Employers will exploit new KiwiSaver 'loophole', economist says

Saturday, 24 May 2025

The KiwiSaver changes have created a new “loophole” many employers are likely to use to keep their costs down, says Council of Trade Unions economist Craig Renney.

The Government’s Budget changes to KiwiSaver have created a new “loophole” many employers are likely to use to keep their costs down, according to union economist Craig Renney.

The Government announced in Thursday’s Budget that it was halving KiwiSaver subsidies, but would also lift the minimum KiwiSaver employee contribution rate from 3% to 4%, along with a matching employer contribution.

The Government hopes that making people save more of their own, and their employers’, money means cutting the maximum government contribution from $521 to $261 would not leave people with greatly reduced nest eggs at retirement.

However, Finance Minister Nicola Willis said savers would be able opt to stay at the 3% contribution rate, which Renney feared would be exploited by employers keen not to see the amount they paid in employer contributions rise to 4%.

“My big concern is that there's a loophole in what's being proposed, which is that you're allowed to go back to 3%, and if you go back to 3%, your employer is allowed to go back to 3%,” Renney told an audience at a post-Budget breakfast in Wellington on Friday.

“I can see a lot of contracts being written for people when they sign new contracts, [saying] ‘I agree to only taking 3%’,” said Renney, economist for the Council of Trade Unions.

That would mean many workers would feel they had no choice but to accept 3% matching contributions.

Halving its own contributions would save the Government $580 million in the coming financial year, Budget figures showed.

“At which point all of these reforms are fairly meaningless, because the workers we are desperately keen to target won't be able to access that benefit,” Renney said.

It’s not the only loophole in KiwiSaver laws that could be used by employers to avoid having to pay 4% employer contributions.

The Inland Revenue Te Taari Take’s regulatory impact statement for the Budget 2025 KiwiSaver changes warned about another way businesses may respond to the KiwiSaver Budget changes.

“We anticipate that this [increase in minimum contribution rates] will lead to reduced profitability, particularly for labour intensive businesses such as the retail sector. It is possible that employers will respond to the increased costs of labour through increased use of total remuneration contracts,” it said.

Total remuneration contracts are contracts in which employers require workers to accept their “employer” contributions come out of their own salaries, rather than being extra when they opt to join KiwiSaver.

While it was once thought these total remuneration contracts would be used for executives, they are common in many lower-paid industries.

Minister of Finance Nicola Willis delivers a copy of Budget 2025 to Prime Minister Christopher Luxon.

A 2022 survey of 306 businesses conducted by the Retirement Commission Te Ara Ahunga Ora found that almost half of employers used a total remuneration approach for at least some of their employees.

The total remuneration loophole was introduced by National when it won power in 2008.

Labour’s Tracey McLellan tried to get total remuneration contracts banned, but her bill failed to win support from Government MPs.

The Retirement Commission said about 80% of people in KiwiSaver would end up with more money saved at retirement as a result of the Budget changes due to the higher contribution rates.

The opposition leader attacked the Government's new KiwiSaver policy, as well as the pay equity changes in the Budget.

However, the regulatory impact statement indicated officials were uncertain of how the public and employers would react to the changes.

Officials thought halving the government contribution might have only a small effect on behaviour. They also told ministers that even if people saved less into KiwiSaver, they would be likely to save more elsewhere.

While Willis defended the cuts to KiwiSaver subsidies, saying it was necessary to make KiwiSaver “more fiscally sustainable”, the changes will result in KiwiSaver becoming a source of tax revenue for the Government.

In the 12 months to the end of March last year, the Government collected $590 million a year in tax from KiwiSaver schemes, according to the 2024 KiwiSaver report from the Financial Markets Authority.

That same report shows that the Government contributions were $990m, though it also paid about $69m in Kāinga Ora KiwiSaver First Home grants, which the Government put an end to in Budget 2024.

The halving of the government contributions would save the Government $580m in the coming financial year, Budget figures showed.

That would appear to show KiwiSaver would generate a net positive income for the Government for the first time since it was created by Labour in 2006.

When contribution rates start to rise, the Government would also earn more employer superannuation contribution tax, which employers pay on their contributions to their workers’ KiwiSaver accounts.

However, the picture was complicated, as the impacts could affect tax revenues and growth elsewhere.

Treasury Te Tai Ōhanga warned that reduced profitability could reduce the money available for businesses to invest in becoming more productive, which underlined the Government’s growth agenda.

The Budget 2025 cuts are the fifth time a National-led government has cut KiwiSaver subsidies.

In 2009 National cut the $40-a-year fee subsidy. In 2011 it cut the maximum government contribution from $1040 to $521.

In 2015, it removed the $1000 kickstarter for new accounts. In 2024, it ended KiwiSaver First Home grants. In 2025, it is cutting the maximum government contribution to $261.