KiwiSaver a super tool

Mark Todd, Partner | March 2006

First published in The Business, New Zealand Herald,
3 March 2006

There was a time, not so long ago, when a great many employers were prepared to help their employees save for retirement. Staff "super" schemes were a major part of the employment landscape.

In part, this reflected the nature of working patterns. Employers took an almost "paternalistic" approach and employees often rewarded them with lifelong loyalty. 

Most of us will know from personal experience or friends and family that these super schemes were highly valued.  Small sums set aside over 30 or 40 years grew into wonderful retirement nest eggs and when it was time to collect the gold watch, it came with a nice fund. This was a source of satisfaction for both employer and employee.

Almost everyone accepts that saving through a deduction from salary has significant benefits. It is relatively painless because there is no opportunity to spend the money. The temptation to buy the latest big flat screen TV or take an overseas holiday is removed, and very little self-discipline is required.

But the number of employers with staff superannuation schemes has dropped over recent years. Many have been wound up or the schemes are now closed to new employees. 

There are a number of reasons why employers are now reluctant to provide superannuation:

• Changing work patterns mean that employees are less likely to remain with a single employer until retirement; 
  
  
• The cost and time associated with operating an employer superannuation scheme; and
  
  
• The legal liability associated with these schemes - an aspect that has increased in the last decade.

Now we have KiwiSaver, the Government-designed plan to reverse the decline and reinvigorate our individual and collective savings while we work and earn. The KiwiSaver legislation released last week is aimed at getting us back on the road to the "good old days" by providing a simple vehicle through which employers can assist their employees to save. 

KiwiSaver aims to tackle employer reluctance in a number of ways:

• KiwiSaver arrangements will "travel" with an employee from one employer to another, accommodating today's work patterns.
  
  
• It is designed to impose only a minimal administrative burden and cost on employers.  KiwiSaver schemes will generally be operated by third party financial institutions and the Inland Revenue will provide a clearing house for contributions. There is no compulsory employer contribution required.
  
  
• Employers will be able to be part of basic KiwiSaver arrangements without Securities Act liability or liability under laws relating to financial advisers. 

Employers will also be able to choose their level of involvement, depending on their particular philosophies and business requirements. Possible options are:

• The minimalistic approach - just complying with the basic requirements of the KiwiSaver legislation. This would require an employer to provide the Inland Revenue with new employee details, pass an information package to new employees and deduct KiwiSaver contributions for employees who do not opt out. 
  
  
• A medium level of involvement - activities over and above the minimum required by the legislation.  For example, employers might promote the benefits of retirement savings in general to their employees or facilitate arrangements under which those employees are able to obtain advice on financial planning. There is also scope for an employer to select a KiwiSaver scheme that will apply to its employees if the employees do not have their own preference. 
  
  
• The more "traditional" model of superannuation - the employer making additional contributions for the benefit of its employees (including, potentially, contributions that "vest" over time).  This approach may be attractive to employers who wish to use superannuation as a tool for the recruitment and retention of employees.

The draft legislation also contains provisions designed to limit disruption to existing employer superannuation schemes. If relevant criteria are met, employers will be able to convert their existing schemes to KiwiSaver schemes or obtain an exemption from the requirement to enrol employees in KiwiSaver. These provisions are critical to ensuring that KiwiSaver is not counterproductive through being the final nail in the coffin for existing schemes.

It is early days for KiwiSaver and a vast array of legal and business issues need to be addressed between now and the anticipated implementation date of 1 April 2007.  

However, my view is that KiwiSaver should be welcomed as an additional tool for employers to assist staff and enhance relationships.

 

Mark Todd is a partner with law firm Bell Gully. A corporate and commercial lawyer, he has a specialist practice in advising on superannuation and investment products. Mark has been involved in superannuation law in New Zealand and the UK for over a decade.