SuperLife

KiwiSaver - The superannuation component solution

 

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 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 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 contributions holiday 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 MTC government payment.

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