In some ways it seems surprising that the coalition government intends to lift both the employer and employee contribution rates to KiwiSaver. This goes against many of the policies we have seen to date which have been aimed at reducing compliance costs and supporting small businesses and employers.
It would be too cynical to suggest that the changes to the KiwiSaver regime are about saving the government money in the form of the government’s own contribution rate being halved. And as Chloe Swarbrick has quite rightly pointed out, the increased cost to government, as the biggest employer in New Zealand, will chew much of this up.
So, how was it that the government anticipated that already struggling businesses would afford the cost of this additional 1% on all salary and wages given that this is the greatest expense for many employers.
This is where the “loopholes” come in. There are a number of ways in which employers will be able to get around the cost of the increased contribution rate.
Firstly employees will be able to “opt out” of the requirement to contribute 4% by making an annual application to Inland Revenue. In this case both the employee and employer contribution rate will remain at 3%. It is not difficult to imagine that some employers will put pressure on employees to do so in order to save themselves a buck or two.
We have not yet seen the wording of the bill but there will need to be some protections for employees around this, including that it can not be a condition of an employment offer that an employee “opt out” of the 4% contribution rate.
In the absence of these protections we are likely to see unfair bargaining claims under the Employment Relations Act where an employee can challenge a term of an individual employment agreement if they have been “induced to enter into the agreement by oppressive means, undue influence, or duress”.
Second, whilst stating that the purpose is that KiwiSaver contributions are paid on top of salary and wages, the KiwiSaver Act allows for employers to avoid this by offering a “total remuneration” package. This is where the employment agreement provides for a total amount of pay from which all costs, including both employer and employee contributions to KiwiSaver, are deducted. What remains is the amount paid as salary and wages. Effectively, therefore, the employee gets no additional benefit from the “employer contribution” because they receive less pay as a result.
This is perfectly legal, and many employers, including the Employers and Manufacturers Association, already have these clauses. Some employers have sought to justify this approach by suggesting that it gives employees a choice, that is they can choose to make contributions to KiwiSaver or they can choose to take the whole of their pay in cash.
But this does not seem to achieve the stated “purpose” of the legislation or the intent that the employer makes a contribution which matches that of the employee. Effectively the employee pays both.
These types of clauses can be negotiated at the time of the offer of employment and included in the original employment agreement. However, the increase in contribution rates will likely result in more employers seeking to introduce this approach into existing employment relationships by offering employees a “variation” to their terms and conditions to incorporate this. As to why any existing employee would agree to such a variation, it could be made a condition of future pay increases or apply in a promotion situation where a new agreement is offered.
There is one level of protection for employees on a “total remuneration” arrangement, and that is that their salary or wages can not drop below the statutory minimum wage, once KiwiSaver contributions are deducted.
The third, and most likely “get around”, is that employers will simply absorb the additional cost by offering lower future pay increases. In its Regulatory Impact Statement, Treasury was quite upfront about this saying; “We have assumed that employers will offset the majority (80%) of their higher contributions via lower-than-otherwise wage increases….”
Originally published in The Post
This applies to both public and private sector employers and appears to have been part of the government’s masterplan for funding the increased costs in respect of its own workforce.
If Treasury’s estimate is accurate and 80% of the additional cost of KiwiSaver contributions will be met by employees, it is difficult to see how the reforms are consistent with the original spirit and intent of the KiwiSaver Act. It may well be that employees will have more money in their retirement, but they will pay for it now.
