growth opportunities for the finance sector peter neilson, chief executive financial services ...

Growth Opportunities for the Finance Sector

Peter Neilson, Chief Executive

Financial Services Council

Presentation to

FINSIA/ANZ Luncheon“What Does 2013 Hold for Us”

Midday, Friday 15th March 2013Hotel Intercontinental

Grey StreetWellington

What the Report is Not About

1. 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.

2. Relitigating the debate about National Savings.

Who is the FSC and what do we doThe FSC replaced the ISI in May 2011 with the aim of:• Applying evidence based advocacy to help grow and protect the wealth of

New Zealanders. Why does that matter? The wealthiest 1% of New Zealanders hold 16.4% of the wealth, whereas the bottom 50% own just 5.2% of the wealth.

• We represent the investment management and personal insurance industries. Property and general insurance is covered by the ICNZ and Health Insurance is covered by the HFANZ. If you have a KiwiSaver account, a superannuation fund, life or income protection policy, there is a better than 80% chance it is provided by one of our members.

Today I am going to talk about the growth opportunities that exist for the financial services industry and what the industry, other New Zealanders and the Government will need to do to bring them to fruition.

2




Some numbers to put the current vulnerability of New Zealanders into focus• Only 9% of New Zealanders think NZ Super ($349 per week maximum after

tax for an individual and $537 for a couple) is sufficient to retire on. (Horizon Dec 2012)

• Only 15% of New Zealanders have income protection insurance. (Horizon Oct 2012)

• For New Zealanders:• Only 15% say they have sufficient savings to last six months if they were

made redundant.• 26% would not be able to pay their bills after just one week.• 54% have insufficient savings to last 4 weeks after being made

redundant.The majority of New Zealanders are financially living close to the edge and unemployment, sickness or retirement could put them quickly over that edge.

3




KiwiSaver Contribution Rates – Horizon Survey December 2012

So about 1 in 10 KiwiSaver members with their employer could be saving at a rate sufficient to fund a comfortable retirement, about 10% of salary.

4

%

Not making contributions currently 20.4

Employees making 2% contributions (employer 2, 4 or 8%. Soon to lift to 3% + 3% at least)

36.8

Employees making 4% contributions (employers 2, 4 or 8%) 18.7

Employees making 8% contributions (employers 2, 4 or 8%) 3.4

Not sure 15.7

Another contribution rate 7.9




The Income Protection Insurance GapIf you have an accident in New Zealand and are off work for more than one week, ACC will pay you 80% of your previous earnings until you return to work. 100% of New Zealanders are covered by ACC and what you receive is not impacted by the earnings of your partner.If you are sick and off work for longer than your sickness or annual leave covers, you are eligible for a sickness benefit that is slightly lower than NZ Superannuation but if your partner also has earnings above the benefit level you will not be eligible for a sickness benefit.Many New Zealand families living with long term sickness find they are too rich to receive a sickness benefit but too poor to pay the rent or mortgage.Here is the kicker, you are 2 to 3 times more likely to be off work for six months or more because of sickness than you are for an accident.There are 972,000 households in New Zealand with a household income above benefit levels that are without income protection insurance. Our missing million customers. Most people with a mortgage have life insurance but only a minority have income protection insurance. Your partner is currently more secure in your home if you die than if you have a long term illness.

5




What can we do about the Income Protection Insurance Gap?The industry has funded the FSC study undertaken by Massey University into the size of the personal insurance gap. Of the $650b gap about 2/3rds of it is related to income protection insurance.The launch of the Massey report put this issue on the agenda but we will need sustained follow-ups to keep it there.We know from our focus group and polling work undertaken by Nielsen’s and Horizon, that:• Potential customers find the whole topic intimidating, the language

impenetrable and mistrust the industry and perceive the products as expensive.

• We make people offers they don’t understand, we talk numbers when they want to talk about preserving their family going forward, the purchase, underwriting and claims processes are all seen negatively.

