6 April 2005

Chair
CABINET POLICY COMMITTEE
BUDGET 2005 SAVINGS PACKAGE: TERTIARY EDUCATION SAVINGS
Proposal
1.

This paper seeks agreement to issue a request for formal expressions of interest
from the market in offering a dedicated tertiary education savings scheme.

Executive Summary
2.

We (the Minister of Finance and Minister of Education) have considered a

number of options for a tertiary education savings scheme, including a proposal
called FUNZ, operated by a not-for-profit entity, a contestable (single or multiprovider) option, and allowing withdrawals for tertiary education from the Workbased Savings Scheme (WBSS).

3.

4.

5.

Background Information
6.

The government has received a proposal, called FUNZ, for a dedicated tertiary
education savings scheme. This proposal is being considered in the context of a
broader set of measures to increase the propensity of New Zealanders to save.

7.

Since late 2004, Treasury officials have been working on a savings package that
seeks to encourage a long-term savings habit. While the savings package is
intended to form an integrated pathway to savings, it has three distinct
components:

8.

a work-based savings option for all wage and salary earners;

a suite of initiatives to assist people into home ownership; and

a dedicated tertiary education savings proposal.

This paper focuses on the tertiary education savings component of the package.
A tertiary education savings scheme would aim to assist families to save for their
childrens tertiary education.

The FUNZ proposal

9.

The promoters of FUNZ believe that their scheme would encourage regular
savings contributions from a variety of sources including family, friends, and Iwi.
The proposal also includes a charitable pool through which donations from
corporate and philanthropic groups could be distributed to the accounts of
children from low income families (its not yet clear what process the charitable
pool would use to determine household income).

10.

The FUNZ proposal would require savings balances to be used to meet the costs
(fees and related course and living costs) of approved tertiary education
programmes, using the same criteria as the Student Loan Scheme. Tertiary
savings account balances would have to be fully drawn down prior to the student
accessing a student loan.

11.

Contestable (single or multi-provider) approach

12.

A contestable approach may offer a number of benefits, including efficient fee

structures, minimising any public perceptions that the government would act as
guarantor of a scheme, and consistency with the governments approach to other
savings initiatives including the State Sector Retirement Savings Scheme
(SSRSS).

13.

Comment
Consideration of options going forward

14.

15.

We decided against the option of allowing a withdrawal for tertiary education from
the WBSS, and not having dedicated childrens savings accounts, on the basis
that this would:

dilute the long-term savings focus of the WBSS; and

be unlikely to achieve savings contributions from third parties, particularly

grandparents and other family members.

16.

a)

determine whether and how to proceed with providing government financial

support for a tertiary education savings scheme (or schemes); and

b)

(if deciding to proceed) select a short list of (one or more) candidates with
whom the government would seek to develop an approved scheme or
schemes.

17.

Proposed design parameters for the purpose of seeking expressions of interest

18.

19.

The following high-level design parameters for a tertiary education savings

scheme were included in the material distributed to providers as part of the initial
round of consultations (these were qualified by the statement that final decisions
were yet to be taken):

voluntary enrolment;

some type of government incentive to encourage participation in the

scheme (it was noted that officials were exploring a range of options
including offsetting account administration fees);

savings balances locked in for a certain period of time or until the savings
account holder had reached a certain age;

a student with a tertiary savings account must use their savings balance
before drawing on a student loan (using the same or similar criteria as for
student loan eligibility for approved tertiary education courses). This would
probably be through StudyLink;

20.

21.

the option to transfer any residual balance from a tertiary education savings
scheme into a work based savings scheme; and

the Government would not act as guarantor for the scheme.

In order to provide greater guidance about the governments preferred design

parameters, we propose that the following additional high-level design
parameters be included in the expressions of interest document:

Single or Multiple providers: The government does not yet have a firm
preference on whether there could be more than one provider of a
dedicated tertiary savings scheme. If a multi-provider option was viable, it
is likely that the government would limit participation to a maximum of three
or four eligible providers.

Interface with student allowance policies: Individuals savings balances

would not affect their eligibility for a student allowance (otherwise there
would be a disincentive for families on low incomes to participate).
Moreover, this scheme, if established, is not intended to replace or replicate
existing policies to assist low income students.

Savings sweetners: The government is considering some form of upfront

contribution to encourage participation in the scheme. Similar savings
models overseas tend to structure the sweetner as an upfront payment in
order to maximise the visibility of the government incentive. Due to the
benefits of early enrolment, it is likely that any government contribution
would be targeted to children aged less than six years. The government
does not propose to target a contribution on the basis of family income as
this proposal is not intended to replace or replicate existing income support
policies.

The rules around lock-in of the savings balance: If an individual does not
participate in tertiary education, their savings balance could be transferred
into the WBSS. This could only occur once the individual had reached a
certain age (for example, 25 or 30 years), subject to advice from the
Ministry of Justice on compliance with the Bill of Rights Act 1990;

Hardship provisions: The government needs to consider in what

circumstances it would be reasonable to allow individuals access to their
savings for purposes other than tertiary education, and how these rules
would be enforced. An example of the type of provision being considered
is in the case of death or permanent disability which prevents the child from
participating in tertiary education.

