Veritas propter investigationem [Truth through research]
TitleKiwiSaver and Retirement Adequacy (2012)
AuthorsKirsten MacDonald
 Robert Bianchi
 Michael Drew
InstitutionGriffith University
TopicsRisk and investment issues
 Pension replacement rates
 Retirement income adequacy
CountryNew Zealand
Date Published2012
Date posted on PR24 Jun 2014
MacDonald, K Bianchi, R Drew, M, (2012). KiwiSaver and Retirement Adequacy (2012) Griffith University,

PensionReforms’ summary and comments

New Zealand’s auto-enrolment, opt-out, national retirement saving scheme (‘KiwiSaver’) started in 2007.  It’s a Defined Contribution scheme where members have a single savings account with one of about 50 approved providers.  There are default investment options but members can also choose their own investment strategies.  This 2012 report looks at what members’ strategies should look like and what that might mean for retirement accumulations.


“This paper seeks to provide positive insights into the design of KiwiSaver by assessing the recently announced move from 4 to 6% minimum contribution rates using stochastic simulation.  We consider retirement adequacy from two perspectives: (i) multiples of gross final earnings achieved during the accumulation phase; and (ii) replacement rates of salaries during the decumulation phase.”


The report dismisses the findings of reports that suggest New Zealanders were saving enough for retirement before KiwiSaver started – see here, here, here and here for some examples.  The report prefers an “…alternative method to model retirement wealth, taking into account financial market dynamics, which is particularly important in the post-global financial crisis (GFC) environment… - the stochastic simulation approach…”


The report notes at least one weakness of such an approach: “…historical returns do not necessarily provide an accurate estimation of the future.”  A lack of good historical data is another weakness noted.


“This study assessed the retirement adequacy of the KiwiSaver system by employing a stochastic simulation approach to an individual’s superannuation investment account.  Two definitions of retirement adequacy were employed, namely, (i) multiples of gross final earnings achieved in the accumulation phase; and (ii) replacement rates incorporating decumulation phase cash flows.  Despite the simulations reporting high final earnings multiples across all investment profiles, the distributions of the terminal values were skewed, suggesting the current system design does not support the generation of ‘adequate’ outcomes for most investors.”


On this basis, the report approved the then recent increase in total contributions from 4% to 6% of pay “as a step in the right direction”.  However, that is seemingly not enough.


“The results highlight a need to consider what additional policy improvements can be made over time to address, in particular, the issues facing young New Zealanders. We would encourage future researchers to consider exploring further questions around differing contribution rates and asset allocations strategies in the KiwiSaver context.”


PensionReforms has a number of problems with the report’s methodology and findings.  Given the authors’ attachment to modeling as the ‘proper’ way of measuring retirement saving adequacy, PensionReforms isn’t surprised that they dismissed the reports that have already looked at New Zealanders’ retirement saving behavior.  They are dismissed as “descriptive or survey based” and, seemingly for that reason, understate “the problem”.


The more important problem is that the report looks at a hypothetical 25 year old employee on a hypothetical wage who works for 40 years until he reaches the State Pension Age receiving hypothetical wage increases in the meantime.  The KiwiSaver account earns hypothetical returns (based on historical data) using different hypothetical investor profiles.  The retirement accumulations are then spent after age 65 on a basis that allows us to compare income ‘replacement rates’.


All this is much too hypothetical for PensionReforms and ignores much of the real world.  It is much easier to see what real retirees’ standards of living look like in retirement and to follow that over time.  PensionReforms has looked at the problems associated with what can only be described as the simplistic measure of ‘replacement rates’ here and here.  Retirement wealth is all that matters and that includes all kinds of things that this report’s analysis misses.

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