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How to budget for KiwiSaver (and save $thousands in KiwiSaver contributions)
You could hear the groans around New Zealand.
From next year every NZ business will have to contribute to KiwiSaver where it employs staff who elect to be part of the scheme. And, with a $1000 government incentive to join, plus tax free contributions from their employer, for many employees (particularly those in higher pay brackets) joining up is going to be very attractive.
But what of your wage bill? Over a 4 year period starting next April, you will see your wage bill increase by up to 4% (depending on how many of your employees decide to be part of the scheme). This increase is going to hit your bottom line and if you don't budget for it now you could be in trouble.
If you don't budget now, you could end up rewarding the unproductive and lazy
Prudent employers use incentives, such as pay rises and bonuses, to reward good employees. For those whose performance is lack lustre, you simply don't give a pay rise at all. Eventually the cream rises to the top and your business runs efficiently.But once the compulsory KiwiSaver contributions come in next year, in effect you will have to give an automatic year on year pay rise to every employee that wants to be part of the scheme. That includes your non performing employees. All they have to do is be part of the scheme and make their own contribution.
And you probably won't be able to reward your good employees over and above this because your KiwiSaver contributions will blow the wage budget. Pay increases go on hold to pay for the scheme and your ability to incentivise your employees is restricted.
And what of those employees who don't opt in?
Those employees who don't opt in to KiwiSaver obviously won't get the extra KiwiSaver contributions. If they are hard working employees, how long do you think it will be before they start asking for a pay rise to compensate them for not receiving KiwiSaver contributions?So, you decide to give them a pay rise. Then the next day they opt in to KiwiSaver and you have to pay the contributions on top of the pay increase.
Since your employees always have the choice to opt in and opt out of the KiwiSaver scheme at any time your remuneration structure could go out of whack over night and your wage bill spiral out of control.
The problem lies in employee choice
You are probably thinking that there is an obvious solution to this problem: when you hire an employee, ask whether they intend to stay in the KiwiSaver scheme or intend to opt out (all new employees automatically go in unless they opt out). Then depending on their answer adjust the offer of employment to suit your budget. But what if, having told you they will opt out, they decide to stay in? You end up paying more.So, instead, why not offer all new employees a lower rate of pay just in case? That's certainly possible but not ideal. Since the compulsory contributions are graduated (i.e. a 1% increase every year until April 2011) you will need to adjust your offers of employment down by 1% each year to make provision for the contributions. This is going to do you no favours in the labour market and will put new employees on a lower rates of pay than existing employees doing the same job. It also doesn't solve the problem of existing employees.
You can't reduce existing employees' rates of pay
The law says that you can't reduce the pay of your existing employees to budget for the compulsory contributions - at least not without their consent and few employees will give their consent to a 1% year on year reduction in their pay for four years to allow you to budget for KiwiSaver (especially if they don't intend to opt in).Gentle persuasion won't work either
If you think that you can persuade your employees not to opt in, then think again. Very soon the publicity surrounding KiwiSaver will probably be enough to make even the least switched on employee curious about the scheme. But there's a bigger reason why you can't embark on an anti-KiwiSaver propaganda campaign: you are not qualified to to advise your employees as to whether they should opt in or opt out.If you do, and your advice is not in their best interests, you will have given negligent advice and could end up getting sued when your employees realise they have been led astray. The simple rule is: if your employees ask for advice, call in an independent financial advisor.
So, if it is now starting to sound as if you have no way out, don't worry, there is an answer that could save you $thousands over the next 4 years and beyond.
The answer lies in your employment agreements
In your employment agreement you will either pay your employees based upon a yearly salary or a hourly rate. For all new employees coming into your business over the coming years you need to insert a clause which sets the maximum you will pay (including your KiwiSaver contributions). The clause should also allow you to pay the equivalent of your contribution to employees who elect not to be part of the scheme as part of their salary or wage. For those that are part of the scheme, the clause should also allow them to elect whether to receive the balance between the government minimum contribution (i.e. 1% from April 2008, 2% from April 2009 etc), and the full 4% as a contribution or as part of their salary / wage.All of a sudden you are back in control of what you pay your employees.
What about existing employees?
You can introduce the new clause into existing agreements as well providing you get your employee's consent. To get this consent you will need to provide an incentive, such as a pay rise or one off bonus. Whilst a small pay rise may cost you now, it could end up saving you money in the long run by keeping a lid on the KiwiSaver contributions e.g. by increasing an employee's pay by 1% now, using the formula in the clause you save up to 3% over the next 4 years if that employee decides to opt into KiwiSaver*. Whilst this incentive may not work in every case, remember any payrise you give now is money in your employees hands compared to KiwiSaver contributions which are locked into age 65.The other important thing to remember is that you should only introduce this clause to the agreements of employees who you believe are likely to opt into KiwiSaver. That is not going to be employees on lower rates of pay because they won't be able to afford it. But, for all new employees you should use the clause regardless.
Time to stop the groaning and get a KiwiSaver clause
The recent decision to make KiwiSaver contributions compulsory has caused a lot of anxiety amongst the business community. That anxiety stems from the fact that you suddenly lose control of your wage bill. A KiwiSaver contract clause puts the control back in your hands. It's now time to stop the groaning and start planning for the next 4 years.* Before amending any existing employment agreement you must allow your employees the opportunity to get legal advice before they sign.
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Do you want to save $thousands in KiwiSaver contributions by getting a KiwiSaver contract clause?You can buy a KiwiSaver Contract Clause from this website for only $75. This clause is drafted by me and comes with my personal guarantee. Click here to read more |
© Michael Smyth. Would you like to use this article in your newsletter, on your website or in your magazine? If so, I would be happy to give you permission. Simply click here to find out how you can use this article
Do you want to save $thousands in KiwiSaver contributions by getting a KiwiSaver contract clause?
You can buy a KiwiSaver Contract Clause from this website for only $75.
This clause is drafted by me and comes with my personal guarantee. Click here to read more