SuperLife

Under KiwiSaver, employers must subsidise their employees’ savings.  To avoid “double dipping”, exceptions apply in respect of employees in pre-May 2007 superannuation arrangements.  

Employer contribution rate

The compulsory employer contribution rate is 3% of the employee’s total taxable pay. Employers can contribute above this level on a voluntary basis. 

An employee’s total taxable pay includes overtime, allowances, holiday pay, etc.  Basically, all “remuneration” subject to the PAYE tax system.  It does not include redundancy pay.

Applicable employees

The compulsory employer contributions apply to all employees, including part- time, temporary and casual employees, who are members of KiwiSaver, who are currently saving through the PAYE tax system.  The exceptions are employees under age 18 and employees who are age 65 or, over if they have been in KiwiSaver for at least 5 years.  If they have not been in KiwiSaver for at least 5 years, employers must continue to contribute in respect of an employee over 65, if the employee chooses to continue to save.

If an employee is not saving through the PAYE system (for example they are on a savings suspension) the employer does not have to contribute.

Employer superannuation contribution tax (ESCT)

All employer contributions are subject to ESCT.

Existing schemes

If an employer contributes to an “existing scheme” for an “existing employee”, they do not need to also contribute to KiwiSaver.  The employer contribution must be above the required minimum employer KiwiSaver contribution level and it must vest in the employee within 5 years.  This is known as “no-double-dipping”. 

The Existing Scheme must have started before 17 May 2007. 

For this purpose an “existing employee” includes employees who started employment before 1 April 2008 and for whom the employer had agreed with the employee before 1 April 2008 to make contributions, even if the employee did not join the scheme until after 1 April 2008.  It will be important that there is proof of an agreement.

For new employees (i.e. employees hired after 1 April 2008), the same exemption does not apply.  For these employees the rules of any existing scheme will need to be changed or KiwiSaver will need to be paid on top, to avoid double payments.  It will be a simple exercise, in most cases, to define the contributions to the existing scheme for new employees as “x% less what the employer pays to KiwiSaver (for those members who belong to KiwiSaver)”.

Savings suspension

If an employee goes on a savings suspension, the required employer contribution also stops.  Employees can go on a savings suspension at any time after 1 year at their option, by advising the IRD, using the IRD KS6 form or doing it online.  If they suffer significant financial hardship before the end of 1 year’s membership, they can apply to the IRD for a savings suspension in the first year.

From 1 April 2019, a savings suspension is for 1 year after which the employee must apply again or re-start contributions.

Auto-enrolment

Unless an employer operates an alternative scheme that qualifies the employer for “exempt employer status”, it must auto-enrol every new permanent employee (aged 18 to 64; full-time or part-time), when they first start work.  This applies even if the employee intends to opt-out. 

For auto-enrolled employees, savings, including compulsory employer contributions, start from the first pay day. 

When an auto-enrolled employee opts out, the employer will receive a refund of its contributions.

If the employer has exempt employer status, auto-enrolment and opt-out reconciliation issues do not apply.  This is because employees only join if they opt-in.  

Key KiwiSaver decisions for employers

In respect of KiwiSaver and the required employer contributions, key decisions include:

• What is the cost to the employer if all employees join?
• Can the payroll system handle the calculation of employer contributions?
• Should the employer pay contributions on top of current remuneration, or look to build them into total remuneration?
• What are the principles behind the employer’s decisions?  Knowing these will provide a clear framework to address future changes to the legislation.

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It is up to an employee to decide whether to join KiwiSaver.  If they are auto-enrolled, they can choose to opt-out.  If they are not auto-enrolled, they can choose to join.  If they join KiwiSaver, an employer must match an employee’s 3% minimum KiwiSaver savings, if they are 18 or older and under their KiwiSaver retirement age.  

If employers do nothing, the compulsory employer contribution leads to an increase in the employment costs and in differences between amounts paid to employees.  As more employees join KiwiSaver, the greater will be the employer’s payroll costs (3% of pay for all who join).  Ultimately this may increase.

