New Zealand: Savings Working Group ideas to promote the KiwiSaver habit

Brief Counsel
Last Updated: 6 February 2011
Article by Mike Woodbury, Emma Harding and Tim Williams

Raising participation in KiwiSaver is central to the Savings Working Group (SWG) strategy to increase New Zealand's savings rate.

We expect a number of the enrolment-related and benefit design recommendations to find favour with policymakers, though most will need to be carefully implemented if adopted. However, the recommendation for a single state sector default scheme seems to involve something of a leap of logic.

This Brief Counsel complements a companion Brief Counsel earlier this week on the SWG's tax proposals

Core KiwiSaver recommendations

  • Auto-enrol in KiwiSaver, with the right to opt out within two to eight weeks, everyone who is in employment, between the ages of 18 and 65 and is not currently enrolled.
  • Lower the age of entitlement to government and compulsory employer KiwiSaver contributions from 18 to 16 (with auto-enrolment from 16 if this change is adopted).
  • Pay the $1,000 kick start for new joiners in annual $200 instalments over five years, with payments contingent on ongoing contributions.
  • Retain the 2% minimum employee contribution rate (to keep entry barriers low) but restore the default contribution rate to 4% of pay
  • Remove the tax exemption on the 2% employer contributions.
  • Enable partial early withdrawals (as of right) to people with "shorter life expectancy".
  • Outlaw (again) the "total remuneration" approach to employer KiwiSaver contributions1.
  • Replace the six default funds with a "single low-cost default scheme" investing solely in index-based shares and bonds.

Commentary

The SWG's report is both well-written and well-reasoned. A number of its recommendations clearly will not find favour with the Government. Others suggest worthwhile initiatives for evolving KiwiSaver and (in so doing) improving New Zealand's dire net savings rate.

Automatic enrolments

This change would apply over and above the current auto-enrolment arrangements and would need to be managed on a very well-telegraphed "D-Day". Even then, it would create major, although once-only, complexity and compliance costs.

Very careful consideration will be needed concerning the implications for:

  • employers who are exempt from the auto-enrolment rules due to offering other schemes which KiwiSaver was intended merely to complement, and
  • employees who are already contributory members of other employer-schemes.

On the second point, the report acknowledges that non-KiwiSaver schemes are valuable contributors to the net savings rate (and indeed recommends extending KiwiSaver-style incentives to other schemes where contributions "are locked in for reasonably long periods"). It would likely be wasteful to auto-enrol those employees when most can be expected to opt out due to "double-dip" prohibitions, contractual KiwiSaver offsets and a forced double-up of member contributions.

Full entitlements from age 16

The report acknowledges that this "lifts the cost of employment a little and may have some negative impact on youth employment levels". We would suggest that serious consideration be given to the 2004 Savings Product Working Group's suggestion that automatic enrolment not apply to employees who earn less than a prescribed minimum amount.

"Drip-feeding" the kickstart

The rationale here is to smooth the fiscal cost of the wider auto-enrolments recommendation and to assist in fostering a savings habit by rewarding members for making ongoing contributions to KiwiSaver. Both aims are valid.

Restoring default employee contribution rate of 4%2

It is unclear whether (and, if so, how) the SWG envisages this change applying to existing KiwiSavers. In principle (and to avoid some potentially fraught outcomes for current default subscribers) we think it should apply solely to new joiners. The last default rate change (from 4% to 2%, on 1 April 2009) also applied only to new joiners.

Removing the ESCT exemption

Employer contributions to KiwiSaver (or to a locked-in account in a complying superannuation fund) at the rate of 2% of total taxable pay are currently paid tax free. The SWG recommends removing this exemption and applying standard ESCT rates as a proxy for income tax.

ESCT is a withholding tax, so at current (income-linked) ESCT rates, this would reduce a 2% employer contribution to KiwiSaver to between 1.79% and 1.34% after ESCT was deducted.

The SWG's rationale for this recommendation is that the current ESCT exemption is:

  • inequitable, in that it provides greater advantages to higher-paid employees, and
  • a "hidden" subsidy and therefore not the most effective way for the government to incentivise KiwiSavers.

If employer contributions to KiwiSaver are to be taxed the same as other employer superannuation contributions, KiwiSaver members should be able to redirect the compulsory employer contributions payable for their benefit to traditional employer superannuation schemes (where they will be payable on leaving service).

