KiwiSaver and total remuneration: a case study in legislative confusion

In this article, written for the Employment Law Bulletin, Geoff Bevan and Mike Woodbury of Chapman Tripp examine National’s changes to KiwiSaver, and look closely at the issue of total remuneration.

Slimmed down

The Government’s KiwiSaver reforms were passed under urgency on 15 December as part of its first 100 days package. 

National’s KiwiSaver is a leaner version of the original. 

Instead of KiwiSaver eventually becoming a 4% + 4% scheme, the compulsory employer contribution will be capped at 2% of gross salary or wages and the minimum (and default) employee contribution will also be 2%. Employers and/or employees can elect to make higher contributions if they wish. 

The amended scheme is therefore more affordable for employers, employees and the government, but individual employee saving levels will be lower.

The changes in a nutshell

Effective 1 April 2009:

  • Minimum contribution levels in the employment context will be 2% + 2%. From 1 April existing employee members (who are contributing at least 4%) will be able to reduce their contributions to 2%. The changes will not be automatic – they will need to fill in a “KS2” form.
  • The employer tax credit (matching an employer’s contributions up to $1,043 per annum for each contributing KiwiSaver member) will be removed.
  • The contribution tax exemption on employer contributions will be capped at 2% (currently, employer contributions are tax-free up to 4% if matched by an employee contribution). 
  • The Government’s $40 annual fee subsidy contribution will be removed.

The Government will continue to match employee contributions at the current level of up to $1,043 a year for all employed KiwiSaver members.

Slightly unexpectedly, given its pre-election policy, the Government has allowed “total remuneration” approaches.  Labour’s September 2008 amendments to the Employment Relations Act 2000 have been repealed (this change was effective immediately). These amendments had prevented employers treating comparable KiwiSaver employees less favourably than non-KiwiSaver employees, effectively banning total remuneration.

Total remuneration – full circle

Total remuneration is probably the area of KiwiSaver most relevant to employment lawyers.

The “standard” and default approach to KiwiSaver is to pay employer contributions in addition to the employee’s gross salary or wages, if the employee joins a KiwiSaver scheme. 

By contrast, a total remuneration approach allows an employer to set a fixed remuneration amount for each employee. If the employee joins KiwiSaver, the cost of the employer contribution (as well as their employee contribution) comes out of the employee’s pay.

Many employers are attracted to a total remuneration approach. Wage budgets are certain (rather than being dependent on how many employees join and keep contributing to KiwiSaver) and KiwiSaver and non-KiwiSaver members are treated equally. 

However during 2007 and 2008 this area became highly politicised and the subject of complete legislative confusion.  After initial uncertainty, total remuneration was permitted, then banned, then (after the change of Government) permitted again. 

These about-turns have created a real mess for employers using total remuneration and – unhelpfully – the validity of existing total remuneration arrangements will vary, depending on when they were agreed.

Despite this difficult history, in some situations a total remuneration approach will still offer real benefits to employers, and therefore remains worth considering.  

A brief history

When first enacted, KiwiSaver was essentially (in the employment context) an employee contributions scheme.   Businesses were only required to facilitate staff enrolment and the collection of contributions. Employer contributions were voluntary, though tax-advantaged.

Then, in the 2007 budget, the Government announced that employers would have to make compulsory contributions from April 2008. The initial rate was 1%, rising to 4% by 1 April 2011.

At this point the legislation was silent on whether total remuneration approaches were allowed. Some businesses put them in place anyway, in most instances offering pay rises to secure the total remuneration agreement. 

However in November 2007 the Government introduced changes which allowed total remuneration approaches, so long as they were negotiated in good faith after 13 December 2007 (section 101B of the KiwiSaver Act 2006). Otherwise, employer contributions had to be paid over and above existing salary and wages.

This caught out employers who had moved early. But with the situation now clarified, a number of others pressed ahead with total remuneration.

In July 2008 the then Labour Government announced an intention to ban the total remuneration approach. This back track was heavily criticised. Labour’s changes were introduced as amendments to the Employment Relations Act 2000 on 2 September 2008 and were enacted the next day. 

The ERA amendments made it illegal to treat otherwise comparable KiwiSaver and non KiwiSaver employees differently. Effectively this banned total remuneration in most work places, because KiwiSaver employees on total remuneration agreements received less cash in the hand than their non-KiwiSaver counterparts, by virtue of their KiwiSaver membership.

Many businesses who had legitimately adopted total remuneration were now forced to change their policies. This created some major headaches.

As well, the hurried legislation produced a number of unintended problems, particularly around contributions to non-KiwiSaver superannuation schemes. 

When it became government, National repealed the September 2008 ERA amendments, opening the way again for total remuneration.

The policy debate

There is room for legitimate debate around whether total remuneration approaches should be permitted. The key benefit for an employer is certainty around wage costs. It’s particularly useful when dealing with highly paid employees, or in very competitive markets: employers can offer the highest remuneration possible, knowing that they do not have to pay any more if the employee joins KiwiSaver.

Similarly, a total remuneration environment works better for non-KiwiSaver employees. They receive the maximum remuneration that the employer is prepared to offer them, rather than a salary or a wage which is discounted back to allow for the possibility that they may join the scheme.

On the other hand, total remuneration reduces the incentive for employees to join KiwiSaver, because they no longer get any free money from their employer. 

National’s approach – a genuine addition to pay?

Leaving that debate aside, it is a little hard to square National’s pre-election policy with its decision to allow total remuneration. 

National’s policy said that no one would have their gross taxable pay reduced as a consequence of joining KiwiSaver, and that an employer’s compulsory contribution would be a “genuine addition” to the employee’s normal pay.

