How a KiwiSaver loophole short-changes employees

Two weeks after Oliver (not his real name) started working at his new job, his boss said he was getting a raise. Oliver was told that without a pay rise, he’d be earning below minimum wage – so his employer needed to bump up his pay.

Oliver initially thought the pay rise was a good thing, but soon realised he wasn’t going to be any better off because his employer’s KiwiSaver contribution was part of his “total remuneration” package.

What is total remuneration?

Employers can choose whether to make KiwiSaver contributions on top of your pay package, or out of your pay package. If the contribution is coming from your pay package, there must be a “total remuneration” clause in your employment agreement.

A "total remuneration” clause allows an employer to deduct KiwiSaver contributions from the employee’s pay.

So, if your total annual remuneration is $56,000 (around the national median income) and you opt in to KiwiSaver, a total remuneration clause will allow your employer to deduct the minimum employer contribution of 3% from your salary. This means your actual annual salary is $1,680 lower than you may have expected, at $54,320.

You also must make a minimum employee contribution of 3% to your KiwiSaver. This is deducted from your salary, which in this example is $1,630 over the year.

However, your employer can’t include a “total remuneration” clause if you’re earning the minimum wage because this would mean you’re getting less than the minimum wage. This is what happened to Oliver. But he didn’t understand this when he signed his employment agreement.

The 3% taken out of his pay would’ve set him below the minimum wage, so his boss told him he would get a raise to put him back up to the minimum wage ($21.20 an hour from 1 April 2022).

Under the Minimum Wage Act, it’s illegal to pay employees less than the minimum wage. Oliver thought he was signing a contract that put him above that.

Employers might argue it’s fair because if employees join KiwiSaver, they could be paid 3% more than employees not in KiwiSaver.

It’s unclear how many people might be paying their employer’s mandatory contribution out of their wages.

A spokesperson for the Ministry of Business, Innovation and Employment (MBIE) said it’s difficult to know how widespread total remuneration clauses are as employment contracts are private.

“Total remuneration is likely to be low in collective employment agreements but likely more common in private sector businesses and employers.”

In 2008, the then Labour government closed this KiwiSaver loophole. However, the loophole was reopened later that year by the successive National government, and it has remained open for the past 13 years.

What’s next

A 2019 Review of Retirement Income Policies by the Te Ara Ahunga Ora Retirement Commission made 19 recommendations to enhance KiwiSaver, including phasing out KiwiSaver contributions as part of total remuneration packages.

In December 2021, Minister of Commerce and Consumer Affairs David Clark responded to the review. At the Minister’s request, MBIE is leading work to consider options for enhancing KiwiSaver.

“New Zealand has not had good savings rates historically and KiwiSaver has changed the savings landscape in a meaningful way,” Clark said.

“In saying that, with KiwiSaver now well established it’s an appropriate time to review the scheme’s overall settings.”

But it’s too early to speculate on what may or may not come from the review, Clark said.

The government will consider five of the 19 recommendations from the 2019 Review of Retirement Income Policies, including phasing out the inclusion of KiwiSaver in total remuneration packages. MBIE stated there is no set timeframe for this work.

The other four recommendations being considered are:

• Introducing an optional ‘small steps’ employee contribution programme to KiwiSaver that automatically increases your contribution by small amounts on a yearly basis.

• Phasing in employer contributions for KiwiSaver members aged over 65 and consider the implications of doing so for those aged under 18.

• Adding a ‘sidecar’ savings account (of up to $3,000) to the main KiwiSaver account for short-term emergencies.

• Using the government contribution to incentivise voluntary contributions to KiwiSaver by non-employees.

We say

We think it’s time to close this loophole to ensure KiwiSaver is fair for all New Zealanders.

Te Ara Ahunga Ora Retirement Commissioner Jane Wrightson also weighed in on the inclusion of KiwiSaver as part of total remuneration packages.

“Our view remains that this appears to go against the spirit of KiwiSaver, which incentivises employees to save small amounts over a longer term with employer support, and ultimately see them into a better retirement.”

Wrightson looks forward to hearing back from MBIE about what enhancements can be made to KiwiSaver. There’s another Review of Retirement Income Policies due at the end of the year.

Here are some tips to consider:

• If you’re negotiating pay for a new role, ensure you fully understand whether your pay includes or excludes KiwiSaver.

• If you’re unclear about how your current gross pay and total remuneration is made up, ask your employer to explain these to you to make sure you understand how your take home pay is calculated.

• Your weekly/fortnightly salary statement should display this information, including tax paid.

Pressure points

Rising costs are already stretching wages. Many first-home buyers will use their KiwiSaver funds to get a deposit together for a home loan.

If you have an employer who can pay their mandatory KiwiSaver contribution out of your pay, a salary or wage that is 3% less can take a toll.

With some of the highest housing costs on record, including rents for new tenancies up 5.8% in the year to December, pay cheques are under pressure. Add to those costs the highest inflation rate in 30 years (5.9%) – with sky-high prices of essentials such as food, petrol and energy – every cent of a pay cheque counts for many New Zealanders.

Oliver thinks it’s unfair that his employer can deduct his KiwiSaver from his pay. “The purpose of KiwiSaver is to encourage saving for retirement, and that is what the employer’s 3% contribution is meant to do”, he said.

“Making it a part of the total package actively discourages joining KiwiSaver as it puts you on a lower hourly rate than your co-workers, effectively 6% less as they don’t contribute to KiwiSaver.”

What to look out for

Here are two examples of contract clauses from MBIE.

1. Employer KiwiSaver contribution included in pay, which means your take-home pay will be less than you expect:

“The employee agrees that their base pay includes all compulsory employer contributions to their KiwiSaver. The employer’s contribution will be deducted from their pay, as required, currently at a rate of 3%. The employee must decide how much their own contributions will be (3%, 4%, 6%, 8% or 10%) and the employer will deduct this from their pay. If the employee does not specify this, the default rate is 3%.

Select one:

• The employer will pay ESCT (employer superannuation contribution tax) and any other applicable taxes.

• The employee and employer agree that all employer superannuation contributions will be treated as salary/wages and taxed via PAYE. The employee can cancel this arrangement in writing at any time.

The employee can opt out of KiwiSaver between 14 and 56 days after their first day of employment.”

2. Employer contribution on top of pay – this means it won’t come out of your pay:

“The employer will make compulsory contributions to an eligible employee’s KiwiSaver scheme as required, currently at a rate of 3% on top of their salary or wage. The employee must decide how much their own contributions will be (3%, 4%, 6% or 10%) and the employer will deduct this from their pay. If the employee does not specify this, the default rate is 3%.

Select one:

• The employer will pay ESCT (employer superannuation contribution tax) and any other applicable taxes.

• The employee and employer agree that all employer superannuation contributions will be treated as salary/wages and taxed via PAYE. The employee can cancel this arrangement in writing at any time.

The employee can opt out of KiwiSaver between 14 and 56 days after their first day of employment.”