retirement.org.nz

Immediate environment

The New Zealand economy is emerging from a deep recession following the global financial crisis. Over the course of this recession the economic and fiscal position has changed markedly. Asset prices and retirement nest eggs have been adversely affected. While consumer attitudes and perceptions towards investing, saving and borrowing appear to have improved recently, job losses have reduced the ability to save for some people. The Government's deteriorating fiscal position during the recession means choices around retirement and savings need to be made to ensure that New Zealanders are able to maintain and grow the value of any provision for their retirement.

The Retirement Commission is well placed to pursue its three key roles of improving financial literacy, actively supporting the development of a trustworthy financial services sector and contributing to a stable and effective government policy.

Recent changes in the Retirement Commission's operating environment

Economic backdrop

A key impact of the recession has been improving household debt and savings. Examples are reduced use of credit cards, slowing debt growth and indications of some households repaying debt. It is important to maintain some these gains of better financial behaviour. While the great depression turned a generation away from debt, it is unclear (but unlikely) that the latest recession will have a similar lasting effect.

The recession has had its costs. There was a loss of 53,000 jobs in 2009, and jobs are still hard to find despite positive economic growth. However, recent employment figures appear to be on the increase. While the Reserve Bank of New Zealand (RBNZ) has lowered interest rates considerably, this has benefitted borrowers more than savers.

The recession has led to significant asset price declines. The drop in asset values and house prices has affected the net worth and retirement incomes of many who are approaching retirement. While asset prices have recovered through much of 2009, restoring some confidence in financial markets and retirement funds, concerns remain over the durability of any global economic recovery. This has made the outlook for asset prices uncertain.

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

Fiscal and policy backdrop

The local recession and the global financial crisis have heavily impacted on public finances. Public sector debt is projected to rise sharply. As a result the government is increasingly concerned to ensure that it is getting value for money. This may have implications for the future policy path for retirement and savings.

The recent Long Term Fiscal Strategy report by Treasury highlighted the costs of an ageing population from retirement income support and healthcare costs. Given the future fiscal challenge, greater debate and understanding of the various options is needed now.

The Retirement Commission is an important and active voice in any conversation.

Trustworthiness of the financial sector

One of the Retirement Commission's aims is to assist with ensuring that we have a more trustworthy financial services sector. The Retirement Commission can influence this by active support for changes identified by research and international best practice, and by co-ordinating a wide range of stakeholders from both public and private sectors.

Asset price declines due to the recession and global financial crisis, preceding failure of many local finance companies, and more recently, poor disclosure and reporting by some in the finance industry are likely to have tarnished the sector's image.

Rising participation in KiwiSaver (1.4 million participants in March 2010, up from 1 million the previous year) suggests the level of public engagement with the financial sector is increasing. Recent KiwiSaver performance reports have highlighted the need for greater disclosure and conformity. Greater co-ordination, implementation and enforcement are required to ensure full confidence in the sector.

Long-term operating environment

The Retirement Commission is committed to helping all New Zealanders plan financially for their retirement and throughout life. The Commission is actively targeting older New Zealanders to prepare them for retirement and to help them manage their money in retirement. In addition, work is underway to target young people to raise a more financially literate generation.

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.

The latest population projections from Statistics New Zealand reiterate that the population is ageing, the older will get older and there will be fewer working age persons relative to those in retirement age. In addition, baby boomers will begin to reach retirement age from 2011. The medium term environment should be seen in the context of the latest Long Term Fiscal Strategy from Treasury, which shows an unsustainable deterioration in public finances unless policy changes are made to address growing healthcare and other ageing related costs.

The concept of retirement and expectations for retirement are changing. Many will choose to retire earlier than 65 (the age of eligibility for New Zealand Superannuation) and many will work well into their later years. Rising demand for high quality aged care shows changing expectations of retirement.

Trends

The median age of our population has risen from 26 years in 1971 to 37 years in 2009, and is expected to rise to 43 years by 2061. The retirement age group is likely to more than double by 2061. This age group has doubled since 1976, to 550,000 in 2009, and is expected to rise by 2.6 times to 1.44 million people in 2061. The largest growth will occur between 2011 and 2037 as baby boomers move into this age group.

The older population will get even older. The 85+ age group is projected to increase from 2% of the population in 2009 to 6% in 2061. This will have considerable implications for retirement planning and fiscal pressures.

There will be more retirees per working age person. In 2009, there were 5.2 working age persons for every retiree. This is projected to fall to 2.3 persons by 2061. This indicates a greater burden on tax payers supporting growing expenditure on healthcare and government funded retirement income.

While baby boomers reaching retirement age from 2011 may create a bulge of retirees, many may choose not to retire. There has been a long term trend of rising participation for those in retirement age. Over the past decade, over 65 participation in the labour force has increased from 7% to 16%. This suggests that an ageing population will have a complex and dynamic impact on the Retirement Commission's operating environment.

Other trends and issues that may hold long-term implications include:

• High level of personal indebtedness, such as mortgages, 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.
• Womens' reduced ability to ‘save for retirement' as a result of lower earnings and labour force participation rates.

Source: Statistics New Zealand, RBNZ, Treasury, DataStream, REINZ, NZIER
⁴http://www.treasury.govt.nz/budget/forecasts/hyefu2009/08.htm