For many employers, accepting the higher cost as it arises is simple and may be the better approach.  This cost is ultimately somewhere between 0% and 3% depending on how many employees join.  For other employers, it leads to an unacceptable increase in the payroll cost of the business or, more importantly, a compromise of the principle of fairness between otherwise identical employees.  Those employers will want to build the cost of KiwiSaver into the remuneration policy, to enable the total remuneration budget to be managed and to ensure equity.

Two approaches to remuneration

In the current New Zealand environment, there are two main approaches or philosophies to remuneration.  Some employers provide benefits on top of base pay, but only for those employees who choose to participate.  This is called the “pay + benefits” approach to remuneration. 

Other employers build the cost of benefits into an employee’s compensation (and do not pay them in addition).  This is called “total remuneration”.  Other terms, such as “total employment cost” or “total compensation” are also used.  Under a total remuneration approach, the employer sets the total compensation appropriate to get a job done.  Then, within that amount, the employee chooses to “buy” benefits by allocating part of their compensation to superannuation or other benefit options available.  An employee’s decision does not affect the total remuneration paid by the employer or its cost - it simply changes how the cost is delivered.  In some cases, the employer will set rules around how the compensation can be delivered, reflecting its business and HR objectives.

There are arguments for and against both the “pay + benefits” and “total remuneration” philosophies.  It is up to each employer to decide what is best for its business.  There are also some employers who will adopt a combination of both e.g. pay + benefits for KiwiSaver (while it stays at 3%) and total remuneration for all other benefits.

The potential impact of KiwiSaver

With KiwiSaver, unless employers take the initiative, the quasi-compulsory employer KiwiSaver contributions will pitch all employers into “pay + benefits”, at least for KiwiSaver.  This is whether they want it or not, and whether it is right for their business or not.

The implication, if an employer simply allows KiwiSaver to happen, is:

• Employees who can afford to join, or who think it’s important to save for retirement, will become KiwiSaver members and receive the employer’s 3%;
• Other employees won’t join.

Those who join will receive a higher total gross remuneration and subject the employer to higher costs than those who don’t, and will also receive higher net remuneration, because:

• Employer contributions.  The employer is obliged to match the employee’s minimum savings requirement.
• Government contribution.  Each year, the government will pay up to $521.43 a year tax-free, as a match to the employee’s savings (the “government contribution”).

Table 1 shows three sample employees, comparing the before and after-tax annual remuneration for an employee who joins KiwiSaver with one who does not.

Note: For simplicity, we have also rounded the $521.43 tax credit to $521.

The table clearly demonstrates the added value an employee derives from being in KiwiSaver.  While part of the gain to an employee is not met by the employer, the remuneration distortions based on whether or not the employee can afford to join KiwiSaver are increased.

If employers just allow KiwiSaver to happen, that is, they do not incorporate the cost of KiwiSaver into their remuneration strategy, then, as employees begin to understand what’s at stake, the employer’s payroll costs will increase as more employees choose to join.  While the cost to the employer is 3%, this may be manageable, but what if this increases in the future.  It is important to establish the principles and strategy before that happens as this lets employers manage the future changes better.

If as an employer, you are comfortable with the extra cost of KiwiSaver and you accept that those who can afford KiwiSaver will get paid more than those who do not, you won’t need to do anything about KiwiSaver other than compliance needs.  The alternative is a total remuneration strategy to KiwiSaver.

The "total remuneration" strategy to KiwiSaver

The total remuneration strategy to KiwiSaver is illustrated by an example.  Assume the employer is faced with the need to increase an employee’s pay to allow for market movement.  The proposed increase for all staff just happens to be 3% as well.  Here’s what the employer could say to an employee:

“This year, we are proposing to increase your overall compensation by 3%.  We intend to do so by introducing a superannuation component equal to 3% of your current pay to be paid on top of your current pay.  The new 3% will be your “super component”. 