• We are talking with the industry about how to overcome these issues and achieve ongoing promotion and increased take-up of income protection insurance.

6




What can we do about the Income Protection Insurance Gap? Continued...• There is product innovation to make products simpler and more flexible. (If you

want to see an example look at KiwiBank’s online calculator and Life and Living insurance product or ANZ’s Lifestyle product.)

• There are more places where you can work out what you need and obtain a quote without feeling hassled. (See Cigna’s Income Protection Policy on its website.)

• We will be talking more with the IRD and Ministers about the issues to do with the taxation of income protection insurance. At the moment lump-sum policy premiums are not deductible and payouts are tax free, whereas payments based on a percentage of previous earnings are taxable and the premiums are deductible. A 128 page technical paper provided little help in clarifying this issue.

• If the industry does not respond to fill this market gap, it is likely eventually that either ACC will be extended to cover illness or a base level of life and income protection insurance will be bundled into KiwiSaver.

• In the meantime take our advice and ask your adviser, bank or broker about income protection insurance.

7




Gradually Stepping up contributions into KiwiSaver to 10%We currently have little action and great inertia regarding increasing KiwiSaver contributions to get them gradually up to the 10% required to provide most New Zealanders with comfortable retirement incomes.The Government has decided that given its concern about the cost of the KiwiSaver incentives likely from a day of enrolment for those not yet enrolled in KiwiSaver, this has been abandoned for the foreseeable future.The Opposition parties seem likely to support a gradual step-up in contribution rates to KiwiSaver and the Labour Party has signalled that it will retain its 2011 election policy to make KiwiSaver universal but probably only up to 7% of incomes.The minimum contribution into KiwiSaver will lift from 2% employee and 2% employer to 3% plus 3% from 1 April.This move is popular and suggests that a programme to step up contributions each year by 1% would also get general support.As part of its contribution to the debate on achieving a comfortable retirement income for New Zealanders, the FSC will be an active participant in the revision of the Long Term Fiscal Projections and the Three Yearly Review of Retirement Income Policy.Our Best contribution to these debates is to make sure they address the right questions.

8

Source: Infometrics from Statistics New Zealand

Number of New Zealand Live Birth 1935-1979

9

0

20

40

60

80

100

120

-10 0 10 20 30 40 50 60 70 80 90 100 110

Net

repl

acem

ent r

ate f

or a

vera

ge in

com

e wor

ker

Percentage of retirement incomes from earnings related (tier 2) schemes

Net replacement rate for average income earner Source: OECD 2011

public schemes

private tier 2 scheme

public& private tier 2 scheme

Dot size proportional to replacement rates for people on 1.5 times average income

AUNZ

IRE

AUT SLVSPN

POR

CAN CHL

CZE

DEN

EST

BEL DEU FRA ITY NOR POL SVK SWE SWZ

GREHUNICE

ISR

JAPKOR

LUX

MEX

NTH

TUR

UK

US

10

Source: Infometrics

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100

2105

2110

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

New Zealand Superannuation (PAYGO) Costs as % GDP 1970-2100 with age of eligibility at 65 and

FSC "Lancet" Longevity (2 years per decade)

11

Retirement in the 20th Century

Retirement in the 21st Century

Funding retirement incomes in 1955Over 65 population less than 300,000Life expectancy at 65 - 12.8 years for males and 16.9 years for females.Seven working age people support one pensioner.Age pensions cost 3% of GDP when the universal pension was available from 65.

Funding retirement incomes in 2055Over 65 population reaches almost 1.7 million.Life expectancy at 65 – 31.3 years for males and 33.9 years for females.Two working age people support one pensioner.Age pensions will cost 9-10% of GDP if the age of eligibility for NZ Superannuation stays at 65.

