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Employment Law

23 May 2011

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KiwiSaver Version 5 – the Only Constant is Change

Last week's Budget confirmed the Government's forewarning that changes would be made to KiwiSaver, the fifth variation to the scheme since its inception. The changes are significant for employers and employees, and are part of a wider strategy to put the Government books back in black.

The key changes are:

From 1 April 2012 all employer contributions to KiwiSaver (and other complying superannuation funds) will cease to be tax-free. Instead they will be subject to Employer Superannuation Contribution Tax (ESCT) paid at the employee's marginal tax rate.
From 1 July 2011 the Government's contribution, in the form of the Member Tax Credit, will be halved from $1 to 50c for every $1 contributed by members, up to a maximum of $521 a year - half the current maximum.
From 1 April 2013 the minimum contributions for both employers and employees will increase from 2% to 3%.

The Government also signalled it intends discussing with employers the feasibility of the Savings Working Group's recommendation of automatic enrolment of all employees aged 18 and over who are not currently members (with opt-out provisions).

A broken promise or new manifesto?

The rise in minimum employer and employee contributions from 2 to 3 per cent is consistent with National's 2008 election campaign, during which National promised to review KiwiSaver once it had bedded in, with a view to introducing a "3+3" scheme.

However, contrary to the changes announced yesterday, National had also promised to retain the Member Tax Credit and keep employer contributions tax-free.

While this has caused some to argue that promises have been broken, it appears the Government is treating the changes as a pre-election policy announcement. During questioning in Parliament on Tuesday, the Prime Minister responded:

New Zealanders will have a chance to vote on all of those changes and decide whether they want to endorse a National Government.

Implications for employers

While the changes to KiwiSaver are not due to come into effect until 2012 and 2013, and only if National gets re-elected, employers need to consider the impact of the changes now.

These changes will result in increased costs for employers. This will be a factor to consider in future remuneration reviews, particularly for collective agreements with 2 or 3 year terms.