We recognise that everyone may have different needs so you have choices about how to receive the super component.  You can:

• choose to have it paid to KiwiSaver.  In this case, you must pay 3% of your overall pay from your after-tax pay as your own savings.  The super component will then be paid as an employer contribution to KiwiSaver.
• choose not to have it paid to KiwiSaver.  In which case you must not be a member of KiwiSaver or if you are, be on a savings suspension to KiwiSaver.  Under this option, you may:

-          choose to take the super component as cash and taxable under the PAYE regime;

-          choose to take it as an employer contribution to a registered superannuation scheme.  In this case ESCT not PAYE, will be deducted from the component.  For all employees, ESCT is the same or lower than PAYE and therefore this option may have an advantage.

"Subject to the legislative requirements, you can make this decision at any time.”

Put this way, the employee will choose what suits their personal circumstances.  The employee can make the trade-off between net cash today, net savings that will be available before retirement, or a contribution locked up under the KiwiSaver rules.  Many will choose to have it go to KiwiSaver, until they have been in for one year.  After one year they will go on a savings suspension to KiwiSaver and have it go to a superannuation scheme or paid in cash.  They will then pay/transfer $1,042.86 to KiwiSaver each year to get the maximum paid government contribution.

All employees can be treated alike

From the employer’s perspective, adopting the “super component” approach means that all employees will be treated at the total remuneration level on a common basis.  Overall, remuneration patterns are protected and the employer gives employees maximum flexibility.

Employee joins KiwiSaver later

If an employee decides, initially, not to join KiwiSaver but to take the “super component” as cash (i.e. taxable under the PAYE regime), the employer should maintain the formal separation of the “super component” from the rest of the employee’s other pay and communicate this on a regular basis.  That’s because the employee can, at any time, choose to join and so trigger the employer’s KiwiSaver obligation.  If that happened, the employee’s total cash will reduce (but not the “wage” component) and the employer’s total cost would be unaffected.

Introducing the "super component" gradually

If the employer hadn’t intended to increase pay by 3%, it may take 2 - 3 years to reach the full “super component” of 3%.  In each year, the employer will identify what, if any, of an increase forms part of the super component until it reaches 3%.  After that, it will need to top up the “super component” in subsequent remuneration reviews to maintain the full 3% of the employee’s total remuneration.

Wage negotiation/salary reviews

Collective agreements should be negotiated to include the superannuation allowance as set out above.  All individual employment contracts (IEC) will need to have a clause covering this “allowance”.  An IEC should have a variation prepared while the “allowance” is introduced for existing employers.

Managing the process

Under a total remuneration approach, the “compulsory” employer contribution need not represent a cost increase, provided the process is managed.  If the employer does nothing, it is allowing KiwiSaver to partially dictate its remuneration policy.  It may wish to do that - it does not have to.

Under KiwiSaver, when an employee saves, their employer must match the employee’s minimum 3%.   

If employers do nothing, the compulsory employer subsidy increases the employment costs and creates differences between amounts paid to similar employees.  As more employees join KiwiSaver, the greater will be the employer’s costs (ultimately 3% of pay for all who join and save). 

While the cost to the employer is limited to 3%, this may be manageable and can be rationalised as a compliance cost or payroll tax.  But what if the 3% increases further in the future.  We would expect that the government having gone down the policy of KiwiSaver, will ultimately look to extend the coverage and increase the employer cost.  It is therefore important to establish the principles and a strategy before that happens.  This lets the employer manage the inevitable future changes better.

For many employers, accepting the higher cost as it arises is simple and therefore the better approach.  For other employers, it leads to an unacceptable increase in the payroll cost of the business and a compromise to the principle of fairness.  These employers will want to build the cost of KiwiSaver into the wider remuneration policy, so payroll costs can be managed and equity is maintained.

Building the costs of KiwiSaver into remuneration

To build the costs of KiwiSaver into remuneration is illustrated by an example.  Assume the employer is faced with the need to increase an employee’s pay to allow for market movements.  The proposed increase for all staff just happens to be 3% as well.  Here’s what the employer could say to an employee:

“This year, we are proposing to increase your overall compensation by 3%.  We intend to do so by introducing a superannuation component equal to 3% of your current pay to be paid on top of your current pay.  Your current pay will not change.  The new 3% will be your “super component”. 

