KiwiSaver providers say hardship withdrawals are being made for the wrong reasons. Photo: RNZ
KiwiSaver hardship withdrawals are "100 percent" being made for the wrong reasons, KiwiSaver providers say - and there are calls for significant change.
Inland Revenue data shows there was almost $49 million withdrawn for hardship reasons in September, up from almost $36m a year earlier.
Withdrawals can be made when someone cannot meet their living expenses or needs to pay for things like medical treatment.
But there have been concerns that people may be making withdrawals in situations where there are other options available to them, or using money for purposes other than they claimed.
One banking industry source said he had heard about people using a withdrawal on "botox and lip fillers". Another KiwiSaver provider said a hardship application had been approved because someone could not sell their Range Rover fast enough.
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David Verry, a financial mentor at North Harbour Budgeting Services, said a hardship withdrawal was the number one request from new clients.
He said financial mentors would try other things first, such as going through someone's budget with them, potentially talk to creditors about hardship provisions, looking at repayment arrangements or debt restructuring, or asking whether family could help.
"From my perspective, a KiwiSaver hardship withdrawal is no more than a 13-week band aid - in this period we need to find more permanent solutions to what are very fundamental underlying issues - too little income, too much debt, too many expenses."
But he said many clients disengaged once they had the approval paid.
"Whether the withdrawal proceeds go to what we have requested, we often never know. I am a great advocate for the KiwiSaver provider to make the withdrawal payments directly to the creditors.
"Many moons ago this used to happen, but we realise this would be an administrative nightmare for the providers. And even where the clients are quite disciplined about the process, having a large chunk of cash in your bank account to cover you for the next 13 weeks can be tempting, to say nothing of emergencies that happen during this time - drip-feeding that cash to cover weekly deficits would be preferrable but an even more logistical or administrative nightmare."
Ana-Marie Lockyer, chief executive of Pie Funds, said she would support looking at options to make sure withdrawals were used for the purpose they were approved for.
"Paying the money directly to whoever needs to be paid could help with that. The key thing is keeping the process simple and fair for people who are already under financial pressure. But also need to balance administrative practicality, privacy, and the need to maintain dignity and trust for members during difficult times."
Koura founder Rupert Carlyon agreed it would be administratively difficult.
"Someone will have five or six different debts that they are looking to clear … A lot of it is also just down to living expenses. So it is frustrating that we often get the same request for the same debt twice, but administratively that's going to make our lives really hard if we have to go through and pay people directly."
He said it was worth asking whether it was appropriate to allow withdrawals for hardship reasons at all.
If New Zealand wanted to lift its contribution rates, that would probably require more incentives to be in the scheme, he said.
"I don't think you can have this financial hardship provision when you've got those financial incentives because people are learning pretty quickly how to manipulate the system and pull them out, you see the ads on TikTok. You see all of that kind of stuff.
"I think we need to have a really good, hard conversation around actually are these financial hardship provisions appropriate and should they be there."
People were "100 percent" withdrawing money for the wrong reasons, he said.
Cases such as the person who could not pay their bills because they could not sell their Land Rover quickly enough were technically within the rules but should not be allowed. "The other message people are getting from some of the social media stuff is if you don't qualify for financial hardship that's fine, spend the money and get yourself into debt and then the hardship withdrawal will work.
"Technically that's within the rules. Now the cat is out of the bag and more and more is going to happen every single day."
ANZ, the country's biggest provider said whether money should be paid direct to creditors was a question for supervisors.
David Callanan, general manager of corporate trustee services at Public Trust, one of the supervisors, said hardship withdrawals should be a last resort.
"Most people who apply have exhausted their options and need urgent support. These situations call for quick action and introducing direct payments to creditors could add cost and complexity for KiwiSaver providers to administer, slowing down support for those who genuinely need it.
"We understand the concern around ensuring funds are used appropriately, and there are already strict rules and checks in place to support that."
Verry said many people wanted to pay off debt and it had to be explained that they could only use their money for arrears.
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Verry said the application volumes were so high that providers were taking much longer to process them.
"I have one client whose phone has been cut off due to arrears and am pleading with the phone company to reinstate it as we have an application in progress."
He said it took mentors a lot of time and effort to work through an application, often including multiple requests for information from KiwiSaver providers.
"Even if we have tried to put everything in - the information requirements are detailed - arguably more information needed than if a client is looking to borrow money."
He said little, if any, funding for mentors came from organisations that suggested their clients engage with them.
"On most finance company and bank websites, clients are directed to call MoneyTalks - the national call centre run by FinCap - if they are experiencing financial difficulties. KiwiSaver providers usually require an applicant to have engaged with a financial mentor as part of the withdrawal process. And for the availability of these services, there is little or no contribution being made by the financial institutions. A levy would be more than useful."
Commerce and Consumer Affairs Minister Scott Simpson said the government was not considering a levy to support mentors.
"I'm aware of the increase in hardship withdrawal applications. It is positive that people are seeking financial advice, but we need to ensure all other options have been considered before KiwiSaver funds are drawn from."
He said it was also not considering requiring payments to be made directly to creditors.
A spokesperson for FinCap said it was not getting enough government funding to keep up with demand.
"FinCap is having to look at how industry can contribute ongoing sustainable funding for financial mentors to meet increasing demand while services are closing.
"Australia and the UK have broad industry contributions to their financial mentor equivalents. Establishing appropriate levies on industries whose customers are supported by financial mentors is our ideal in the long term. This should sit alongside increased funding from government. Steady levy contribution would mean a stable workforce of expert financial mentors who can get on with their vital work - helping their communities navigate increasingly complex financial difficulties every day.
"In recent days we've seen the announcement that the Online Casino Gambling Bill will be adjusted to see a 4 percent duty from online gambling licensees compared to a minimum of 40 percent of proceeds from pokie machines. This is an example of an industry that creates demand for support from financial mentors as those gambling and their wider whānau experience hardship. It would be great to see a further levy specifically funding financial mentors who work with whānau harmed by gambling addiction, as well as the broad industry levies we hope to see."
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