Automatic Workplace Retirement Accounts in the United Kingdom and New Zealand
International Affairs Issue Brief
Publish Date: October
As proposals for an Automatic IRA are considered, policy makers may find it useful to review voluntary workplace savings initiatives recently introduced in New Zealand and the United Kingdom. Much like the proposed Auto-IRA in the U.S., the KiwiSaver (NZ) and Workplace Pension Reform (UK) employ automatic enrollment provisions to increase workplace pension coverage and low household savings rates. Both stipulate centralized reporting and record keeping and are designed to avoid undermining existing pension provisions. Unlike the proposed Auto-IRA, they mandate modest employer contributions.
KiwiSaver Program - New Zealand
Introduced in 2007, KiwiSaver is a subsidized, voluntary defined contribution retirement savings plan designed to supplement New Zealand's flat-rate universal old-age pension (Superannuation) and to increase New Zealanders' low rates of household savings.
- Employers are required to enroll new employees between ages 18 and 65 into a KiwiSaver savings scheme.
- Participants contribute between 2% and 8% of their gross earnings into one of several approved, private sector provided savings schemes with varying degrees of risk and return. They have the choice to opt out, but failure to do so, and failure to select a contribution rate/fund, results in a default contribution of 2% into a fund with a conservative investment risk profile.
- A compulsory 2% employer contribution, annual member tax credit (max $1043 NZD/$765.27 USD) and a $1,000 NZD (approx. $734 USD) government "kick start" subsidy provide financial incentives for participation.
- The portability of KiwiSaver accounts and the fact that a worker can only have one such account at a time eliminates the need for roll-overs and simplifies asset management.
- Funds are eligible for lump sum withdrawal when participants reach statutory pension age of 65. Early withdrawals are permitted in the event of severe financial hardship and for eligible first home purchases.
- Between the launch in 2007 and June 2009, 1.1 million New Zealanders joined the KiwiSaver program, surpassing expectations (NZ's population is 4.2 million). The participation rate is expected to increase as new workers enter the workforce.
Workplace Pension Reform - United Kingdom
The UK government is currently implementing landmark pension reform to encourage greater workplace pension saving, particularly in low to moderate earners. From 2012, employers will be required to automatically enroll all eligible jobholders into a qualifying workplace pension and to make minimum contributions into it.
- All jobholders aged at least 22 years old who have not yet reached State Pension age and are earning more than £5,035 (approx. $8,044 USD) a year (in 2006/07 earnings terms) will need to be automatically enrolled into their employer's workplace pension.
- Employers will also need to contribute 3% on a band of earnings for eligible jobholders - between £5,035 (approx. $8,044 USD) and £33,540 (approx. $53,577 USD) a year. This will be supplemented by the jobholder's own contribution and around 1% in the form of tax relief. Overall contributions will total at least 8%.
- Employers will be able to choose the pension scheme(s) they want to use to fulfill their new duties, provided the scheme(s) meet certain quality criteria.
- A newsimple, low-costpension scheme - currently known as the personal accounts scheme - will be introduced as one such qualifying pension arrangement that employers can use.
- The intention is that the personal accounts scheme will operate as much as possible like any other trust based, multi-employer, occupational pension scheme, but it willbe uniqueas it will have millions of members and hundreds of thousands of employers taking part.
Implications for the U.S.
The proposed Automatic IRA would provide a new opportunity to save for retirement at work to tens of millions of Americans. Features recently adopted in the UK and New Zealand, like automatic enrollment, simple default account features, and low-cost investment options could, in combination, prove to be a powerful force for improving the retirement security of low- and moderate-income workers in the U.S.