Nov 2007

Last week the Finance and Expenditure Committee reported back to Parliament on the Taxation (Annual Rates, Business Taxation, KiwiSaver and Remedial Matters) Bill 2007 (Bill). The Bill was introduced in May and was the subject of extensive submissions at the Select Committee stage.

The Bill contains important amendments to the KiwiSaver Act 2006, including the compulsory employer contribution regime to apply from 1 April 2008.  This Stop Press highlights some key KiwiSaver points for employers to consider. 

Compulsory employer contributions must be paid on top of salary or wages

From 1 April 2008, employers are required to make compulsory contributions on behalf of their employees who are contributing to a KiwiSaver scheme or a complying superannuation fund.  The Select Committee's amendments to the Bill have made it clear that compulsory employer contributions must be paid in addition to an employee's gross salary or wages.  However, from 13 December 2007, employers and employees are free to agree contractual terms that ignore that general purpose.  Therefore, an employer and employee can agree that the employee's total remuneration includes any compulsory employer contributions to KiwiSaver that the employer may be required to make, provided this agreement is reached on or after 13 December 2007. 

We consider that there is still some risk for employers in reaching this kind of agreement with their employees.  As a result, we recommend employers seek specific advice from us if they are considering reaching an agreement that employees' total remuneration includes compulsory KiwiSaver contributions.

Existing superannuation schemes: Double Dipping

The Bill allows certain employer contributions to registered superannuation schemes to be off set against the amount of any compulsory employer contributions.  In some circumstances, this will avoid employees "double dipping" and employers having to contribute to an existing company superannuation scheme as well as KiwiSaver.  The specific requirements outlined below will need to be met before contributions to an existing scheme will count towards the compulsory employer contribution rate.

Defined Contribution Schemes

In order for employers to avoid the potential "double dip" and have their contributions to an existing defined contribution scheme count towards the compulsory rate, certain criteria must be met.  Employers need to check all the following boxes:

• the scheme is a registered superannuation scheme;
• the scheme existed on 17 May 2007;
• the employer provided access for employees generally to the scheme before 17 May 2007;
• the employee is either:
  • employed by the employer before 1 April 2008 and the employer makes or has agreed to make contributions before 1 April 2008; or
  • covered by a collective employment agreement that was in force before 17 May 2007 and expires after 1 April 2008, under which the employer is required to make contributions; and
• the scheme has a vesting scale of five years or less.

As first introduced, the Bill required employer contributions to vest immediately before they could be counted towards the compulsory contribution rate.  This has been relaxed and now vesting must occur within five years. 

Defined Benefit Schemes

Employers with defined benefit schemes will also be exempt from making compulsory employer contributions for employee members, if certain criteria are met.  Employers will need to check all the following boxes:

• the scheme is a registered superannuation scheme;
• the scheme existed on 17 May 2007;
• the employer provided access for employees generally to the scheme before 17 May 2007;
• the employee: 
  • is employed by the employer before 1 April 2008 and the employer makes or has agreed to make contributions before 1 April 2008; or
  • is covered by a collective employment agreement that was in force before 17 May 2007 and expires after 1 April 2008, under which the employer is required to making contributions; or
  • has had contributions paid or credited to the scheme by a previous employer;
• the contributions are made in respect of a retirement benefit calculated with reference to the employee's salary or wages; and
• the employer is required to make contributions by statute, trust deed or an employment agreement.

Post 1 April 2008 Employees

Employers will need to be careful about employees who commence employment after 1 April 2008 and who are not covered by an applicable collective employment agreement.  There is a possibility these employees may double dip by joining the existing company superannuation scheme and subsequently joining KiwiSaver.

Although the Bill has substantially reduced the risk of employees double dipping, employers should review their employment arrangements to minimise the risk of double dipping.  Possible options open to employers include:

• reaching a agreement with employees on or after 13 December 2007, that the employee's total remuneration includes any compulsory employer contributions to KiwiSaver that the employer may be required to make;
• reviewing any existing superannuation policy or scheme membership eligibility criteria to address the possible situations where double dipping may arise.  For example, employers may wish to provide that future contributions for members who join the existing scheme after 1 April 2008 will be reduced by the amount of any compulsory employer contributions the employer is required to make to that Members KiwiSaver scheme.  This is likely to require an amendment to the existing scheme trust deed and investment statement.

Next Steps

We encourage employers to consider how the points outlined in this Stop Press might impact on their business.  Please contact us if you would like us to work through any KiwiSaver issues with you.

This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.