Labour’s debate-worthy proposals to make KiwiSaver compulsory for employees, and to give the Reserve Bank a role in varying contribution rates, raise interesting implementation issues. Our Australian neighbours have had compulsory superannuation in place for around 20 years and a comparison with their model throws up a number of questions. We look at some of those here.
Exceptions to compulsion
Compulsion in Australia carries with it, of necessity, some reasonably complex exemption provisions. There are approximately ten categories of fully or partly exempt employees, who include those:
- receiving a before-tax salary or wages of less than AU$450 in any calendar month
- aged under 18 and working 30 hours per week or fewer.
The other exemption categories cover such things as certain work done outside Australia, earnings above the maximum super contribution base and part-time employees doing work of a domestic or private nature.
Labour has so far confirmed that its universal KiwiSaver regime will exempt very low earners (with an income threshold likely well below the minimum wage). It will also exempt the self-employed and business owners.
The intended carve-outs are otherwise unclear, though Labour signals that exceptions would be “limited to those which apply to the Australian scheme”.
Importantly, we do not yet know whether the current grandfathering exemptions (whereby superannuation contributions which began before 1 April 2008 offset an employer’s KiwiSaver obligations) will be retained so that:
- those employers need not also contribute to KiwiSaver for the relevant employees, and
- those employees need not join and contribute to KiwiSaver.
Clarification is needed as to the intended workplace savings interface more generally.
Compulsion and the existing facility for a potentially ‘evergreen’ employee contributions holiday (irrespective of hardship) would make strange bedfellows. Contributions holidays are not permitted in Australia, where the compulsion regime is employer contributions-based.
Labour’s universal KiwiSaver proposals are silent on what would become of a current KiwiSaver scheme member’s ability to take a contributions holiday, entirely as of right and for renewable five-year periods, after 12 or more months’ membership.
We expect it is contemplated that this contributions holiday facility would be retained but tightened up - perhaps so as to require a much shorter maximum holiday period between elections (with an employee then having to notify elective renewals more frequently).
VSR - doing the sums
Employers are responsible for deducting employees’ KiwiSaver contributions from salary or wages, adding their own contributions (from which contribution tax must first be deducted) and then remitting both contribution streams to Inland Revenue. This means that they must alter their payroll systems to account for any changes to minimum contribution rates.
The numerous employee and employer contribution rate changes since KiwiSaver’s inception, and last year’s removal of the employer’s superannuation contribution tax exemption, have already caused difficulties for some employers despite some fairly long lead times. Variable Savings Rate (VSR) changes made in response to economic fluctuations might lead – unless very carefully signposted and kept simple – to still more confusion and calculation errors.
Labour has signalled that the VSR mechanism would apply only to employee (not employer) contributions to KiwiSaver, meaning that while it would impact on employees’ take-home pay, it would not impact on employers’ remuneration costs.
As the law stands, an employer’s KiwiSaver contributions must be paid on top of each employee’s salary or wage entitlements (making KiwiSaver employer contributions a ‘use it or lose it’ employment benefit) unless the employer obtains the employee’s consent to a ‘total remuneration’ arrangement whereby:
- the employer’s KiwiSaver contributions are deducted from the employee’s before-tax salary or wages, and
- conversely, if the employee chooses not to join KiwiSaver (or takes a contributions holiday) his or her salary or wages increase by the amount of what would otherwise have been the employer’s before-tax KiwiSaver contributions.
If there was to remain a facility for contributions holidays under universal KiwiSaver, we expect that Labour (having previously outlawed them) would look again at the permissibility of total remuneration arrangements. This is because making employer contributions tradable for cash nullifies a key KiwiSaver contribution incentive.
We assume that opt-outs (following auto-enrolments) would become a thing of the past under universal KiwiSaver.
It remains unclear how the gradual increase from the current minimum aggregate KiwiSaver contribution rate of 6% (3% employee and 3% employer) to 9% would impact on employee and employer contribution rates, though continued equivalence – i.e. in due course 4.5% each – seems Labour’s likely intent.
Labour’s policy refers in several places to using the VSR mechanism to vary the employee contribution rate for “work based” savings - indicating that it may contemplate applying it not only to KiwiSaver schemes but also to grandfathered workplace savings arrangements. This would be unworkable for defined benefit schemes. It would also, in our view, complicate the administration of other non-KiwiSaver schemes and plans to an extent which considerably outweighed any potential economic upside.
We will monitor with interest the emerging details of the proposed VSR and compulsion arrangements.
One thing is clear from the energetic and numerous responses (pro and con) to Labour’s proposals. This looks set to be (not for the first time) an election driven by savings issues.