New Zealand’s national income insurance scheme: a lost opportunity

Vol 47: Issue 1 | April 2024

One of the consequences of the October 2023 change of government in New Zealand is the demise, possibly forever, of plans for a national income insurance scheme. 

The scheme was proposed by the former Labour Government in early 2022 and came out of the Future of Work Tripartite Forum, a partnership between government, Business New Zealand and the New Zealand Council of Trade Unions.

In comparison with Australia, where 31 per cent of workers have income protection, the penetration of income protection products is at a low 15 per cent in New Zealand. 

The idea was to introduce a national scheme that would provide workers with an income substitute if they were made redundant or were unable to work for medical reasons.

It was seen as an alternative to earlier plans to reform redundancy laws with recommended compulsory payments based on length of service.

Safety net

To fund the scheme, the original proposal was for a compulsory 2.77 per cent levy on salaries and wages, with employers and employees contributing equally. The funds would be in a national pool and not set aside in individual accounts. 

The scheme would have allowed an employee to access payments for up to seven months, comprising a four-week notice period, followed by four weeks of 80 per cent pay provided by employers, followed by a further six months of financial support funded from the scheme at 80 per cent of salary. 
 
The initiative was inspired by similar schemes in Scandinavia (see breakout) and also by New Zealand’s own Accident Compensation Corporation (ACC), which covers people who are injured in accidents. The ACC would have administered the scheme had it gone ahead under the initial proposal.

Despite being the product of a tripartite consultation involving both business and unions, the incoming National Party-led government of Prime Minister Christopher Luxon saw the scheme as a “jobs tax” and has shelved it — along with a raft of other initiatives from the previous government.

Addressing under-insurance

The idea, however, had the attention of the insurance industry over 2023. 

Grant Willis, executive general manager at Asteron Life, is diplomatic in his comments in the wake of the scheme’s demise but says his company “believes in building the financial resilience of New Zealanders”.

“Supporting them in building this resilience is one of the central goals of the personal and income protection insurance we offer,” he says. “We are always willing to play a part in any future discussions to address under-insurance in New Zealand, including through life insurance or income protection cover provision.”

Much of the engagement from the insurance industry came through the Financial Services Council New Zealand’s outgoing chief executive, Richard Klipin. Klipin, who recently announced he would be stepping down, says his organisation was “vocal and supportive” when the idea was originally floated, because it was concerned that “Kiwis are fundamentally under-insured”.

“The scope then grew and grew and grew, and therefore so did the cost and complexity of implementing and administering the scheme,” says Klipin.

“It started as a way of solving the problem of what happens when people are made redundant to what happens when they became sick, and when the scope started to creep like that, it became clear that more money was needed.”

Stumbling blocks

Klipin makes the point that the insurance sector already has strong “intellectual property” and the capability around delivering income protection products.

While the industry favoured a scheme that followed the model of the retirement savings scheme KiwiSaver — where the management of funds are outsourced to the private sector under a scheduled tender process — the previous government’s plan was for it to be managed by the ACC.

“We said that we already had a really effective working scheme with KiwiSaver and why wouldn’t you do the same thing?” says Klipin.

“The expertise for this scheme was in the insurance sector, not in the government agencies.”

Klipin sees the demise of the scheme as a “huge opportunity missed, because we were very supportive of the plan upfront”.

“But we were always concerned about the execution and the complexity of the implementation,” he adds, “even though it was a good idea with strong underlying merit.”

Understanding income protection

For the future, Klipin sees financial literacy as the critical tool to drive any increase in income protection in New Zealand. With the government scheme now mothballed and a legislative solution on the backburner for the foreseeable future, education is now the key. 

New Zealand saw an uptick in people taking out insurance products, particularly health insurance, during the COVID pandemic, but Klipin says it’s too soon after that event to know if it has permanently changed people’s behaviour.

“People make these decisions when it’s a clear priority for them,” he says. “When they buy a car, they can’t drive unless it’s insured; they can’t buy a house unless it’s insured.

“But income protection insurance is a challenge. We have to help people engage with their money and understand their risks.”

Income protection in Sweden: how it works

According to Sweden’s 2023 Unemployment Report, 3.9 million working-age Swedes are members of an unemployment fund — equivalent to 73 per cent of the country’s total workforce. 

Sweden has a selection of unemployment funds that people can choose to join and make modest voluntary contributions to — the country’s largest fund targeted at university graduates charges 130 kroner (A$19) per month. Employers, self-employed people and the state also pay into the funds. 

Maximum payouts are based on a member in full-time work contributing to a fund for a minimum of 12 months. There’s a sliding scale for part-time workers and those who have been a fund member for less than a year, or who aren’t a fund member.

If a person who makes voluntary contributions becomes unemployed, they can receive up to 80 per cent of their previous salary for the first 100 days of unemployment, capped at 1,200 kroner (A$175) per day before tax. Someone who does not contribute to an unemployment fund will only receive the basic state subsidy of 510 kroner (A$75) per day before tax. 

People may still receive income protection payments if they are out of work when the 100 days are up. Parents of children younger than 18, for instance, receive a further 150 days of payments. Others will receive support too, but at a lower percentage cap (usually a maximum of 70 per cent instead of 80 per cent of their previous salary).

The income protection scheme ensures Swedes have enough time to find another job equivalent to their last one without undue hardship, but the drop in income acts as an incentive for people to actively look for work. 

How many Kiwis would use a national income protection scheme? 

The New Zealand Ministry of Business, Innovation and Employment estimates 115,000 of the country’s population of around 5.3 million would potentially draw on an income protection scheme each year, in the event of extended unemployment or illness preventing them working.

Read this article and all the other articles from the latest issue of the Journal e-magazine.

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