Update on KiwiSaver

The KiwiSaver reforms were passed under urgency last week as part of the Government’s first 100 days package. The changes to KiwiSaver itself will take effect on 1 April 2009. The repeal of the September 2008 ban on total remuneration is effective immediately.

What has changed?

  • The minimum employee contribution rate will be 2% of gross salary or wages, instead of 4%. Employees can continue to pay or, in the case of new hires, elect to pay above 2% if that is their choice but the automatic rate for persons joining the scheme on or after 1 April 2009 will be 2%. 
  • The compulsory employer contribution rate will be capped at 2% rather than increasing to 3% and 4% in subsequent years. 
  • The employer tax credit will be removed. 
  • The 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.

These changes were all signalled by National pre-election.

The day before the legislation was introduced, the Government confirmed two policy changes:

  • continuing to match employee contributions at the current level of up to $1,043 a year for all employed KiwiSaver members; and  
  • removing the $40 annual fee subsidy paid by the Government each year into a person’s KiwiSaver account to reimburse some of the fees charged by the scheme to that person.

The first of these changes had been informally signalled in advance and prescribed a welcome remedy to what had, in our view, been an unworkable feature of National’s pre-election policy announcements. The removal of the fee subsidy was previously unannounced.

Unexpectedly, given National’s prior policy, the Government has also allowed “total remuneration” approaches whereby (subject to conditions) an agreed remuneration package can include a KiwiSaver employer contributions component which is tradable for cash.

Matching government contribution changes

National’s policy had been to cap the matching Government KiwiSaver contribution, for salary or wage earners, at 2% of gross salary or wages. This would have created unfairness for people earning less than $52,150 a year, as 2% of their salary would not have equated to $1,043 (and there would have been no provision for them to “top up” their contributions to access the full $1,043).

More particularly, as we observed in our last KiwiSaver Policy Alert, the policy would have been very difficult to administer in practice. The commentary accompanying the Bill acknowledged this.

Fee subsidy

The price for maintaining the status quo on the Government’s matching contribution subsidy is the loss of the fee subsidies. These will be removed from 1 April 2009, except to employees who at that time are either enrolled in a scheme or have had a valid enrolment application lodged for them with a provider.

For some of those persons, there will be one or (at most) two post-1 April 2009 payments of $20. No fee subsidy amounts will be payable subsequently.

The fee subsidy was the only ongoing incentive provided to KiwiSavers under 18. Its removal has the potential to erode those persons’ savings over time, where annual contributions are not being made to KiwiSaver accounts.

Total remuneration – full circle

A pleasant surprise for employers is the reintroduction (in a sense) of provisions allowing “total remuneration” arrangements.

Employers who have held the line through the recent flip-flops, and want to persist with a total remuneration approach, will now need to check that their contractual arrangements fit with National’s legislation.

In most cases we think they will. However, the legislative wording is now slightly different, and some clauses designed to fit with the older wording may need to be revisited.

The reduction of the tax-free cap on employer contributions

Only the first 2% of an employer’s KiwiSaver contributions will now be tax-free (and only while it is matched by employee contributions sourced from salary or wages). The employer will be liable to pay employer’s superannuation contribution tax (ESCT) on contributions above 2%, or on any contributions not matched by the employee.

The standard rate of ESCT is 33%. However, an employer can elect to adopt a system of “tiered” ESCT rates (currently 12.5%, 21% and 33%), based on the total of an employee’s gross salary or wages plus employer superannuation and KiwiSaver contributions, so that ESCT rates more closely align with employees’ marginal tax rates.

The ESCT rate thresholds, where this “tiered” rates facility applies, have been amended effective 1 April 2009. Additionally, on 1 April 2011 the 21% rate will decrease to 20% and the upper limit for this rate will increase to $60,000.

The ESCT changes will of course apply to registered superannuation schemes as well as KiwiSaver schemes.

The verdict

Reduced incentives

By and large, these changes should in our view ensure the sustainability of KiwiSaver.

Reducing the minimum employee contribution rate will likely increase the number of new KiwiSaver memberships, and reduce the number of applications for contribution holidays.

The change from a “4 + 4” scheme to a “2 + 2” scheme will likely make it less attractive for some KiwiSaver providers to stay in the market, unless they determine that the numbers of new members likely to join outweigh the slower build-up of existing members’ funds under management.

One other potential issue with making KiwiSaver a “2 + 2” scheme is a seemingly unintended consequence for members who are applying for a first home subsidy from 2010 onwards. Under current criteria, one of the published eligibility requirements for the subsidy is that the member has contributed to KiwiSaver “around 4% of their income” for three to five years. However, there have been indications that the Government is aware of this issue and we expect the position to be clarified (along with house price and income caps) before the first subsidies are paid out in 2010.

Total remuneration

Although it’s a welcome change, we think the reintroduction of total remuneration comes with some political risk. National’s election policy promised 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.

However the amended legislation makes it clear that 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 seems to be that employees entering into these agreements will receive a pay increase which is tagged (wholly or in part) as a “KiwiSaver/superannuation allowance”. That allowance can either be put into KiwiSaver or taken as cash. However, the law doesn’t (and can’t) require the allowance to be genuine extra money. In reality, many employees are simply going to get the pay increase (or the starting salary) they would otherwise have got, albeit one that is sliced and diced in a different way.

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