KiwiSaver Evaluation: Follow-up survey of SME employers (Research and evaluation reports)

Document summary: This report provides findings of follow-up research to the 2009 SME tax compliance costs survey (above). This research asked SME employers to report on a range of other costs (including making changes to remuneration approaches and other workplace-based superannuation schemes) associated with meeting their KiwiSaver obligations.

Document content:

Background and objectives

One of the Inland Revenue KiwiSaver evaluation's longer-term objectives is to assess the initiative's value-for-money consideration taking into account small and medium enterprises (SME) employers' costs and benefits. In the shorter-term, quantifying SME employers' KiwiSaver costs could contribute to policy decision making. This is because it will provide data on the dollar value of costs, the distribution of costs across types of activities (e.g. changes to remuneration practices and workplace superannuation schemes) and the distribution of costs across types of SMEs (e.g. small versus medium-sized employers).

SME employers' compliance costs for meeting their KiwiSaver responsibilities were measured in Inland Revenue's 2009 compliance cost survey. This report presents the results to a follow-up survey of a subset of respondents to the 2009 compliance cost survey. The target population for the follow-up survey is:

Respondents to the 2009 SME compliance cost survey who are active SMEs employing 50 staff or less, or with an annual turnover of $10 million or less, which employ KiwiSaver members, have changed their approach to remuneration due to KiwiSaver and/or had a workplace superannuation scheme before KiwiSaver started on 1 July 2007.

The objectives of the SME employers follow-up survey are:

To identify whether and how KiwiSaver has affected employers' remuneration practices and, in turn, how any effect on remuneration affects employees' participation in KiwiSaver;
To determine whether and how KiwiSaver has affected employers' provision of workplace superannuation and, in turn, how any effect on employers' provision of workplace superannuation affects employees' take up of KiwiSaver;
To measure the cost of employers' contributions to KiwiSaver; and
To identify any benefits that employers have gained from KiwiSaver.

Method

The methodology used for the SME employers follow-up survey consisted of the following:

A self-completion survey of 253 SME employers, of which 170 returned completed questionnaires giving an overall response rate of 68%.
The questionnaire was extensively pre-tested in a qualitative manner using cognitive interviewing techniques. A more formal pilot was also undertaken.
Questionnaires for the main survey were completed from 23 April to 19 May 2010.

The maximum margin of error on a total sample size of 170 is +/-7.5%. However, care should be taken in interpreting the findings as many of the results are based on small subsets of the total sample (and therefore carry higher margins of error).

Key findings and conclusions

Key findings and conclusions in relation to the four survey objectives are provided below.

What is the cost of employers' contributions to KiwiSaver?

Most absorb contributions as an extra cost to the business and only pay the compulsory employer contribution (CEC), but when additional contributions are made they are a strong driver of KiwiSaver uptake

The requirement for employers to contribute to KiwiSaver does not appear to have had an adverse impact on the SME employers. This is evidenced by most employers (89%) being able to absorb their contributions as an extra cost to the business. In addition, most (71%) of the 84 employers that had a non-KiwiSaver workplace superannuation scheme when KiwiSaver started, have continued to offer the non-KiwiSaver scheme with 88% of these employers contributing more than 2% to it.

Overall, the employers have decided not to take up the option of making additional KiwiSaver contributions, with the large majority (81%) only contributing the compulsory employer contribution (CEC) of 2%. The total gross value of these employers' CEC varies with around one half (52%) making contributions of less than $500 in a month, 17% contributing $500-$999, and the remainder (31%) contributing more than $1,000.

For the 27 respondents who make additional employer contributions, the most common rate of additional employer contributions is 2%, with around two-thirds (67%) of these employers contributing this amount. The dollar values of the additional employer contributions vary with just over half (56%) contributing under $600 per month (for all employees), 19% contributing $600 to $2,999 per month and 25% contributing $3,000 or more per month.

The majority of employers that had ever made additional contributions, did not change the rate of these contributions in response to the 1 April 2009 policy changes regarding capping the CEC at 2%, removing the employer tax credit (ETC) and making all additional contributions liable for employer superannuation contribution tax (ESCT).

Additional contributions to KiwiSaver accounts result in higher take up of KiwiSaver among a business's employees. Aside from two business demographics (business size and length of time in business), whether or not an employer makes additional contributions is the strongest determinant of high take up of KiwiSaver.

How has KiwiSaver affected employers' remuneration practices, and, in turn, what effect has this had on employees' participation in KiwiSaver?

Most have not changed their remuneration practices, but those that do most commonly apply a 'salary sacrifice' which tends to negatively impact on the uptake of KiwiSaver

Employers make compulsory employer contributions in addition to an employee's gross salary or wage. Beyond this, the effect of KiwiSaver on employers' remuneration practices appears to be limited with a large majority (81%) of respondents indicating that they have not changed their remuneration practices because of KiwiSaver.

Among the 38 employers that have made a change to their remuneration practices, 'salary sacrifice' was the most common change (over half of those who made a change) and this was done for reasons of fairness and equity. Use of 'salary sacrifice' negatively impacts on the uptake of KiwiSaver. Further, the data analysis shows that the absence of a 'salary sacrifice' approach is especially important in driving uptake of KiwiSaver when the employer does not make additional contributions.

The costs of changes made to remuneration approaches because of KiwiSaver are relatively low and in line with changes made for reasons not related to KiwiSaver

The cost of internal and external time spent on changes made to an employer's remuneration approach because of KiwiSaver is generally low. Out of 30 respondents, five incurred no internal costs and 25 incurred internal costs of less than $500. Further, only five of the 30 respondents incurred any costs from external advisors to put the changes in place.