The types of issues that providers would be asked to provide feedback on include
their views on:

Likely levels of participation with and without any government contribution

to individual accounts.

Providers views on how the scheme may best be promoted to establish

client interest and take-up.

Likely administration costs for operating the scheme and, assuming

different levels of participation, what this means for fees on individual
accounts.

Possible scheme design parameters or rules that could reduce the risks
associated with low account balances and small transactions (for example,
family accounts or minimum deposit requirements).

How providers responses would vary depending on whether the provider

was the only provider of the scheme or was one of a small number of
providers (for example 3 or 4).

Whether and how distribution of the savings balances through StudyLink

might impact on how any scheme might be structured and delivered.

The most appropriate investment structure (initial consultations suggest

that a unit trust structure is the most likely investment vehicle).

Possible implementation timeframes.

Proposed process and implications for Budget 2005

22.

Subject to Cabinet agreeing to the proposed design parameters, we recommend

that Cabinet agree to delegate authority to the Minister of Finance and Minister of
Education to sign off on the final version of the request for expressions of
interest. This would enable the request document to be issued as soon as
possible. We will report back on the results of the expressions of interest and
recommended next steps by the end of June 2005.

23.

24.

Not proceeding with a tertiary savings initiative remains a fall back option if the
responses indicate that a scheme would not be viable, for example due to
inordinate administration costs or very low levels of participation.

Financial Implications
25.

The following financial implications are indicative only:

Further consultation
26.

There will be costs incurred in 2004/05 associated with the preparation and
distribution of a government request for formal expressions of interest, and the
development of advice to Cabinet on the outcome of that process. These costs
can be absorbed within existing Vote Finance baselines.

Establishment and implementation costs

27.

28.

Government savings contributions

29.

Table 1: Fiscal costs associated with different level of government contribution and
participation rates

30.

31.

32.

Human Rights Act

33.

Publicity
34.

Note that there are interest groups who will be opposed to this proposal, notably
student union groups and the Council of Trade Unions. These groups argue that
a tertiary education savings scheme will largely benefit individuals who can afford
to save, and that it undermines the concept of education as a public good.

Consultation
35.

The following departments have been consulted in the preparation of this Cabinet
paper: The Department of Prime Minister and Cabinet, the Ministry of Economic
Development, Inland Revenue, the Ministry of Justice, the Ministry of Education,
the Ministry of Social Development, Te Puni Kokiri, the Ministry of Pacific Island
Affairs, the Ministry of Womens Affairs, and the Ministry of Youth Development.

Recommendations
36.

We recommend that Cabinet:

36.1

note that the government has received a proposal, called FUNZ, for a
dedicated tertiary education savings scheme;

36.2

note that the Minister of Finance and Minister of Education have

directed officials to explore a contestable approach to identifying a
preferred provider(s) of a tertiary education savings scheme(s);

36.3

agree to seek formal expressions of interest from the market in offering

a dedicated tertiary education savings scheme, and that the promoters
of FUNZ will be invited to resubmit their proposal as part of this process;

36.4

agree that the following design parameters be included in the

documentation seeking expressions of interest:
i

Voluntary enrolment.

ii

Some type of government incentive to encourage participation in the

scheme. This could include an upfront payment targeted to children
aged less than six years in order to encourage early enrolment.

iii

Savings balances could only be used to fund approved tertiary

education programmes (possibly using the same or similar criteria
as the student loan scheme).

iv

Savings would need to be fully drawn down before a student could

access a student loan. Distribution of the savings would probably be
through StudyLink.

An individuals savings balance would not affect their eligibility for a

student allowance.

vi

If the individual did not participate in tertiary education the savings

could be transferred into a work-based savings account. This could
only occur once the individual had reached a certain age (for
example, 25 or 30 years at which time individuals are less likely to
need to access the student loan scheme), subject to advice from the
Ministry of Justice on compliance with the Bill of Rights Act 1990.

vii The savings would be able to be access under certain

circumstances such as the death of the child or financial hardship
grounds (the actual rules have yet to be determined).
viii The government has not made a decision on whether there could be
more than one provider of a dedicated tertiary education scheme;
however it is likely that participation would be limited to a maximum
of three or four providers.
ix
36.5

The Government would not act as guarantor for the scheme.

agree that the documentation would seek feedback from providers on

the following issues:
i

Whether some form of upfront government contribution is necessary

to encourage participation in the scheme.

ii

Likely levels of participation with and without any government

upfront payment to individual accounts.

iii

Providers views on how the scheme may best be promoted to

establish client interest and take-up.

iv

Likely administration costs for operating the scheme and, assuming

different levels of participation, what this means for fees on
individual accounts.

vi

How providers responses would vary depending on whether the

provider was the only provider of the scheme or was one of a small
number of providers (for example 3 or 4).

vii Whether and how distribution of the savings balances through

StudyLink might impact on how any scheme might be structured
and delivered.
viii The most appropriate investment structure (initial consultations
suggest that a unit trust structure is the most likely investment
vehicle).