We recognise that everyone may have different financial needs, so you have choices about how to receive the super component.  You can choose:

• to have it paid to KiwiSaver.  In this case, you must be a member of KiwiSaver and pay 3% of your income from your after-tax pay as your own savings.  The super component will also be paid as an employer subsidy to KiwiSaver and will be subject to the ESCT rules.

• not have it paid to KiwiSaver.  In which case you must not be on a member of KiwiSaver or, if are, be on a savings suspension to KiwiSaver.  Under this option, you may:

-          choose to take the super component as cash and taxable, under the PAYE regime;

-          choose to take it as an employer contribution to a registered superannuation scheme.  In this case ESCT, not PAYE, will be deducted from the component contribution.  For all employees, ESCT is the same or lower than PAYE.

“Subject to the legislative requirements, you can make this decision at any time.”

Put this way, an employee will choose what suits the employee’s personal circumstances.  The employee can make the trade-off between net cash today, net savings that will be available at or before retirement, savings locked up under the KiwiSaver rules.  Under the option to not pay it to KiwiSaver, there is no need to offer employees both the cash pay and superannuation option.  The options could be limited to one.

All employees can be treated alike

From the employer's perspective, adopting the "super component" approach means that all employees will be treated at the total remuneration level on a common basis. Overall, remuneration patterns are protected and the employer gives maximum flexibility.

Employee joins KiwiSaver later

If an employee decides, initially, not to join KiwiSaver but to take the "super component" as cash (i.e. taxable under the PAYE regime), the employer should maintain the formal separation of the "super component from the rest of the employee's other pay and communicate this on a regular basis. That's because the employee can, at any time, choose to join or save in KiwiSaver and so trigger the employer's KiwiSaver obligation. If that happened, the employee's total cash will reduce (but not the "wage" component) and the employer's total cost would be unaffected.

Remuneration = wage component + super component
 

Introducing the "super component" gradually

If the employer hadn't intended to increase pay by 3%, it may take a few years to reach the full "super component" of 3%. In each year, the employer will identify what, if any, of an increase forms part of the super component until it reaches 3%. After that, it will need to top up the "super component" in subsequent remuneration reviews to maintain the full 3% of the employee's total remuneration.

There may also be advantages in building the Super component to beyond the 3% level (e.g. to 5% or 10%) to accommodate further government imposed increases. Given employees have flexibility and choices, it will be up to them to determine how much is KiwiSaver, how much is Super and how much is cash.

Wage negotiations/salary reviews

Collective agreements shopuld be negotiated to include the superannuation allowance as set out above. All individual employment contracts (IEC) will need to have a clause covering this "allowance." An IEC should have a variation prepared while the "allowance" is introduced for existing employers.

Managing the process

Under  a total remuneration approach, the "compulsory" employer contribution need not represent a cost increase, provided the process is managed. If the employer does nothing, it lets KiwiSaver partially dictate its remuneration policy. It may wish to do that - it does not have to.

Flexibility

The above approach also lets employees take advantage of the flexibility superannuation offers. Employees can go on a savings suspension to KiwiSaver, take the taxable Super component as superannuation or cash. Employees will then be free to make voluntary contributions to KiwiSaver (i.e. ideally $1,043 a year) or transfer savings from their superannuation scheme to KiwiSaver, to maximise the annual government contribution.

When KiwiSaver was set up in 2007, the legislation provided the facility for employers to become exempt from the auto-enrolment provisions. To become exempt, employers had to provide a superannuation scheme as an alternative or supplement to KiwiSaver, that met certain minimum requirements.  The alternative scheme was either a stand-alone trust, or an arrangement through a master trust, such as SuperLife, the alternative arrangements had to that exist prior to 6 October 2009. No new employers can get exempt status.

“Exempt” in this context does not mean that the employer is exempt KiwiSaver.  It means that the employer is exempt from the employee auto-enrolment requirements of KiwiSaver.

It is important to recognise that an employee does not have to join the exempt scheme; it just needs to be available when the employee starts work.