The very close similarity between the internal and external costs associated with changes made to remuneration approaches because of KiwiSaver, and those made for reasons not related to KiwiSaver, provides further evidence that the costs associated with KiwiSaver are not excessive.

Few plan future changes to their remuneration approach because of KiwiSaver

The future impact of KiwiSaver on remuneration practices also appears to be limited, with only 14% of all respondents indicating that KiwiSaver has prompted their business to plan future changes to its remuneration approach. The most common change planned involves viewing KiwiSaver as part of total remuneration.

How has KiwiSaver affected employers' provision of workplace superannuation and, in turn, what effect has this had on employees' take up of KiwiSaver?

Most employers continue with existing schemes to cater for the preferences of employees

Overall, the research results suggest that KiwiSaver complements rather than replaces, or adversely affects, existing registered workplace superannuation schemes. The main finding supporting this conclusion is that most (71%) of the 84 businesses that had an existing scheme before KiwiSaver started on 1 July 2007 continued to operate the existing scheme independently of KiwiSaver. Employers say they have done this to cater for the preferences of their employees, with specific recognition of the existing scheme's benefits not offered by KiwiSaver as well as the ease of retaining the existing scheme.

Although KiwiSaver has not had a major effect on employees leaving existing schemes, it offers some unique benefits that result in some employees taking advantage of both schemes

In general, non-KiwiSaver workplace superannuation schemes may appear more attractive to employees than KiwiSaver primarily because of higher employer contribution rates and being able to get a lump sum when they leave their place of employment. However, non-KiwiSaver schemes appear less attractive in other ways; the employee contribution rate may be higher, members have longer to wait until employer contributions are vested and there are more restrictions on when and who can join the schemes.

Of the 49 respondents with a current non-KiwiSaver scheme, 27 (55%) had at least one employee keen to take advantage of both the benefits offered by KiwiSaver and the benefits offered by an existing scheme. These employees either made no changes to their non-KiwiSaver scheme, or modified their contributions to that scheme, and joined KiwiSaver as well. Only three respondents had at least one employee who closed their non-KiwiSaver scheme so they could join KiwiSaver instead.

The costs incurred from changing the existing scheme when KiwiSaver started are relatively low

The internal and external costs of changing an existing scheme when KiwiSaver started appear to be relatively low. Of 20 respondents, the number of hours spent by internal personnel ranges from zero to 20, with a median of six hours. The associated cost of this time was $224 (median). Further, eighteen of the 21 respondents who answered the question on external costs indicated they spent nothing on paying for external advisors for this purpose.

There is some indication that the costs associated with changes to the existing scheme because of KiwiSaver may be higher than those incurred from changes to the existing scheme for reasons not related to KiwiSaver. However, no firm conclusions can be drawn due to the very small sample size of this latter group.

The absence of an existing scheme encourages the uptake of KiwiSaver

The absence of a non-KiwiSaver workplace existing scheme is an important explanatory variable in terms of a high take up of KiwiSaver. Further, when combined with additional employer contributions and making money management information available, the absence of a non-KiwiSaver scheme is part of the most powerful combination of characteristics that predict a high take up of KiwiSaver (business size and length of time in business aside).

The future impact of KiwiSaver on the provision of workplace superannuation is limited

The future impact of KiwiSaver on the provision of workplace superannuation appears to be limited. Less than one in ten (8%) employers with a current non-KiwiSaver scheme indicated that KiwiSaver has prompted the business to plan future changes to its current non-KiwiSaver scheme. These employers said they planned to 'phase out' or 'wind up' the scheme.

Most employers do not nominate a KiwiSaver scheme for employees to join and those that do tend to be larger businesses

Most employers (62%) did not take up the option of nominating a KiwiSaver scheme for employees to join if they don't choose their own. Reasons for this most commonly relate to a belief that the employee should choose their own scheme and the employer's sense of moral responsibility for the scheme's performance.

Employers who have nominated a scheme tend to be larger businesses. Reasons for nominating a scheme primarily relate to a belief that the chosen scheme provider was the best choice for the business's employees.

Nominating a scheme does not appear to be a particularly important factor in determining higher uptake of KiwiSaver (although it can be important when money management information is not made available).

Most do not make general information about managing money available to employees, but when it is made available it maximises the uptake of KiwiSaver when done in combination with additional contributions and the absence of an existing scheme

A large majority (78%) of respondents do not make general information about managing money (e.g. budgeting, managing debt, savings) available to their employees.

For the 19% of employers who do make general information about managing money available, the most common information channels are in-house information sessions run by financial advisors or investment scheme providers, and direct discussions between employer and employee(s). Many of these employers were using such information channels prior to KiwiSaver. Thus, KiwiSaver appears to have had little effect on the way general money management information is provided, as it only prompted a few of these employers to use particular information channels.

The most powerful combination of employer characteristics (aside from demographics) in predicting take up of KiwiSaver is making additional employer contributions, not having an existing non-KiwiSaver scheme and the provision of money management information. So, although not significantly correlated with take up of KiwiSaver by itself, the provision of money management information is an important (and statistically significant) variable when working synergetically with these other variables.

What are the benefits that employers have gained from KiwiSaver?

On the whole, employers in this survey do not believe that KiwiSaver has benefited their business. Only 5% of respondents believed it had.

Around half (51%) of those with current non-KiwiSaver schemes report that KiwiSaver has had no effect on their business's ongoing costs for providing their current non-KiwiSaver scheme. Nearly one third (31%) report there has been an increase in their ongoing costs whereas few (8%) report there has been a decrease in ongoing costs.

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