This proposal would be the fourth major watering down of KiwiSaver incentives. On 1 April 2009, fee subsidies and employer tax credits were discontinued and the tax-exempt component of an employer's KiwiSaver contributions was reduced from 4% to 2% of pay.

Relaxed early withdrawal rules

The SWG recommends allowing partial withdrawals, as of right, before New Zealand Superannuation age for persons "for whom the eligibility age is inappropriate or unsuitable". It cites those in lifelong physical work, Māori, people with disabilities and "other groups with shorter than average life expectancies".

In our experience such a facility would create significant evidentiary difficulties and attendant cost and complexity. Arbitrary and at times unfair factual distinctions would be likely. The stated goal is to encourage people to save extra in KiwiSaver "knowing they could withdraw it if needed" – but this is the policy underlying the existing significant financial hardship, second chance home purchase and serious illness withdrawal facilities.

Adopting the Australian complying superannuation fund early retirement facility (which applies universally) would in our view be better in principle, and in view of pending trans-Tasman savings portability.

Outlawing "total remuneration"

The rationale the SWG offers to support its position that employers "should not be able to pay out their KiwiSaver contributions irrespective of whether employees join KiwiSaver" is that:

  • the positive incentive created by the employer contribution is eroded by businesses that pay employees on a total remuneration3 basis, and
  • if total remuneration applies, the only non-government financial incentive to join KiwiSaver is the current ESCT exemption (which the SWG recommends should disappear).

Paying KiwiSaver compulsory employer contributions in addition to an employee's gross salary or wages, conditional on the employee joining and contributing to KiwiSaver, is already the standard and default approach. Though it offers certainty in relation to wage costs for employers, the incidence of total remuneration is low.

Wider auto-enrolments might tempt more employers to move to total remuneration, but ultimately the cost of employer contributions will always be passed back to employees through lower salary or wage increases. The concept of "genuine additions" to pay is perhaps a little illusory.

Any change here would be a noteworthy further legislative flip-flop. In 2007 the then Government specifically confirmed an employer's ability to adopt a total remuneration approach (after some initial uncertainty). This option was then prohibited during 2008 but permitted again in December 2008.

One key difficulty which emerged from the initial prohibition was that employers were prevented from offsetting compulsory KiwiSaver contributions against contributions made to other schemes (typically themselves paid on top of salary). This was due to a wide prohibition on offering any lesser terms or conditions based on KiwiSaver membership.

Single default scheme proposal

This is in our view an extreme solution which is not warranted. We think the recommendation gives insufficient weight to factors such as reasonable fees constraints, the steady decline in fees and expenses (as a proportion of assets) and wider competitive tensions among providers.

Were it adopted, it seems the six default providers would be obliged to surrender all default members to the single nationalised provider, in six mammoth (and potentially goodwill destroying) transfer exercises. Those providers would likely then rue their initial success.

Proposals such as the (contradictory) suggestion that consideration be given to introducing rules aimed at reducing "churn" between default schemes are considerably more measured.

We doubt that the defeatist single scheme proposal will find favour.

Other reform ideas floated by the SWG

The SWG also raised a number of ideas which it stopped short of recommending. These were:

  • auto-enrolling self-employed and non-employed persons aged 18 (or, if applicable, 16) or over, with the ability to opt out
  • removing or reducing the government's matching contributions for those on higher incomes
  • permitting self-managed funds (these are common in Australia), and
  • increasing the government's matching contributions to $2 for every $1 contributed – "either with no change to the current maximum annual credit limit, or in conjunction with a reduction in the current limit".

In addition, the SWG discusses whether the Government should directly intervene to develop an annuities market, itself providing annuities, or "providing the ability to buy an increased entitlement to NZ Superannuation" (in each case on a full cost-recovery basis).

We agree with the SWG's comments that, were this to happen, it would be necessary that any extra New Zealand Superannuation entitlements purchased in this way be "contractually based (and thus immune from any changes that future Governments may make to the underlying NZ Superannuation entitlements)".

Other SWG proposals provide welcome endorsements of policymakers' and others' recent efforts in seeking to require regular, clear and simple scheme reporting and improved financial literacy.

1. As an aside, the SWG's report was released on the eve of Punxsutawney Pennsylvania's annual Groundhog Day.

2. Footnote 1 refers.

3. "Total remuneration" means a remuneration package that includes any required KiwiSaver contribution. If an employee elects to join a KiwiSaver scheme, their salary reduces by the amount the employer is required to contribute. This approach is common in Australia, where superannuation is compulsory.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mike Woodbury
Emma Harding
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions