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Much of the Retirement Commission’s strategic work takes account of trends and possible long term future scenarios. This section of our Statement of Intent focuses primarily on issues and infl uences that are relevant to our work over the next three years, but also in the longer term.

Our immediate operating environment

The Commission’s immediate operating environment has changed in the past year as a result of the worldwide economic downturn and disruption within some parts of the financial services sector. Both of these have impacted on our work and have implications for New Zealanders planning financially for their retirement.

New Zealanders close to or in retirement have been particularly hit by the drop in interest rates and subsequent drop in returns on their savings, and the fall in value of many superannuation and investment funds. Many in this group have also lost savings in failed finance companies and, because of their stage in life, have limited opportunity to recoup their losses. However, for New Zealanders with mortgages the drop in interest rates has brought the opportunity to pay off debt more quickly.

House values have also declined in the last year bringing to an end, at least for now, the dramatic rise in prices over the last decade. This has resulted in a decline in New Zealanders’ net worth. Again the greatest impact has been felt by those close to or in retirement looking to realise the value of their houses. For some New Zealanders the fall in house prices has led to negative equity where the mortgage is greater than the current value of the house. However, for others, lower prices have brought an increase in housing affordability.

Rising unemployment and a tighter labour market are also likely to have an impact on people’s ability to save or manage debt should they lose their job or suffer a cut in income.

Performance failure in the financial services sector, such as the recent collapse of many finance companies and perceived unethical practices, is likely to have undermined efforts to build the public’s trust in the sector.

At an anecdotal level, people’s confidence in financial markets appears to have been affected though the longer term impact of this is not yet clear. In the coming year, the Commission will look at options for researching consumer trust and monitoring levels of trust and confidence in the sector.

There are different views on the impact and medium to long term effects of the worldwide recession. No one knows what the future environment will be like which makes it less certain for all New Zealanders in relation to retirement income. Fortunately New Zealand Superannuation remains a solid foundation for retired people and all the major political parties view its stability as important.

Not surprisingly, these economic challenges have led to an increasing demand for financial education. The focus of the Commission’s work is on helping New Zealanders become more informed and skilled at managing their personal finances. This is based on the view that the quality of a retired person’s life will depend significantly on their standard of living and most significantly, that the retirement income a retired person receives will largely determine this standard.

We make some fundamental and important assumptions about this operating context, and if change did occur, for example, in the Government’s retirement income policies, then this could have an impact on our work.

Our key operating assumption is that the sources of retirement income and government retirement income policy will continue to be reasonably stable and that a high level of political consensus on this policy will be maintained.

The KiwiSaver scheme, introduced in July 2007, is likely to continue its increase in membership over time. Prospective and existing members will require ongoing information to make informed decisions, at the point of entry and at regular membership anniversaries, and whenever the Government makes changes to the scheme. The Commission will continue to provide up-to-date and relevant information at these points.

In October 2006 the Commission launched a three-year workplace financial education programme. The objective of the programme is to help New Zealanders make decisions on their participation in KiwiSaver, or other savings options, in the context of their wider personal financial situation. This workplace programme was extended for a further four years in 2008.

The need to make a personal decision around KiwiSaver provides a compelling incentive for individuals to appreciate the need for, and to absorb personal financial information and education. The programme reminds New Zealanders that they can and should be making financial preparation for the future.

Factors that could affect our operating environment

The following situations or events could affect our operating environment.

Slow global recovery from the current recession: The speed of the global recovery will affect the time it takes for unemployment rates to stop rising and people’s net worth to start increasing again.

Personal debt levels: With the high level of household debt, and a lower rate of employment growth, an increasing proportion of New Zealanders will find it hard to service their debt. This could make it more difficult for them to reach their retirement savings goals in the longer term.

Loss of the current political consensus about the Government’s ongoing commitment to funding retirement incomes: This continuing consensus might not be assured in the future.

The wider environment

New Zealand’s society is changing and ageing and there is an opportunity now for the Retirement Commission to provide financial education to the large number of working baby boomers, before they retire.

We are all getting older on average...

The median age increased from 26 years in 1971 to 36 in 2006 and is expected to reach 40 in 2027. By 2061 half the population will be aged 44 years and older.

The old will be getting older...

In 2006 the oldest 10% of the population was 68 and older; in 2050 it will be 80 and older.

There will be fewer 'work-aged' people compared with older people...

• The number of people aged 65 years and older doubled between 1972 and 2006 to 510,000.
• It is estimated there will be 1.44 million people aged 65 and over in 2061, 3.8 times the 2006 total.
• For every person aged 65 and over, there will be 2.2 people in the conventional working age group (15-64) by 2061, compared with 5.4 people in 2006.¹

Other relevant trends include the increasing ethnic diversity of the population and the trend towards more people aged 65 and over who have paid employment.

Already, the number of working Kiwis classed as ‘older workers’ (aged 50 – 64) has more than doubled between 1991 and 2005.²

For many in this age group, the word ‘retirement’ is outdated. Some will want to stop work earlier, but others will want to keep working well into their 70s or older.

These trends present a wide range of often complex implications for personal, institutional and government decision making about retirement issues. Accordingly, the Commission makes a considerable investment in research and analysis to inform our planning for the future and the information we provide to the public and stakeholders.

Other trends and issues that may hold long term implications include the following.

• Increasing personal debt levels, such as student loans and credit card debt.
• High levels of consumption expenditure.
• People buying homes later in life as a result of housing affordability pressures.
• International employment opportunities and patterns.
• Changes in career patterns and workforce participation.
• Different patterns of 'retirement' as individuals start part-time or other paid work at different points.
• Women’s reduced ability to 'save for retirement' as a result of lower earnings and labour force participation rates.

We expect the range of retirement income sources to remain broadly the same – that is from the Government, privately funded investments, including KiwiSaver, and workplace superannuation. However, the balance between these sources might change.

In summary, we can forecast with some confidence that, in the longer term future, New Zealand will have an older and more diverse population that displays more varied patterns of paid work, both in the conventional working age and retirement age groups. People are also likely to have higher expectations of what is an acceptable standard of retirement living.

However, whatever the current or future environment, there remains the need for each individual to plan financially not only for their retirement but throughout life.

¹ Statistics New Zealand, National population projections Series 5, 2006

² Statistics New Zealand, National population projections Series 5, 2006.