10

ix

Possible implementation timeframes.

36.6

agree to delegate authority to the Minister of Finance and Minister of

Education to sign off on the final content of the request for expressions
of interest;

36.7

agree that the request for expressions of interest be issued as soon as

possible to enable the process to begin in advance of Budget 2005;

36.8

note that, subject to Cabinet agreement to recommendation 36.7 above,

the Minister of Finance and Minister of Education will report to Cabinet
on the results of the expressions of interest and recommended next
steps by the end of June 2005;

36.9

note that the decision on whether to proceed with a dedicated tertiary

education savings scheme will be informed by whether the results of the
expressions of interest indicate a reasonable level of market interest and
that the scheme would be financially viable;

36.10

note that the costs associated with implementing a dedicated tertiary

education savings scheme will depend on a number of policy decisions
yet to be taken, including the number of providers, the design
parameters, and the nature of the governments ongoing involvement;

36.11

36.12

Hon Dr Michael Cullen

Minister of Finance

Hon Trevor Mallard

Minister of Education

11

Annex 1: Tertiary Education Savings Scheme Options

CAB
100/2002/1

Consultation on Cabinet and Cabinet

Committee Submissions
Certification by Department
Departments consulted: The attached submission has implications for the following departments whose views have
been sought and are accurately reflected in the submission: The Department of Prime Minister and Cabinet,

the Ministry of Economic Development, Inland Revenue, the Ministry of Justice, the Ministry of
Education, the Ministry of Social Development, Te Puni Kokiri, the Ministry of Pacific Island Affairs,
the Ministry of Womens Affairs, and the Ministry of Youth Development.
Departments informed: In addition, the following departments have an interest in the submission and have been
informed:
............................................................................................................................................................................................................................................

Others consulted: Other interested groups have been consulted as follows:

............................................................................................................................................................................................................................................

Signature

Name, Title, Department

Date

Claire Douglas, Manager, The Treasury

23 /3/2005

Certification by Minister
Ministers should be prepared to update and amplify the advice below when the submission is discussed at
Cabinet/Cabinet committee. The attached submission:

Consultation at
Ministerial level

did not need consultation with other Ministers

has been the subject of consultation with the Minister of Finance
[required for all submissions seeking new funding]
has been the subject of consultation with the following Minister(s)

Consultation
with
Government
MPs

Consultation at
Parliamentary
level

does not need consultation with the government caucuses

has been or will be [specify which] the subject of consultation with the following
government caucuses:

Labour caucus

Progressive Coalition caucus

does not need consultation at parliamentary level

has been or will be [specify which] the subject of consultation with the following other
parties represented in Parliament:
...........................................................................................................................................................................

Signature

Portfolio

Date
/

Most submissions to Cabinet and Cabinet committees are relevant to departments other than the initiating
department. It is important for the quality of decision making that all interested departments are involved in
developing a submission. Departments should consider the schedule of interests of all departments in chapter
11 of the Cabinet Office Step by Step Guide for every submission for which they are responsible. Particular
attention should be paid to the need to consult the departments listed below, which have a broad horizontal
responsibility.
The Cabinet Office will reject submissions if the necessary consultation does not appear to have taken place.

Department

Issues on which they must be consulted

Crown Law Office

Proposals having legal implications for the Crown

Ministry of Consumer Affairs

All policy proposals likely to affect the economic welfare of

consumers

Ministry of Foreign Affairs and Trade All proposals having implications for New Zealand's external
relations, trade policy and international legal obligations
Ministry for the Environment

All proposals having significant environmental implications

Ministry of Maori Development

All proposals with implications for Maori, as individuals, communities

or tribal groupings, with particular focus on reducing inequalities, and
Treaty of Waitangi issues

(Te Puni Kokiri)

Ministry of Pacific Island Affairs

All proposals with implications for Pacific peoples as individuals and

communities with particular focus on closing the gaps issues

Parliamentary Counsel Office

Proposals for legislation or amendments to legislation

Department of Prime Minister &

Cabinet

All policy proposals which are likely to have implications for the
government as a whole, or for the coordination of the activities of two
or more departments

Ministry of Research, Science and

Technology

All proposals having implications for science policy or funding, or

which might be significantly influenced by scientific or technological
input

Senior Citizens Unit, Ministry of

Social Policy

All matters relating to the well-being of older people

State Services Commission

All proposals with an impact on organisational structures, Chief

Executive accountability or departmental performance specification
and industrial relations in the state services

The Treasury

All proposals having economic, financial or fiscal (expenditure or

revenue) implications

Ministry of Women's Affairs

All proposals that relate to the economic and social status of women,
especially Maori women

Ministry of Youth Affairs

All proposals dealing with issues of concern to 12-25 year olds