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National's KiwiSaver and "Cullen Fund" policies

13 November 2008

Significant changes will be made to KiwiSaver by the incoming government (linked to National's tax cuts package), though the basic structure of the regime will remain intact. Additionally, a major change is proposed for the New Zealand Superannuation Fund, also known as the "Cullen Fund".

KiwiSaver policy

The old

National will retain many of KiwiSaver's existing features, including:

  • its voluntary character, with automatic enrolment for new employees and a right to opt out
  • the $1,000 government "kick-start" and $40 per annum fee subsidy, and 
  • the member tax credit (matching members' contributions up to a maximum of $1,043 per year).

The new

However, the new government will make a number of key changes:

  • the standard minimum employee contribution rate will be 2% of gross salary or wages, instead of the current 4% 
  • the minimum employer contribution rate – currently 1% of gross salary or wages – will increase to 2% on 1 April 2009 (as the legislation currently prescribes) but will remain at that rate. National will repeal the KiwiSaver Act's provisions for increases to 3% on 1 April 2010 and to 4% on 1 April 2011
  • National will discontinue the employer tax credit (currently matching an employer's KiwiSaver contributions up to $1,043 per employee, per annum) from 1 April 2009
  • only the first 2% of an employer's contributions will be exempt from contribution tax (currently, employer contributions are tax free up to 4% if matched by an employee contribution), and 
  • the September 2008 Employment Relations Act amendments will be repealed. This is a welcome move, as there were a number of serious issues with those changes which Chapman Tripp had raised publicly and with officials (and which had yet to be satisfactorily addressed). However, it seems clear that effective "total remuneration" approaches to KiwiSaver employer contributions will still not be allowed (see below).

There was some initial uncertainty as to whether the self-employed and the non-employed would remain eligible for member tax credits. We now understand that they will. National's initial policy was that employees would only receive a member tax credit equal to their minimum contribution rate (2% of salary), even if they made additional voluntary contributions.

For low income earners, this would have been less than the full $1,043 which is available to other members, and (in our view) the policy would have been difficult to administer. However, in a recent meeting with unions, National has undertaken to have a fresh look at the issue, and this would be something we'd expect to see changed.

Slimmed down

We agree with commentators who say that reducing the minimum employee contribution rate to 2% will likely remove an existing constraint on growing KiwiSaver membership numbers. Inland Revenue's first KiwiSaver Evaluation Report in September 2008 reported that the minimum 4% contribution rate "is the main feature that is discouraging enrolments".

That report also noted that another factor discouraging participation was a concern that future governments might change or even discontinue KiwiSaver. Though National's proposals for an "enduring, affordable KiwiSaver" produce a slimmed-down menu of incentives, its commitment to retaining KiwiSaver will no doubt also mitigate those concerns.

A minimum employee contribution rate of 2% will likely also reduce (longer term) the frequency with which employees take hardship or affordability-based contribution holidays. National says it will consider a "3% plus 3%" option when the country (and the government) can afford it.

Is "total remuneration" back in favour?

No. National will repeal the September 2008 amendments, and this will enable employers to pay non-KiwiSaver members extra cash to offset all or part of the amounts that KiwiSaver members receive as employer contributions.

However, National also says it will ensure that employees do not have their gross taxable pay reduced by reason of joining KiwiSaver. This would appear to mean that if a non-member who has received the extra cash then elects to join KiwiSaver, the employer must continue paying the extra cash (as well as paying the required employer contribution).

If National's current policy is enacted, we doubt that formal total remuneration approaches will be common.

It seems the amending legislation will likely confirm that employers can offset KiwiSaver employer contributions against their contributions to non-KiwiSaver superannuation schemes. That will be a welcome and sensible confirmation.

Some general comments

We wonder whether it will remain practicable or desirable, with a new minimum employee contribution rate of 2%, to continue requiring an 8% (as well as a 4%) rate also to be offered to all employed KiwiSaver members. Software and systems constraints will be relevant here.

A KiwiSaver regime which is less generous, and features lower overall contribution rates, should leave a commensurately greater place in the sun for more tailored and flexible non-KiwiSaver offerings.

New Zealand Superannuation Fund policy

Established under the New Zealand Superannuation and Retirement Income Act 2001, the New Zealand Superannuation Fund (the "Cullen Fund") was created to partially provide for the future cost of funding New Zealand superannuation payments. Like many countries around the world, New Zealand has an ageing population, with the number of retired people expected to double by 2050.

National's policy is to use the resources of the New Zealand Superannuation Fund to invest in, and grow, the New Zealand economy. The target is to invest at least 40% of the Fund in New Zealand.

The current mandate of the Guardians of the Fund is to invest on a prudent, commercial basis consistent with best practice portfolio management. Ministerial directions may be given to the Guardians regarding "the Government's expectations as to the Fund's performance", but the "how to" of investing the Fund is left to the Guardians' discretion.

A legislative amendment will be needed for the New Zealand Superannuation and Retirement Income Act 2001 to allow a Ministerial direction to the Guardians concerning the proportion of the Fund to be allocated to New Zealand.

Interestingly, the Act specifically requires that on the introduction of the amending Bill, the minister must report to the House on the consultation process that followed the formulation of the required amendment. That report must state whether consultation has taken place with the Guardians and with several political parties who have previously notified their agreement to the relevant Part of the Act – Labour, United Future and Progressive.

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