In February 2020, Wiremu and Anna applied to withdraw funds from their KiwiSaver accounts on the grounds of significant financial hardship (SFH). Wiremu and Anna’s KiwiSaver scheme supervisor agreed to a partial release from Wiremu’s account of $5,700, and a full release from Anna’s account of $300.
The amounts released were based on the supervisor’s analysis of Wiremu and Anna’s financial position, including their debts. $3,800 was released to cover three months of the couple’s deficit in meeting their living costs and debt payments. The other $2,200 released was to clear debt arrears.
Wiremu went back to the supervisor and said they should have agreed to release more funds so that he and Anna could completely pay off more of their debts. The supervisor said their decision to allow only a partial release was in line with the law and standard industry practice. Although in some circumstances KiwiSaver funds can be released to pay off debt arrears, funds would not be released to pay down other debts. The supervisor said Wiremu and Anna could make another withdrawal application in a few months’ time.
Wiremu complained to FSCL about the supervisor’s decision.
Although Wiremu and Anna understood that KiwiSaver funds couldn’t be released to pay off debt balances, they considered it did not make financial sense for them to have to continue making SFH withdrawal applications. Wiremu and Anna wanted the supervisor to release further funds so they could pay off their smaller to medium debts. This would create more room in their budget to pay down their larger debts faster and improve their overall financial position.
Clauses 10 and 11 of Schedule 1 of the KiwiSaver Act set out that a KiwiSaver supervisor can agree to the release of funds where a member cannot meet their minimum living expenses, if the supervisor is satisfied that alternative sources of funding have been exhausted. Further, the supervisor can release funds up to a specified amount which, in the supervisor’s opinion, is enough to alleviate the particular hardship.
We said that the supervisor had correctly applied the law in deciding to release only enough funds to pay off Wiremu and Anna’s arrears, so they could continue to meet their living expenses, while still paying their other debts to avoid those debts falling into arrears.
We also said that the purpose of SFH withdrawals is not to make a person’s financial position better. The release of funds on the grounds of SFH is essentially the ‘ambulance at the bottom of the cliff’. Once the arrears had been paid, Wiremu and Anna could continue to meet the minimum payments on their debts and pay their living expenses, with the help of the KiwiSaver ‘top up’.
At the same time, we could appreciate Wiremu and Anna’s view that they appeared to be in a constant cycle of applying for SFH withdrawals. However, if the supervisor agreed to release some lump sums so Wiremu and Anna could pay some of their debts in full, they would end up in a worse financial position. The level of Wiremu and Anna’s debt meant that, unless there was a dramatic change in their financial position, it was inevitable that all the KiwiSaver funds would soon be exhausted by them making SFH withdrawals. The difference was that if the supervisor allowed the release of lump sums to pay off some smaller debts, Wiremu and Anna’s KiwiSaver funds would run out in about 10 months, as opposed to 16 months if the supervisor just released the ‘top up’ amounts every 3 months.
As time consuming and stressful as it was for Wiremu and Anna to continue making SFH withdrawals, that appeared to be the better option for them. Wiremu and Anna accepted our decision, and the complaint was discontinued. We had concerns that because Wiremu and Anna had fallen into arrears so quickly with some of their loans, there may have been some irresponsible lending and suggested to Wiremu and Anna they may want to talk to their lenders.
Insights for consumers
It is a common misconception that KiwiSaver funds can be drawn on to pay debt. It also seems counter-intuitive to many people, especially in the current economic climate, to have funds locked in a KiwiSaver account, while that person is also servicing debt. However, unless you’re withdrawing funds to purchase a first home, the thresholds to withdraw funds earlier than retirement are necessarily high. The ultimate purpose of KiwiSaver is to save for one’s retirement and allowing lump sum withdrawals to pay down debt undermines that purpose.