as we have enough people still working and therefore able to earn and therefore make the additional savings. • Savings for retirement is more efficient because of compound interest but like all things good, compound interest takes time. • Eventually the window of opportunity closes as the costs of making the transition becomes impossible because the combined cost of paying for those already retired out of taxation and the yet to retire out of savings becomes economically and politically difficult. 22

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  25. What do people under 45 know and do about retirement • If you saw the Campbell Live programme after we released the FSC report “Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders”, you will know that most people under 45 do not know that the highest NZ Superannuation benefit is only $349 a week or about $18,000 a year to live on. One person interviewed on Campbell Live thought it would be $35,000 a year which interestingly is about the level most New Zealanders said they would need to have a comfortable retirement. • Historically New Zealanders have not started saving seriously for retirement until they reach 45. • For most of us that is too late because by waiting that long you need to save 25% rather than 10% of your income to fund a comfortable retirement. 25

  26. Actions for those under 45 • If you are not in KiwiSaver - join it or your employer’s compatible programme. • If you have suspended your contributions - restart them as soon as you can. • If you are contributing 2% and your employer another 2% (soon to be 3% plus 3%) - when you next have a wage or salary increase move up at least to 4% plus 2% or preferably 8% plus 2% and look forward to a much longer and more comfortable retirement than your grandparents probably enjoyed. 26

  27. What does this all mean to Savers, Trustees, Advisors, Fund Managers and Government • If the typical young New Zealander can expect to live 30 to 40 years in retirement then: • It is likely that savings levels and contribution rates will need to rise considerably to fund additional years in retirement. A 10% contribution rate from 25 is the new black. • Most retirees will need to invest for capital growth post retirement if their retirement savings are to last the distance including refurbishing their home and maintaining their lifestyle for much longer than for their grandparents retirement. 27

  28. Actions for Savers, Trustees, Advisors, Fund Managers and Government • If you have some responsibility for a defined benefit scheme then it would be prudent to review the scheme in the light of the improvements in post 65 longevity now expected. • Greater clarification from Government on what younger New Zealanders can reasonably expect from the tax payer in retirement is needed now to help young people plan for a comfortable retirement. We have suggested a cross party select committee on retirement income policy to increase that clarity by creating a broadly supported sustainable policy. 28

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