Employers including KiwiSaver as part of pay packets instead of on top

New research has revealed the prevalence of employers including KiwiSaver contributions as part of their employees’ total remuneration rather than on top of their earnings.

The Retirement Commission surveyed more than 300 small, medium, and large organisations about the use of a total remuneration approach to KiwiSaver, finding that 45% use the model for at least some employees.  

The findings show that 25% of employers include employer KiwiSaver contributions as part of total remuneration. A further 20% adopt both approaches, paying some employees earnings plus KiwiSaver, and paying others earnings inclusive of KiwiSaver.

Of the employers which use a total remuneration approach, 66% said it was because the accounting is more simple, 42% because they use contract and casual employees/it is not required, 37% said for transparency, and 21% said because it is cheaper for business. 

Those using a mixed approach gave transparency as the main reason (42%), use of casual and contract employees/not required (40%), and fairness (34%).

Of the employers paying KiwiSaver contributions on top of earnings, 55% said they didn’t know about the total remuneration model or have always used their own model, 45% say their own model is more transparent, and 18% believe ‘earnings plus KiwiSaver’ is more appealing to potential and current employees. However 40% of ‘earnings plus KiwiSaver’ users have considered using the total remuneration model with 88% of them selecting contractual or legal considerations as a reason not to.

Under the KiwiSaver Act, employers must contribute a minimum of 3% of an employee’s gross pay if the employee is a contributing member of KiwiSaver. 

Retirement Commissioner Jane Wrightson says it’s disappointing to see almost half of employers using a total remuneration for at least some of their employees. 

“This is not how KiwiSaver is designed to operate, as the legislation clearly states that compulsory contributions must be paid on top of gross salary or wages except to the extent that parties otherwise agree. However, it is not legislatively prohibited so long as the outcome is the result of good faith bargaining,” she says. 

“The prevalence of a total remuneration approach may explain why some KiwiSaver members have taken a savings suspension and not contributed to the scheme while in paid work. It could also be possible that some employees may not even be aware that this approach is being used, and assume that the employer contributions are on top of their earnings instead of being included.” 

KiwiSaver membership is high, according to the Financial Markets Authority annual KiwiSaver report, with more than three million members (around 96% of the working age population) but ‘non-contribution’ rates are also high, with around 39% of members not currently contributing to their KiwiSaver accounts. There have been around one million non-contributors since at least 2020 before the recent cost of living crisis.

Earlier Retirement Commission research on KiwiSaver non-contributors, found not being in paid work was the main reason for non-contribution (66% of non-contributing members) because they were either studying, parenting or unemployed for some other reason. Seventeen per cent were on saving suspensions and nine per cent were self-employed. Other reasons (8%) included employer-related reasons such as the employer just recently applied for the KiwiSaver scheme, unsuccessful opt-outs, and procrastination/forgetting.

Retirement Commission senior director of policy Dr Suzy Morrissey says it is possible that use of total remuneration could be impacting the decisions of the other 33% of non-contributors but further research would be needed with employees to test whether that is the case.

Guidance to employers when KiwiSaver was introduced said, ‘employees and employers alike have a stake in lifting the saving performance of New Zealand. Increased savings helps employees enjoy a higher standard of living in retirement and also increases the supply of domestic savings that can be invested in New Zealand businesses, helping local businesses grow’. 

But the new research suggests this joint approach to retirement savings is no longer common, says Wrightson, and the removal of the incentive provided by the employer contribution on top of salary or wages goes against the ‘spirit’ of the scheme – potentially putting people off from contribution.

The full report is available here and the policy brief is available here.