With the National Employment Savings Trust (NEST) coming, the NZ government illustrates a low-cost approach to distributing protection products. Greg Becker explains
KiwiSaver is the New Zealand government's strategy to increase savings for retirement.
The solution is voluntary, but has been designed with features that make it accessible.
Enrolment is automatic, and although opt-outs are permissible, many customer focused features have been developed to increase take-up:
■ there is a NZ$1,000 kick-start payment from the government
■ it accepts employee and employer contributions directly from pay
■ it has simple contribution options (either 2%, 4% or 8% of salary)
■ employers are compelled to make a 2% contribution if you do
■ it is open to people who are not formally employed, or who have volatile income
■ the government makes a contribution in the form of tax credits - up to NZ$1,024 per annum.
To respond to the concerns of the young who complain that "they should not be saving for retirement", but rather "be saving for a down payment or deposit", or the fear that they will never get to use their money because they "cannot see that far into the future", early access to the funds is available when:
■ buying your first home
■ moving overseas permanently
■ under certain situations of significant financial hardship or
■ serious illness.
The UK pensions regime has some parallels with QROPS (Qualifying Recognised Overseas Pension Schemes) available for those who emigrate, tax incentives to encourage pension contributions, and with NEST, a system where all employers have to make contributions.
The key difference is that the KiwiSaver addresses some of the significant concerns of the young who see retirement as being too far off, and not their current priority.
This holistic approach to an individual's finances, and viewing one's pension assets as part of their ‘personal balance sheet' that can be used as a layer of protection in times of need, addresses some very real concerns.
The recent earthquake in Christchurch is a useful example: if you have a pension fund, but no house, being able to access some of your non-housing assets to address your current housing needs certainly has appeal. Why should your pension fund not be a rainy day fund as well?
So there are potential implications for the UK market, and things for us to consider:
■ On diagnosis of a serious illness, is it more desirable to allow people to access their pension rather than encourage them to buy a critical illness policy? The amount of cover may not be adequate but there is wide population coverage and the customer has no underwriting, commission or admin costs.
■ Is an opt-in scheme for health and life insurance a good thing? As above, the middle market would have cheap, easy to access cover, but would this be adequate?
■ Would a scheme like this encourage people to save?
■ Is "self-insurance" more desirable than buying insurance?
■ Should we encourage people to be more self sufficient and less dependent on the state?
Moving on, Intelligent Life have developed a platform that can facilitate low-cost, paperless online sales.
It was originally used by Pinnacle Life who has won many awards for launching the first online paperless application process that can offer ‘instant' sales.
The model and platform have been reused in other markets, and successful operations exist with Once Life in Australia and Instant Life in South Africa.
Their quotes are often the cheapest in their market, partly due to the low cost distribution method and administration processes.
What both of these initiatives demonstrate is that customers can take control of their purchasing decisions, and that some will if they can see some upside in reduced premiums.
We know NEST is coming. We know the RDR is coming. Could NEST be extended to be a more comprehensive solution that meets an individual's needs more fully? Will protection ever be covered under RDR? If so, how can IFAs add value if simple low-cost options are available to the public?
Greg Becker is product development actuary at RGA
