On Wednesday, the minimum default KiwiSaver contributions increase from 3% to 3.5%.
This is good news for those employees that are paid KiwiSaver on top of their gross salary.
However, there is a large chunk of the working population that will see no benefit from this change. The self employed, as well as employees on a total remuneration contract. This type of contract is where employer KiwiSaver contributions are included as part of your gross salary.
I feel the total remuneration contract has always been a sneaky way for companies to provide KiwiSaver. Sure, it is included in the contract when employees sign up for a job but a lot of people don’t fully comprehend contracts. It is not until they receive their first pay and they wonder why they are not being paid KiwiSaver on top of their salary. And companies rely on people not understanding. It’s very deliberate. Most employers don’t bring up this discussion proactively. They hope it is not noticed or brought up in the first place. Employers publicly state they offer these contracts for transparency and fairness, but privately that is often not the case.
Research from the retirement commission states that 25% of all employers provide total remuneration contracts to all their staff. Another 20% of employers use a mix of total remuneration and on top of. Once you remove the 11% of employers that ‘don’t know’ or listed ‘other’, that is about 50% of all employers with KiwiSaver eligible employees using total remuneration contracts to some extent.
Of the 20% of companies that use the mixed model, 29% use total remuneration on nearly all employees. So that is almost 35% of contracts on total remuneration now. If we assume that the rest of the 71% of contracts under the mixed model use total remuneration contracts for half of employees, that is another 8%. So almost 43% of all eligible KiwiSaver eligible employees on a total remuneration contract.
Now to be the fair, the research didn’t determine what percentage of employees under an employer that offered a mixed KiwiSaver model to its employees (including salary and on top of) were on total remuneration or not. We do know that 29% of those employees are mostly on total remuneration. I think half of the remaining 71% on total remuneration is a fair assumption.
Either way, there is a very god chance that over 40% of KiwiSaver eligible employees are paid KiwiSaver as a total remuneration contract. That leaves around 60% being paid KiwiSaver on top of gross salary.
40% is a lot of employees that will see no benefit to this change.
But what I really wanted to write about today was the unintended consequences of this change. It will be really interesting to see, but I think we will see an increase of total remuneration contracts. Many employers will want employees to absorb the increase in costs.
Under a total remuneration contract, if an employee is on a $100,000 gross salary and both employer and employee contribute 3% to KiwiSaver, that means the employee contributes around $3,000 a year and employer $2,010. This means the employees salary can be reframed as $97,990 base salary plus $2,010 KiwiSaver. So when the employer has to increase contributions to 3.5%, under a total remuneration contract, an employer is under no obligations to increase your salary like they would be if KiwiSaver were on top of your salary. The extra $500 required by a 0.5% increase in contributions in this example will just be taken out of your base salary. For example, $97,490 base salary (a decrease of $500) and $2,510 KiwiSaver (an increase of $500). No change to your income. In fact, your take home pay is now less.
Great if you’re an employer! The cost is absorbed by employee.
Employers historical record of always going for the bottom dollar has me believing we will see an increase in total remuneration contracts.
If we don’t see an increase in these types of contracts, employers will find another way to reduce costs. They may put a hold on recruitment placing greater workloads on those that remain. They may lay off some staff. Or they may remove or reduce bonus income or other incentives.
There is no free lunch in business and these KiwiSaver changes will probably see many kiwis no better off for their retirement.
A far greater impact would be to make the employee contributions tax deductible or tax free until time of withdrawal. Or perhaps removing the ability for the bulk of employers to include KiwiSaver as part of salary (total remuneration). These are things that make a real impact to most people. Then employers can’t game the system like they most likely will. There are too many loopholes in the current system available for employers to exploit.
Call me a cynic if you like. I’m just trying to be real. I know there are some very good employers to work for who do the right thing by their employees, but I am afraid that is a minority. Given the choice, most employers choose their wellbeing over yours.
That’s all today. I don’t intend to come across as negative on KiwiSaver. I do like the fact that it provides some retirement savings in a set and forget way. Also great for those not on a total remuneration contract. I just wanted to highlight what I think will be an unintended consequence of these changes. I will wait with bated breath and would love to be proven wrong.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.