Arguably, the amended legislation does not achieve that.  Once again, employers can, in good faith, contract out of paying employer contributions “in addition” to wages and salary. If employees who enter total remuneration arrangements later join KiwiSaver, they will not receive any “free money” from their employer and, technically, their gross salary and wages will reduce. 

The theory behind National’s approach seems to be that existing employees who enter total remuneration agreements receive (or will have received) a pay increase which covers their employer contribution. That contribution (effectively a “KiwiSaver/superannuation allowance”) can either be put into KiwiSaver as the employer contribution, or taken as cash. 

Although the wording could be much clearer, National’s changes now arguably require such an increase to have been given, if the employer wants to rely on a total remuneration agreement.* Originally that protection was not in place.

However, the law doesn’t (and can’t) require these pay increases to be genuine extra money. Many employees will have simply received the pay increase they were going to get anyway. 

For new employees who sign up to total remuneration arrangements, there is even less to guarantee that they are getting a “genuine addition". Most likely their starting salary has simply been sliced and diced in a different way, meaning they meet the cost of the employer contribution without actually receiving any more money.

Ultimately though, the cost of employer contributions will always be passed back to employees through lower future salary or wage increases. Promises of “genuine additions” are therefore perhaps a little illusory. The real question is which staff wear the cost.

In a “standard” environment, this cost is shared by all staff.  Everyone gets less remuneration, so the employer has money to pay the employer contributions when staff join the scheme. In a total remuneration environment, the cost is borne only by KiwiSaver staff.

Some practical considerations

Total remuneration agreements made before 13 December 2007

Employers who implemented total remuneration before 13 December 2007 may find their agreements are invalid. If they haven’t already, those businesses should tidy up the issue by “re-agreeing” their total remuneration arrangement. 

They should also assess whether they have breached the law by reducing their employees’ gross salary or wages in order to pay compulsory employer contributions, in reliance on an invalid total remuneration agreement. 

Generally, we have found that the large majority of staff do not present an issue, even though their total remuneration agreement may be of no effect. This is because most employees received a pay rise when they signed that agreement and, at that point, decided whether or not to join KiwiSaver. If they chose to join they put the rise straight into KiwiSaver as the employer contribution, and their gross wages and salary did not reduce.  

The issue arises where a pre-13 December 2007 total remuneration employee has taken the extra cash in the hand, and then later changed his or her mind and joined KiwiSaver. There probably will be a breach if the employer took that cash back (relying on the invalid total remuneration agreement) to fund the compulsory employer contribution.

Total remuneration agreements made after 13 December 2007

These agreements are permitted under the KiwiSaver Act.

However, National’s changes introduced a further element to section 101B, which applies (from 15 December 2008) to new employees, or to existing employees who join KiwiSaver on or after that date.  These total remuneration arrangements will only have effect if the employee’s contractual terms and conditions “account for” the amount of the employer’s compulsory contributions. 

Quite what this means is uncertain. Is it enough for the employment agreement to say that the employee’s remuneration is inclusive of any required KiwiSaver employer contribution? Does the contract have to go further and specify the amount of that contribution? Or does the existing employee who has agreed to total remuneration actually have to have received a pay rise which matches the 2% compulsory employer contribution?

For new employees (employed on or after 15 December 2008) we think it should be enough to offer terms and conditions containing a standard total remuneration clause.  This would simply say that the employee’s remuneration is inclusive of any KiwiSaver compulsory employer contributions. 

A cautious approach would be to go further and actually specify the amount of the employer contribution in the agreement (noting that this contribution is tradable for cash, if the employee is not a contributing KiwiSaver member). Strictly though, we do not think this should be necessary, and this approach may create some future inflexibility.  

Where an existing employee (with a total remuneration agreement in place) joins KiwiSaver on or after 15 December 2008, employers are wise to be a little more cautious before reducing pay to cover the employer contribution.

To do this safely, the employer may want to ensure that the employee has received a pay rise which at least matches the employer contribution when (or perhaps since) the total remuneration arrangements were agreed. 

Again, given the wording of the Act, we have doubts as to whether this is strictly necessary. However, it is an approach which arguably best matches the intention of National’s amendments to section 101B. In any case, employees will have usually received such a rise so in practice this issue may not arise very often.

Is introducing total remuneration worth the hassle?

In certain contexts, we think it could be. Up until now it seems the majority of employers have voted with their feet and not adopted total remuneration (despite its initial attractions). 

Partly this will have been because of the legislative uncertainty. Equally though, many employers will have been reluctant to be seen to take away the “free money” incentive to join KiwiSaver and/or they will not have seen sufficient benefit in making major changes to their contracts and remuneration strategy.

The lower employer contributions under National will also reduce the benefit of total remuneration. With compulsory employer contributions capped at 2% instead of eventually increasing to 4%, employers may be more prepared to simply absorb the cost when staff join KiwiSaver.

On the other hand, a significant number of employers have remained strong proponents of total remuneration, and National’s changes have been a welcome relief. 

We think that total remuneration remains a good option for employers with small to medium sized and highly paid workforces. It is also a useful approach for senior executives. However, although the threat of another major policy shift seems low while National remains in power, employers may still be wary of the risk of further legislative changes.  

* Section 101B(4) of the KiwiSaver Act 2006, as amended from 15 December 2008.  This additional requirement (discussed in more detail below) only applies where an employee commences employment or opts into KiwiSaver on or after 15 December 2008.  It does not apply to existing employees who were already in KiwiSaver prior to that date.

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