Why no employer should dismiss Kiwisaver as just another piece of red tape

Anna was on the verge of making a decision. "What are the benefits of joining your superannuation scheme and do you contribute?"

Up to that point, the interview had been going really well. Anna was perfect for the role. Her CV stacked up and she was easy to get on with. The problem was a competing offer from John's main competitor. The offer was very slightly lower in terms of salary, but John's competitor was running a superannuation scheme in which it would contribute 4% of Anna's salary. In Anna's mind that was a much better package.

Why a lower salary and higher superannuation contribution worked for Anna

Anna liked the idea of her employer contributing to her superannuation scheme. Anna had always been a saver and this way she was getting 4% of her salary paid into her scheme by her employer tax free. For John to match that deal he would have to increase his salary offer by 6% since he could not get the same tax advantages by simply implementing a pay rise. The other option was to contribute 4% to a superannuation scheme himself.

But John didn't have a scheme

When 1 July 2007 had ticked around, John hadn't really investigated Kiwisaver properly. He knew he had to make deductions from his employee's salary (if they opted in), but did little more. That meant that all his employees were on the default scheme. In practice this meant that all his employees who had opted in were on different products provided by different providers. John couldn't give any information to Anna about his scheme, because his employee's schemes were picked at random by the IRD. He couldn't even give Anna the choice as to which scheme to choose, because he had no-one on call to advise her what might be the best scheme for her particular circumstances.

So John could only answer that he had no scheme other than the default scheme. Anna asked about contributions again.

Why contributions wouldn't work for John

If John decided to match the 4% contribution of his competitor by making the same contribution to the default scheme, he would leave himself at risk. That's because under the default scheme all contributions vest on day one. That means if an employee leaves after a year, he or she can take all the employer's contributions with them. His competitor, however, had set up their own scheme through one of the well-known providers. Rates of return were good, but of more importance to the employer was that the employer's contributions vested over a 5 year period. That meant that if an employee left after year 1, they would only take one fifth of the employer's contributions with them, and after year 2, two fifths etc. For John's competitor that was a great incentive for their employees to hang around.

John's incentive would cost him money

John had always dismissed superannuation schemes. But with the advent of Kiwisaver the goal posts had changed. Overnight superannuation schemes became a valuable commodity in the labour market as more and more Kiwis understood the need to save for their future. Employers of choice were those with their own superannuation scheme.

John realised that in order to lure Anna the only real option available to him was to increase her salary package by 6%. Even then there would be no guarantee that she would stick around. On the other hand, if he lost her to his competitor there was a good chance she would stay there for some time to maximise her employer contributions. John couldn't afford to lose her, but he knew he also couldn't afford to hire her. Maybe it was time to look again at the Kiwisaver option.

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