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Jonathan Eriksen explaining to employees their
superannuation benefits (March 2007)
Employer - It's Time to Wake Up to KiwiSaver by
Eriksens first
appeared in the business section of the Sunday Star Times on 6 May 2007. The
complete discussion below highlights the importance and benefits of active
employer participation in providing superannuation benefits to their employees.
We create customised solutions that best meet your
preferences:
 | Adapting
your current superannuation set up (if you have one) to be compatible with
KiwiSaver requirements |
| Organising a new KiwiSaver scheme for your employees |
| Recommending master trusts providers if needed |
| Conducting superannuation seminars for employees |
| Supporting HR and payroll staff in administering contributions with
training |
Contact us to see how we can help you and your employees
gain the full benefits of KiwiSaver.
Superannuation News covers the KiwiSaver changes announced in the May 2007 NZ Budget.
Why Should an Employer Bother with KiwiSaver?
In my view there are at least three good reasons for an employer to take the time to understand KiwiSaver.
First it creates an opportunity to give a tax-efficient pay rise. In our tight labour market, keeping good staff is difficult but this may help.
By offering to match an employee’s KiwiSaver contributions $ for $ up to 4%, you are actually providing up to a 6% pay rise.
Let me explain. Currently employer contribution to superannuation schemes are subject to super scheme contribution withholding tax (SSCWT).
If an employee on say $50,000 gets a 2% employer superannuation subsidy, this costs the employer a tax deductible $1,000 (2% x $50,000). At present the IRD takes 33% before the funds get into the super scheme. Only $670 hits the member’s account.
Under KiwiSaver the full $1,000 is received in the fund – a 50% increase taking the 2% up to 3% in value. So with a 4% subsidy, the impact is a 6% gross pay rise! But it only costs the employer 4%.
Employees also have a strong incentive to contribute. In addition to the offer of matching contributions, I like the mortgage diversion. After a year’s membership, the employee can recycle 2% from their 4% to pay off their mortgage on their home (not on a rental property). This means for a net 2% member contribution they receive a 4% contribution from the employer which is a 200% return on their own money even without any interest earnings!
So for an initial 4% investment to get the employer’s matching 4% they effectively lose 2% to savings. It also pays off the mortgage faster which reduces the interest cost and saves even more.
This also applies to small business owners who have an incorporated company and pay themselves a salary – providing a tax efficient way of getting a little bit out of the business to invest separately as a risk management strategy.
Secondly, if you don’t contribute, it provides higher paid staff with an opportunity to salary sacrifice up to 4% of gross taxable income on which they PAY NO TAX. Salary sacrifice is where the employee negotiates with their employer to deduct part of their gross pay from their salary and for the employer to pay it as employer contributions to a superannuation scheme. So the employee pays less tax on a lower gross income and it doesn’t cost the employer anything. That’s a lot better than paying away 39 cents in the dollar to the IRD. Higher paid staff should be able to tuck away a measly 4% or 8% (2% + 2% or 4% + 4%) for a rainy day (death, serious ill health or financial hardship or age 65) without missing it.
The third reason, which I believe is the most important, is to enhance the value proposition for yourself and your employees. Forget about the tax breaks and other goodies, such as $1,000 up front, mortgage diversion, first home subsidies, etc.
By law, default KiwiSaver providers must offer a generic commodity product with a low risk investment mix. This will consist of at least 80% cash and bonds and only up to 20% in shares and property which tend to produce higher investment returns over the longer term. These default products are unlikely to generate as good a return as 90-day bills under our current high interest rate environment and thus won’t really reward savers for deferring their spending.
However there are a number of non-default provider products which are more attractive by way of potentially higher investment returns, more flexible fees and benefits which are easier to use and understand.
For a small business, why not consider doing KiwiSaver with your bank? That way you can check your KiwiSaver account balance when you do your internet banking. Having some money in KiwiSaver accounts should help negotiate that extra overdraft around tax time or take out another loan when you want to expand the business. This should make mortgage diversion easier too.
Some boutique KiwiSaver providers invest just in New Zealand and Australian shares – two very well performing stock markets. Others offer additional voluntary benefits such as a life insurance and health insurance although these benefits can’t currently be bought out of KiwiSaver contributions. Some will charge no administration fees if you have other insurance with them.
Remember, the main reason we all need extra retirement savings plus New Zealand Superannuation in our old age is to be able to pay for health care and enjoy our retirement rather than join hospital waiting lists for the operations we need to stay active.
Over the next five to ten years I expect successive Governments to iron-out some of the KiwiSaver wrinkles like the fixed retirement age of 65 and bring in some form of compulsion. If you don’t like my three reasons for looking at KiwiSaver now you will effectively be forced to later. Why not be prepared?
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