KiwiSaver should be more inclusive with employers’ contribution

KiwiSaver should work today and tomorrow (Picture from KiwiSaver Annual Report 2020)

 KiwiSaver has been around since 2007, intended to help Kiwis save for their retirement. Since then, New Zealanders have amassed over $60 billion in KiwiSaver savings.

While this sounds good, Kiwis still have quite a way to go to being financially prepared for retirement.

Many New Zealanders do not contribute to their accounts. The 2020 KiwiSaver Annual Report said that 1,084,866 members were non-contributing KiwiSaver members.

Reasons for apathy

There are lots of reasons why many would not choose to contribute to KiwiSaver. They might be tight on money, or they might not want to lock their money up until they turn 65.

But there is one other reason which potentially is turning off some Kiwis from KiwiSaver.

Total Remuneration Agreements decide in advance a fixed amount of compensation an employee will receive for doing work. However, this fixed amount is inclusive of your base salary, your KiwiSaver contributions, and any other benefits you receive from your workplace.

An Example

They may sound like any other normal workplace agreement to the untrained eye, however, looks can be deceiving. So, let us illustrate this using an example.

Normally, an employee receives their KiwiSaver contributions on top of their pay. This is called a Pay + Benefits Approach.

Suppose that an employed staff member receives $100,000 in wages before tax.

By contributing 3% of their salary towards KiwiSaver, an employee will get an additional $3000 before tax on top of their wages from their employer. This extra $3000 goes towards their KiwiSaver account, after tax is deducted.

In essence, the employer contribution acts as a reward for contributing to KiwiSaver.

This is because many employees know that their employer will contribute 3% of their salary towards their KiwiSaver account if they contribute 3% too.

Imperative incentives

When, according to a Westpac-Stuff survey, one in three New Zealanders have less than $1000 in savings, every incentive Kiwis have to save is a good thing.

However, this incentive does not exist for people on Total Remuneration Agreements.

Imagine that the same employee signed a Total Remuneration Agreement to receive $100,000 before-tax. In this case, the employer’s contribution comes out of the $100,000 in their Total Remuneration Agreement.

This is a loophole because an employee is in essence paying their own employer’s contribution. I think this should not be the case.

Employers’ contribution

Instead, employer contributions should come from the employer, in addition to what has been paid to employees, just like the Pay + Benefits approach mentioned earlier. This way, employees are incentivised to join and contribute to their KiwiSaver accounts.

With no incentive to save in their KiwiSaver account, people on Total Remuneration Agreements may be less likely to save for retirement.

There is simply no reward for them to contribute more to their accounts, as their employer does not give them any extra money for doing so.

Without saving for retirement, Kiwis may end up running out of money in their golden years.

Superannuation inadequacy

While some may think they will be able to get by on New Zealand Superannuation alone, in reality, they may actually just one big medical bill away from being stuck in debt.

Additionally, there are no guarantees as to what Superannuation will look like in the future. Potentially, New Zealand Superannuation payouts may not be as high as you would like, or the eligibility age might increase.

One should keep this in mind before they neglect saving for retirement. Saving what you can for retirement is better than saving nothing for retirement.

A Commission for Financial Capability report showed that half of 51- to 60-year-olds thought “hardly at all” or “a little” about how much they would need for retirement.

It is therefore important that we do whatever we can to encourage Kiwis to become financially educated and save for retirement. Fixing total remuneration agreements would help us do this.

Clive Fernandes is an Authorised Financial Adviser and the director of National Capital, a financial advisory firm that provides personalised investment advice, with a primary focus on KiwiSaver.

Disclaimer: The above article is not intended to be personalised advice. It is general in nature and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. A copy of Clive Fernandes’ disclosure statement is available on request and free of charge. The above story has been sponsored by