12

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

New Zealand NZS pension in 2055

Australia pension for someone retiring in 2055 having earned the median income

Ratio(AU/NZ)

Australia pension for someone retiring in 2055 in Australia having earned the average income

Ratio(AU/NZ)

Retirement income

Dollars $NZ 31000 $A60800 2.31* $A69000 2.67**

% per capita GDP

34% 52% 1.50 59% 1.70

Contributions

2011 4.3% 7.2% 1.66

2055 7.4% 9.9% 1.34

Average 2011-2055

6.4% 9.2% 1.44

13




What are the right questions to ask about retirement income policy?1. Should the objection for retirement income policy be a comfortable

retirement not just the avoidance of absolute poverty?• Only 9% of New Zealanders think NZS alone will be adequate.• Its not just about the financial sustainability of NZS, NZS on its own is

inadequate as an income and needs supplementing with an expanded KiwiSaver.

2. Shouldn’t we be talking about NZ Superannuation and KiwiSaver, not or KiwiSaver?• With 2 million New Zealanders already enrolled, shouldn’t we stop

pretending PAYGO (NZS) and SAYGO (KiwiSaver) are competitors and treat them as complements?

3. What really is happening to longevity after 65?• We have consistently underestimated the improvements in longevity

after 65.

14




What are the right questions to ask about retirement income policy? Continued ...

4. Do we really have a hang-up about KiwiSaver compulsion?• Why do we think compulsory taxation to pay for someone else’s

pension (NZS) is OK, but compulsory contributions to fund your own 2nd tier pension (KiwiSaver) is not OK?

• If we have universal coverage (compulsion) can we avoid the cost of the current KiwiSaver incentives?

5. Are we prepared to do something about the tax and other bias against savings in equities or bonds, particularly those products with compounding returns, while we treat preferentially investments in real estate?• If not, should we offset this with compensatory tax reductions on long-

term savings such as for retirement?

15




What are the right questions to ask about retirement income policy? Continued ...6. Shouldn’t we start this debate with a realistic Business As Usual BAU case?

The Treasury draft Long Term Fiscal Projections assume that:• Longevity stops increasing at a rate it has for the past 40 years.• Labour productivity growth rates will be 25% higher than the last 40

years.• The Government will not give tax cuts to return fiscal drag for 50 years.These assumptions would produce a low ball estimate of the likely cost of funding NZS and provide more excuses for delay.

7. On reasonable assumptions, doesn’t SAYGO (KiwiSaver) cost less than PAYGO (NZS) to produce the same pension, or a larger pension, for the same consumption foregone?• What therefore, is the optimal balance between NZS funded from

taxation and KiwiSaver funded by contributions and when do we need to start the transition if we need to afford to pay for both?

16




What are the right questions to ask about retirement income policy? Continued ...8. Can we make this NZS/KiwiSaver hybrid fair for women, the

low paid, Maori and Pacifica, and how?9. If we do have universal KiwiSaver, should the savings be

guaranteed?10. Should we require that you take part of your KiwiSaver “pot”

and turn it into a pension?We are in for an interesting debate during 2013.

17

Source: Infometrics from Statistics New Zealand

18

0.0

500.0

1000.0

1500.0

2000.0

2500.0

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

2110

Historical

SNZ Series 5 (1 in 10)

SNZ VLM Projection 2012

SNZ P50

Population Aged 65 and Over

19

Actual over 65 Population Compared to SNZ Mid-Series projections

20

Period Life Expectancy at Age 65

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

Year turn 65

HistoricalP50VLM

Contribution rate needed to achieve same KiwiSaver Plus account balance at age 65/70 for

(Cohort turning 65 in 2061) Median Income Account balance at 65 Account balance at 70

Male Female Male FemaleKiwiSaver Plus Account Balance if you start at Age 25 on 10% contribution rate: 638,000 420,000 781,000 515,000 Starting age Required contribution rate (%)

25 10.00 10.00 10.00 10.00

35 13.84 14.25 13.54 13.90

45 23.60 24.54 21.94 22.64

55 58.64 60.43 46.34 47.12

21

growth opportunities for the finance sector peter neilson, chief executive financial services ...

Documents