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.
- Tax subsidy. Each year, the government will pay up to $521.43 a year tax-free, as a match to the employee’s savings (the “member tax credit”).
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.
|The impact of KiwiSaver on "total remuneration"|
|Before tax pay||$30,000||$30,000||$50,000||$50,000||$50,000||$50,000|
|Take home pay||$25,295||$24,395||$41,255||$39,755||$68,075||$65,375|
|Plus tax credit to KiwiSaver||n/a||$450||n/a||$521||n/a||$521|
|Plus net employer subsidy to KiwiSaver||n/a||$743||n/a||$1,238||n/a||$1,890|
|Net annual total remuneration||$25,295||$26,488||$41,255||$43,014||$68,075||$70,486|
|Gain from joining (after tax)||-||+4.72%||-||+4.26%||-||+3.54%|
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 contributions holiday 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 contributions holiday 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 government paid MTC.
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.