Article by Tracey Cross and Alasdair McBeth
Draft legislation for the new KiwiSaver regime was released at the end of last month. The KiwiSaver Bill has important implications for employers. We are currently reviewing the Bill to assess its implications for employers, and will produce a more detailed update setting out our analysis shortly. In the meantime, we highlight a few key features.
All employees over 18 years of age, when starting a new job with an employer that is not an exempt employer, are automatically enrolled in a KiwiSaver scheme. The Bill provides for certain exceptions.
Any person subject to the automatic enrolment provisions, unless they validly opt out, will become liable to automatic deduction of contributions and must become a member of a KiwiSaver scheme.
The window to opt out is two to six weeks following commencement of employment (this is longer than originally proposed).
Every employer of a person who starts a new job must give notice and certain information to the Commissioner of Inland Revenue if the employer is satisfied that the employee is subject to the automatic enrolment rules.
A person who starts a new job with an exempt employer is exempt from the automatic enrolment rules.
An employer who currently has a registered superannuation scheme may apply to be an exempt employer.
To be exempt, the employer’s scheme must satisfy the following:
- All permanent employees aged 18 and over must be eligible to be a member and be able to transfer their interests in another scheme to that scheme.
- The trust deed must allow members to transfer withdrawal benefits to another scheme.
- The minimum employee contribution must be at least 4% of the employee's gross salary.
- Employer contributions must vest completely within five years of membership.
- The scheme must be a registered superannuation scheme.
The Commissioner of Inland Revenue must supply to each employer all information packs the employer requires. This information pack contains general information about the KiwiSaver scheme as prescribed in the Bill. The employer must provide this information pack to each of its new employees.
Employers must deduct contributions via payroll and pay these to the Inland Revenue. PAYE rules will apply to the deduction of contributions. The minimum contribution is 4% of an employee’s gross salary or wages.
KiwiSaver scheme contributions will be held in an Inland Revenue holding account for a period of at least three months before going to the appropriate provider. Interest will be payable on contributions held.
KiwiSaver scheme members can take a contributions holiday only after the first 12 months of contributions (except in the case of serious financial hardship, in which case they can cease contributions sooner). Applications for contributions holidays must be made to the Commissioner of Inland Revenue.
Voluntary lump sum contributions are also permitted.
The ability to divert contributions towards mortgage repayments is no longer a feature of KiwiSaver.
The Crown must pay a contribution of $1,000 to the first KiwiSaver scheme of which a person is a member. The Crown subsidy is locked-in until the date of entitlement to withdrawal benefits (and cannot be used for first home purchases or serious hardship withdrawals).
A fee contribution of a flat dollar amount per member per annum will be paid by the responsible Department for each KiwiSaver scheme member. It is unlikely that this fee contribution will fully cover the fees of each KiwiSaver scheme.
Any scheme that satisfies the following criteria is eligible to be a KiwiSaver scheme:
- It is established by trust deed and governed by New Zealand law.
- Its principal purpose is to provide retirement benefits directly or indirectly to natural persons.
- It is a defined contribution scheme.
- If a new scheme, it must have at least one independent trustee.
- At least one trustee is a New Zealand resident or, if a corporate trustee, at least one director is a New Zealand resident.
A KiwiSaver scheme may, but does not need to be, a registered superannuation scheme.
Many of the provisions of the Superannuation Schemes Act 1989 will apply to a KiwiSaver scheme. These provisions are specified in the Bill.
A KiwiSaver scheme will, for the purposes of any other act, be treated as a registered superannuation scheme.
KiwiSaver rules set out in Schedule 1 of the Bill are implied into every trust deed that establishes a KiwiSaver scheme. These rules include that:
- Trustees may not charge a fee that is unreasonable.
- The courts have jurisdiction to determine whether a fee is reasonable.
- The Government Actuary may publish guidelines regarding reasonable fee levels.
- Contributions are locked in until the later of the age of entitlement to New Zealand Superannuation and the date on which a member has been a member of a KiwiSaver scheme for five years.
- All withdrawals must be paid as a lump sum.
- Withdrawals may be made for the purposes of purchasing a first home. This option is only available following three years of membership.
- Withdrawals may be available in cases of serious financial hardship on application to the trustees of the scheme.
- Members can transfer from one KiwiSaver scheme to another.
Applications for registration as KiwiSaver schemes are made to the Government Actuary in much the same way as applications to become registered superannuation schemes under the Superannuation Schemes Act 1989. The Government Actuary has 28 days after receiving an application to consider whether the scheme is eligible to be a KiwiSaver scheme.
Trustees of existing superannuation schemes may do one of the following:
- Convert the entire scheme to being a KiwiSaver scheme.
- Establish a new KiwiSaver scheme within the existing scheme.
- Continue operating independently of KiwiSaver.
Under either of the first two options, the process is by submitting a proposal to the Government Actuary. The proposal must be in the form prescribed in the Bill.
To convert the entire scheme, trustees will need to obtain the consent of all members and contributing employers to the proposal.
To establish a KiwiSaver scheme section within an existing scheme, trustees are only required to notify members and contributing employers of the proposal. A proposal is treated as providing a right for a member to elect to transfer all or part of their interest in the registered superannuation scheme to the KiwiSaver scheme.
Trustees may make proposals on an alternative basis. In other words, if the consent of all members is not obtained to the proposed conversion, trustees can instead opt to set up a new KiwiSaver scheme section.
Choice of KiwiSaver scheme
A member may choose the KiwiSaver scheme that they wish to become a member of by contracting directly with the provider.
If an employee does not choose a KiwiSaver scheme, then an employer may choose the KiwiSaver scheme of which their employees will become members.
If neither the employee or the employer choose a KiwiSaver scheme, then contributions will be paid to one of the default providers as selected by the IRD.
The Minister may appoint one or more eligible KiwiSaver providers for a specified term to provide a default KiwiSaver scheme and default investment product.
A default provider must have at least one trustee that is a trustee corporation.
Default providers and default schemes will be selected via a competitive tender process.
The Government Actuary is the main regulatory authority. The Bill provides the Government Actuary with an extensive role and gives him certain powers and authorities.
The Bill provides for regulations to be passed prescribing a number of matters which will be important to KiwiSaver schemes.
An interface with the securities legislation is provided for in the Bill. Importantly, the Bill specifies that employers will not be considered to be ‘promoters’ under the Securities Act 1978 simply by virtue of complying with their responsibilities under the KiwiSaver legislation.
The KiwiSaver Bill has been referred to the Finance and Expenditure Select Committee following its first reading on 2 March 2006. The Committee has called for public submissions on the Bill, with the closing date for submissions being 5pm on Friday 28 April 2006. It is intended that legislation will be enacted in October 2006, with KiwiSaver schemes to start operating from 1 April 2007.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.