Implication of exempt status

The main reason for having exempt status is to help the employer manage the KiwiSaver compliance obligations.  Exempt status removes the need to automatically enrol new employees in KiwiSaver.  Exempt status shifts KiwiSaver from a compulsory opt-out regime, to a voluntary opt-in regime.  Therefore, if an employer has exempt status:

• The employer is not required to hand the “IRD KiwiSaver pack” to each new employee, when they first join service.  Instead, it must give the employee the equivalent details for the alternative scheme.  This does not stop an employee:
  • already a KiwiSaver member, from continuing their contributions, or
  • not a KiwiSaver member, from choosing to join KiwiSaver.
• The employer will not need to advise the IRD, for KiwiSaver purposes, that the employee has started work.
• The employer does not have to deduct the compulsory minimum 3% contribution from the employee’s pay from the first pay day.  This will save the employer significant reconciliation work for employees who choose to opt-out, as soon as they can.  The same applies to the employer contributions.

However, if an employee is already a KiwiSaver member, the employer must still deduct contributions, pay the employer subsidy and forward the net amount to the IRD.  This will apply until the employee goes on a savings suspension.  Also, any employee, not a KiwiSaver member, can still choose to join KiwiSaver.  They just will not be auto-enrolled.  The employer will then be obliged to administer the required KiwiSaver deductions.

The alternative scheme is not an “approved” KiwiSaver scheme.  Therefore unless the alternative scheme is also a “complying fund”:

• The government does not pay the member the $1 for $2 government subsidy. 

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Should an exempt employer continue to be exempt?

As with all employee benefit decisions, to justify having an exempt scheme, there must be a recruitment, retention or employee management advantage or it has to reduce the employer’s costs.  This has to be more than the advantages from having non-exempt status or operating no scheme at all.

The key advantage of maintaining exempt status is the removal of the need to deduct KiwiSaver contributions from a new employee’s first pay day, i.e. until the employee has decided whether or not to opt-out.  This will avoid significant payroll reconciliation issues and will be an advantage to an employee who intends to opt-out.  It will also eliminate the risk that the employer fails to act on an opt-out request.  It will therefore reduce the work load of payroll staff. 

Avoiding the auto-enrolment provision will also benefit employees, as it will mean that they can make a conscious decision, in their own time, whether or not to join KiwiSaver.

Whatever decision the employer makes about having exempt status, it should also put in place a policy to actively encourage employees to make a decision on KiwiSaver, i.e. to facilitate employees who wish to opt out, to opt-out and ensure that those who wish to contribute, understand the rules.  The auto-enrolment procedure assumes what constitutes “appropriate” behaviour, and that is not a good HR strategy.

Requirements for the alternative scheme & exempt status

The alternative scheme must be a registered superannuation scheme (a stand-alone scheme or through a master trust) that applied before 6 October 2009. It must have the following features:

1. Be open to all permanent employees, including part-time employees, who are age 18 or over and under age 65.
2. Eligible employees must be able to join immediately on starting employment.
3. Employees must be able to transfer their other superannuation benefits to the scheme.
4. The total contributions (member and maximum employer rate) must be at least 4% of total gross base taxable income if it is a defined contribution scheme. For defined benefit schemes, the scheme’s actuary must certify that the value of the benefits accruing in each year is at least equivalent to the 4% minimum.
5. Any employer’s contributions that form part of the 4% minimum, must vest over a period of 5 years or less.
6. On becoming entitled to a benefit (e.g. on leaving service) members must be able to transfer their benefit to another registered scheme or to a KiwiSaver scheme. Benefits do not however have to be locked up until age 65.

An employer can satisfy the exempt status by the use of more than one scheme and by the use of a master trust.

To become exempt, an employer had to apply to the Financial Markets Authority. An employer needed to satisfy the Financial Markets Authority that it complied with the requirements. The employer may also need to show that it continues to meet the requirements each year. The Financial Markets Authority will maintain a register of exempt employers.

To become exempt, an employer had to apply to the Financial Markets Authority. An employer needed to satisfy the Financial Markets Authority that it complied with the requirements. The employer may also need to show that it continues to meet the requirements each year. The Financial Markets Authority will maintain a register of exempt employers.

If the exempt employer ceases to comply with the requirements, the Financial Markets Authority or the employer can apply for the employer to be removed from the exempt register.

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