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Publications

Total rem…Gone for all money?

11 September 2008

The “total remuneration” approach to KiwiSaver has been effectively banned in legislation rushed through Parliament under urgency last week. The change was flagged by the Government in July.

In essence, the new law says a KiwiSaver member cannot be offered lesser terms (or be otherwise disadvantaged) in comparison with a "comparable" non-member employee of similar skills, experience and circumstances.

The amendments apply to employment agreements entered into on or after 2 September 2008, and also to variations made to existing agreements from 2 September.

Implications

The implications of this change are serious and potentially complex for employers who use a total remuneration1 approach, and perhaps also those who look to offset any existing superannuation subsidies against KiwiSaver employer contributions.

  • From 2 September, KiwiSaver employer contributions (currently 1%) need to be paid on top of the salary or wages offered to new staff. Generally, total remuneration arrangements are now not lawful, although see our comments below. 
  • Employers using a total remuneration approach will have some breathing space for staff employed before 2 September 2008. However, in reality they will need to transition employees off those arrangements (both to avoid having different employment arrangements depending on the employee’s start date and also to avoid the risk of eventually breaching the new law). These employers should seek specific advice quickly, particularly before implementing pay increases.
  • There may be issues with superannuation contributions made to non-KiwiSaver schemes that are additional to base salary and not tradable for cash. If those contributions reduce when staff join KiwiSaver, the legislation allows differing interpretations – a point that should (and almost certainly would) have been picked up in a select committee process. We and others have sought urgent clarification. 
  • Employers cannot offer lesser pay rises to KiwiSaver employees because they are members of the scheme. (In our view this was never a sensible idea anyway, as non-members were always free to take the larger pay rise, and then turn around and join KiwiSaver.)

Good law?

In a word, no.

There is a legitimate policy debate around whether or not total remuneration should be allowed.

Proponents say this approach ensures non-KiwiSaver members aren't disadvantaged (remembering lower-paid workers may not be able to afford to join). Total remuneration also gives employers certainty about their wage and salary costs.

On the other hand, KiwiSaver becomes a less attractive proposition for total remuneration employees as they bear a greater cost if they join the scheme, and they don't get any "free money" from their employer. This cost (and disincentive to join) will grow, as the compulsory employer contribution moves from 1% to 4% over the next three years. Government has also expressed concern that total remuneration allows employers, if they choose, to pocket the government-funded employer tax credit when it is the employees who actually meet the costs of the scheme.

However, leaving that policy debate aside, this new law is highly unsatisfactory for a range of reasons.

Back-tracking

The amendment represents a significant policy and legislative U-turn, and one that will cost some employers dearly.

When it suddenly introduced employer contributions, the Government didn't clarify whether a total remuneration approach would be permitted. However, in late 2007 it passed a law that expressly allowed total remuneration agreements, provided they were entered into on or after 13 December 2007.

Employers were entitled to rely on this law when setting their remuneration policies and a number (particularly medium to larger corporates) did so, only to have the rug ripped from under them by this latest change. These employers are now in an extremely difficult predicament.

The Government should have thought the matter through, taken a position, and stuck to it.

Existing arrangements not safe

Although they have a window of probable safety, employers don't have ongoing certainty that their existing total remuneration arrangements will be upheld.

When Government first announced the change, it said existing arrangements would not be affected; indicating that employment agreements made between 13 December 2007 and 1 September 2008 would remain valid. However, looking at the law, we doubt this is the case.

This is because the new law applies to variations made from 2 September 2008. Employment agreements are varied all the time. An annual pay rise, for example, probably amounts to a variation, and may trigger the new law, making the pre-existing arrangements illegal.

Different treatment

The law seems to allow different treatment (and total remuneration) for employees who, because of their seniority or specialist skills, do not have any "peers". This opens up a potential minefield of litigation, and may involve detailed comparison of an employee's qualifications, experience and skills with those of other employees within (and potentially outside) their organisation. Practically, we suspect most employers will just avoid the argument, and not use total remuneration.

Passed by lunchtime

As a result of being rushed through, the legislation has a number of technical problems and unintended consequences which have the potential to create real uncertainty, and which will need to be fixed.

These sorts of issues should be picked up during the debate and select committee processes. This law was introduced on 2 September and passed at around 11am the next day. This is an indictment on New Zealand's legislative process. Urgency should not be used unless absolutely necessary for amendments that have technical and complex ramifications.

  1. Under a total remuneration arrangement, employees receive the same amount of money from their employer regardless of whether or not they are KiwiSaver members. If a "total remuneration" employee joins KiwiSaver, his or her before tax pay is reduced by the amount of the employer contribution.

Contacts