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Can KiwiSaver Calm the Recession?

KiwiSaver has several unique characteristics that make it investment gold and a GDP booster, writes Sam Stubbs, of Simplicity.

7 September 2023

In reading the dire predictions for our economy, one thing seems to be overlooked - the impact of KiwiSaver. I don’t blame the economists for this; they are paid to predict the next quarter, not the next 20 years. And they tend to think of KiwiSaver money as just another pool of investment savings.

But it’s not. Every dollar of KiwiSaver savings invested in our economy is more impactful on GDP and jobs than almost any other. Why? KiwiSaver has several unique characteristics that make it investment gold, and a GDP booster.

The first is its sheer size. Now over $91 billion, KiwiSaver is expected to be over $200 billion by 2030. That’s $200,000 million, the largest pool of domestic savings New Zealand has ever seen. And KiwiSaver’s growth provides an average additional investment of 2.3 per cent of GDP every year. To understand what money of that scale does to an economy look at Australia. Its $3 trillion of retirement savings has shielded it from recession for the last 26 years.

To see how special KiwiSaver money is, let’s take the example of funding a big construction project. In New Zealand, we have traditionally built buildings with a lot of debt. So, when interest rates rise or resale values drop, the lenders can foreclose mid-project, or the developer may start to default on debt or contractor payments. The net result is building projects stop mid-stream, and subcontractors find themselves suddenly unpaid and/or out of work. That exacerbates unemployment and the recession and we are seeing that happen right now.

Building projects

An alternative is KiwiSaver-funded building projects. Because KiwiSaver-funded projects will traditionally have less debt (and because funds continue to consistently grow with ongoing contributions), the cash flows are more certain. So the construction project carries on, and everyone keeps their job. This is just starting to happen in NZ, with the first KiwiSaver funded build-to-rent project opening in April.

And the evidence of pension-funded prosperity is compelling. Just look across the ditch. Australia is a commodity economy, meaning its GDP should rise and fall with the price of iron ore and coal. But until Covid, Australia was recession-free for 26 years. Why? A huge contributor was the consistency and scale of its investment in the local economy, via its ever-growing pension funds.

In NZ, the same will happen. The sheer scale of KiwiSaver savings will allow it to be applied to infrastructure investments previously too expensive to contemplate, and ones that will carry on regardless, and thus help mute any recessions.

The second reason KiwiSaver money is special for growth and productivity is its longevity. KiwiSaver savings are locked up, in many cases for over 40 years. That allows fund managers to invest it long term. It’s the reason four large KiwiSaver managers are already investing in local venture capital and private equity. And this is just the start; it’s good for start-ups and small/medium businesses wanting to expand.

The third reason KiwiSaver is investment gold is its consistency. Foreign investment can be a trend-driven tidal wave of capital, causing damage and distortion when it comes and goes. But KiwiSaver is like a slowly rising tide of savings. It’s hard to spot its impacts year by year, but it lifts all boats (that are fit to float) over time.

‘In the hood’

The fourth reason KiwiSaver is special is it’s 100 per cent Kiwi. That removes the problem of offshore investors in sensitive industries. It’s also likely to be more attractive to government, iwi and councils for co-investment. After all, it’s just locals investing “in the hood”.

The fifth reason KiwiSaver is special is how suited it is for investing in building, owning and renting homes. If anything is going to help solve our housing crisis, it’s KiwiSaver. Why? Because 42 per cent of OECD citizens live in medium and high-density apartments, with many of them owned by pension funds. It’s not uncommon for large pension funds overseas to have five to 10 per cent of their investments in rental housing. KiwiSaver funds can also become large mortgage lenders, competing with the banks and pushing down rates.

And the final reason is how KiwiSaver can be a serious competitor to banks as commercial lenders. They can lend directly to businesses, providing an alternative to banks. KiwiSaver funds cannot take term deposits without being a bank, but they can lend to whoever they like. And why wouldn’t they?

The bottom line is KiwiSaver money is special. It will slowly transform NZ from a capital-poor to a capital-rich economy, just as it has in Australia, Europe and America. It will be invested for the long-term, and it will be our money. And it will fund many start-up and SME companies, directly or indirectly.

It won’t happen quickly, but it will happen. And it might just help dampen this impending recession. Our economic future is rosier than many think.

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