Saving the kiwi

Like it or not, the KiwiSaver scheme is just months away from implementation. Carlene du Toit examines why we need it and what’s in store for employers.

On 1 July 2007 the Government launches KiwiSaver  its bold new voluntary, work-based savings scheme to help New Zealanders with their long-term retirement plans. Many employers, uncertain as to what is expected of them, may well be approaching this red letter day with considerable trepidation. 

What is the rationale for KiwiSaver? Well, statistics show that more Kiwis are living a lot longer. According to Statistics New Zealand Population Projections for the year 2051, men are expected, on average, to reach the age of 83.5 and women 87. Currently Kiwis aged over 65 constitute 12 percent of the population but by 2051 this percentage is expected to have grown to 26 percent.

The aging population is placing an ever heavier burden on social and medical services and on a tax-paying workforce that is shrinking relative to the population as a whole.

The New Zealand Official Yearbook 2006 shows that in 2005 an amount of $6,270 million was paid out in the form of superannuation to 475,215 people  by 2051 these figures will be staggering.

Clearly, therefore, Kiwis need to save more during their economically active and in work years to provide for their retirement. 

According to Inland Revenue KiwiSaver will not replace superannuation; it is simply a means for all employees to save by way of their employer deducting either four or eight percent from their earnings. These deductions will be collected by the employer and sent through Inland Revenue who will then channel them to one of the six default scheme providers.

The minimum contribution rate will be four percent of gross earnings but savers may elect to save eight percent of their gross earnings and employers are free to contribute.  Deductions will be made from the very first pay day and employees may opt out after the first 14 days and before eight weeks after the commencement of employment. If they opt out their initial deductions will be refunded.

Employees who stay in KiwiSaver may only draw their money at the age of 65, to pay a deposit on a first home, or in instances of significant hardship, serious illness or permanent emigration.

KiwiSaver is open to all New Zealand citizens in work or who are entitled to be in New Zealand indefinitely under the Immigration Act. Some categories of employee will not be automatically enrolled in KiwiSaver. These include those who work for employers that meet the exemption criteria as well as employees under the age of 18 and over the age of 65.

Self-employed benefits

On the face of it KiwiSaver is a great concept, says Warwick Walker of FSB4Financial, an independent financial services company in Wellington that runs KiwiSaver workshops for employers.

The initiative will address issues such as the high percentage of retirees in New Zealand who tend to be asset rich and cashflow poor, he says. Many of them have to resort to measures such as reverse annuity mortgages to free up the equity in their homes in order to survive. This is tantamount to eating the roof over your head, he says.

KiwiSaver will have a knock-on effect, he predicts, as the savings will inevitably be invested in the New Zealand economy thus giving it a powerful boost. This is what happened in Australia, says Walker, and we can assume that the phenomenon will repeat itself here.

Impact on employers

A wealth of information is provided on the www.ird.govt.nz/kiwisaver and www.kiwisaver.govt.nz websites. Employers who already have a superannuation scheme in place have two options: apply for an exemption if they meet the criteria or continue with an existing scheme as well as offering KiwiSaver. If they do not have a scheme in place, they may select a particular scheme provider for all their employees or they may leave this decision to Inland Revenue; in which case they will find themselves in the unenviable position of having to deal with several of the providers as Inland Revenue will allocate providers on a sequential basis. 

KiwiSaver will inevitably mean extra work for the employer says David Lowe, advisory services manager for The Employers and Manufacturers Association (EMA); But overall a good job has been done of keeping the compliance burden down.

Lowe cautions that the administrative functions involved are not payroll related and employers cannot simply rely, therefore, on their payroll companies to take care of everything.

Ironically, employers who have been proactive in looking after their employees now find themselves in the most difficult position.

Most existing workplace superannuation schemes do not fit neatly into the KiwiSaver criteria framework and so major decisions have to be made that will have far-reaching implications for employees, says Lowe.

According to Tower, one of the six default scheme providers, the extra administrative duties imposed on employers will include: 

• Providing all new employees (within 7 days of commencement of employment) as well as existing employees who wish to opt into the scheme with a KiwiSaver pack supplied Inland Revenue.
• Passing the new employees details, along with opt-out forms, to Inland Revenue.
• Making deductions from employees earnings with immediate effect.
• Passing the deductions on to Inland Revenue with the requisite information.
• Dealing with employees who have failed to opt out.
• Managing opt out and contribution holiday schedules.
• Fielding questions from employees and/or referring them to sources of assistance.

To reduce compliance costs KiwiSaver deductions will form part of the PAYE deductions and is scheduled at the same time as the Employer Monthly Schedule (PAYE). Employers will also be able to file for this online (including making payment).

Prepare now

Prior preparation, says France, is the key to pain-free compliance.  

Carlene du Toit is an Auckland-based writer. Email cdtcreative@xtra.co.nz