By Amanda Morrall
Workplace Savings are accusing the Government of delivering a damaging blow to KiwiSaver through plans to start taxing employer contributions on top of halving member tax credits.
The Government reaffirmed its promise to retain the NZ$1,000 kick-start to incentivize new members. However Finance Minister Bill English said the tax-free status on employer contributions would end in April 2012, with contributions taxed at the employee's marginal tax rate. (See Alex Tarrant article here).
Cuts to member tax credits are scheduled to take effect from June 30, 2012 reducing the Government's matching credits from $1 to 50c up to a maximum of $521. Come April 2013, KiwiSavers and their employers will be compelled to make up for the shortfall with minimum contributions rising from 2% to 3%.
While the industry had widely prepared itself for cuts to the Member Tax Credit, it was taken off guard with plans to scrap the tax exemption on employers contributions.
Workplace Savings executive director Bruce Kerr said on Wednesday it would be "difficult to see how KiwiSavers would continue to be tempted by the Government to save for a product for their retirement'' when the sweeteners to do so were becoming increasingly diluted.
Kerr said the Government, by taxing employer contributions, was significantly reducing the attractiveness of the scheme weighed up against other workplace superannuation offerings.
"We definitely support KiwiSaver in and of itself and I don't think cutting the member tax credit to 50 cents on the dollar is a bad thing. It's good Government is committed to co-savings with New Zealanders but one of the main sweeteners has been the tax free employer contribution which could be seen as being the offset to having money locked away to age 65 and KiwiSaver being in an illiquid investment.''
KiwiSaver losing its lustre
A now more pronounced advantage of other workplace superannuation schemes over KiwSaver would be the "leaving service benefit" which allows employees to be paid out a portion of their savings upon ending employment with a particular company. In addition to that, some schemes come with built in life insurance policies.
Workplace Saving chair David Ireland said the Government was sending a mixed message.
"They've retained the member tax credit at a level that is meaningful but on the other side of it, you have this extra tax take on employer contributions which just means that KiwiSaver is not as attractive as it used to be. The Government is saying 'you're going to have to do more of it yourself.'
"Whether KiwiSaver remains a preferred savings option or people are going to start looking at other savings channels that are more flexible remains to be seen. But we're hoping that people will continue their savings journey regardless even though there isn't the same level of tangible encouragement."
The savings industry itself will have to "suck it up and cope with it and come up with other members to convince people to keep saving,'' said Ireland.
Providers defend KiwiSaver, say cuts good medicine for NZ
Providers were more upbeat about the Government's plan for KiwiSaver.
ANZ Wealth managing director John Body said the bank (which offers four separately branded schemes in KiwiSaver) said the bank was "pleased with the details of the budget" on the grounds that it confirmed earlier signals for "modest changes.''
"We don't think that people should be put off joining or discouraged from continuing to contribute to the scheme,'' said Body, adding that he believed KiwiSaver was still the best vehicle for saving toward retirement.
"These changes do not derail the fundamental benefits and design of the scheme...This is a one-off budget with a focus on returning to surplus and economic growth. As the economy grows and wages rise then contributions to KiwiSaver will be easier for individuals and employers to manage."
Prime Minister John Key said on Wednesday he expected wage growth would exceed inflation leaving people in a net position to ramp up savings.
Body said reducing the overall level of the Members’ Tax Credit was the most sensible way to reduce government liabilities while maintaining the fundamental design of the scheme.
Default provider AMP had a similar view and was sympathetic to the Government's need to reduce spending.
"We understand the Government's overall financial position, and the need to make some trade-offs in the Budget and we are encouraged that although the balance between Government, member and employer contributions will change the overall level of savings in KiwiSaver will be generally maintained,'' said AMP Corporate Superannuation Manager David Wallace.
"We have always favoured raising minimum contributions in small incremental steps to bring us into line with other OECD countries’ savings schemes," he added.
NZ still behind Australia
Budget 2011 cuts to KiwiSaver are projected to save NZ$2.6 billion over four years. Since KiwiSaver was introduced in 2007, Government has made contributions of NZ$3.3 billion.
Sam Stubbs, CEO of default provider Tower Investments, said he would have liked to have seen employer and employee contributions raised further to help bring New Zealand in line with savings levels in Australia. Stubbs said New Zealanders were still only saving two-thirds of what employees across the Tasman were banking.
"I think it's a necessary long-term thing,'' he said of the Government's decision to cut the member tax credit.
"It's never easy to ask people to take more money out of their pocket but it's been well signaled and employees are getting two years to prepare for it and to go into wage negotiations.''
So how much worse off will KiwiSavers be once the member tax credits are halved?
On an average salary of NZ$50,000, the Government taxing the employer contribution would effectively mean you'll end up paying an additional NZ$320 a year in taxes, reducing your annual investable earnings by the same amount.
KiwiSavers who wanted to keep their savings levels at the same rate as they are now will have to notch up savings by an extra NZ$260.75 per year, NZ$2,607 over 10 years, NZ$5,215 over 20 or NZ$10,430 over 40 years. (For more see article by Amanda Morrall "Is KiwiSaver still a good investment."