Introduction
The labour cost index (all labour costs) consists of two parts – a salary and wage rates component and a non-wage labour costs component. The salary and wage rates component of the labour cost index (LCI) reflects changes in base salary and ordinary time wage rates, and overtime wage rates. The non-wage component measures changes in six costs:
- annual leave and statutory holidays
- superannuation
- Accident Compensation Corporation (ACC) employer premiums
- medical insurance
- motor vehicles available for private use
- low-interest loans.
Compulsory employer contributions to their employees' KiwiSaver schemes were introduced on 1 April 2008. This article looks at the superannuation index and how the introduction of compulsory employer KiwiSaver contributions impacted on the LCI (all labour costs) for the June 2008 quarter.
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The superannuation index
The superannuation costs survey is used in the LCI (all labour costs) to measure changes in the costs (to employers) of contributing to superannuation schemes. The superannuation survey is the fourth largest of the six surveyed non-wage costs with an overall weight in the index of 1.37 percent as at the June 2001 quarter.
The survey collects information on employer contribution rates and employee participation rates. It asks respondents to provide the superannuation subsidy including withholding tax, the number of participating employees and the total number of employees for each category or scheme that the employer contributes to. The superannuation subsidy can be given as a percentage of gross wages or salaries, or as a dollar value. Subsidies can also be provided as a percentage or dollar range, if applicable.
Employee participation rates are calculated using the number of participating employees and the total number of employees that could receive employer contributions to superannuation, to arrive at the proportion of employees belonging to each scheme. In some cases, respondents are unable to provide a break-down of total employees eligible to join each scheme because they are generic schemes and an employee could belong to any combination of schemes. For example, if an organisation has two superannuation schemes available for employees, and all employees are eligible to join both, the respondent will not be able to split up the total employees across each scheme. Therefore, one total will be provided, and an overall participation rate can be calculated.
The categories or schemes that are used in the index are matched to specific wage and salary occupations. Some categories or schemes will be occupation specific and therefore can be directly matched with specific wage occupations. For example, if the wage and salary occupation is sales manager, it will be matched to all management categories or schemes listed on the superannuation survey for the same organisation. In most cases however, categories or schemes are not occupation specific. Therefore, the wage and salary occupation would be matched to any category or scheme that the occupation may have.
When the index is calculated, the cost per employee per week for contributing to superannuation schemes on behalf of employees is used. This is derived by multiplying the subsidy for the scheme by the full-time equivalent number of employees participating in the scheme. The result is known as the subsidy cost, which is then multiplied by the weekly ordinary time wage to obtain a dollar value. Finally, this is divided by the total full-time equivalent number of employees. The result is the cost per full-time equivalent employee per week for contributing to superannuation schemes on behalf of employees. It is this cost that is used in the calculation of the index, with the index showing how this cost is changing over time.
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KiwiSaver and the superannuation index
KiwiSaver is a voluntary savings scheme open to employees. Employer contributions to their employees' KiwiSaver schemes were made compulsory from 1 April 2008. As the superannuation index measures changes in costs to employers of subsidised superannuation schemes, KiwiSaver was introduced into the LCI (all labour costs) in the June 2008 quarter to ensure the index correctly reflected the changes in costs faced by employers.
Also introduced on 1 April 2008, was a tax credit of up to $20 per member per week, which employers could reclaim to help offset any contributions they made to their employees' KiwiSaver schemes. Tax credit information was also taken in to account in the calculation of the June 2008 quarter LCI (all labour costs).
The tax credit was available to all contributing employers to reimburse them for the cost of making contributions to employees' KiwiSaver schemes. The tax credit could also be claimed against contributions made to a complying fund, but could not be claimed for contributions to any other schemes such as a defined benefit scheme. In addition, the employee receiving the contribution had to be 18 years or older, and under the age at which they became eligible to withdraw their savings (the age at which they qualified for New Zealand Superannuation – currently at 65).
As mentioned, the tax credit was a maximum of $20 per member per week. This means that if an employer was contributing more than $20 per week to their employee's KiwiSaver scheme, the tax credit did not fully offset all of the employer's cost. Two scenarios where this may happen were if the employer was contributing more than 1 percent to an employee's scheme, or if an employee's wage or salary was higher than $104,000 (at the 1 percent contribution rate). In the first case, if an employer was contributing 2 percent, and the employee earned $60,000 per annum, the weekly contribution was approximately $23. Therefore, the employer could only claim $20 back and the remaining $3 would not have been reimbursed. In the second case, if an employer contributed 1 percent, but the employee earned $120,000 per annum, the weekly contribution was approximately $23 and the same thing applies. In contrast to this, an employer could not claim the entire $20 per week per employee back if their contributions were less than $20 per week. For example, if an employee earned $30,000 per annum, the employer contributed approximately $5.80 per week to their KiwiSaver scheme at the 1 percent rate, and therefore could only claim back a tax credit of $5.80, not the entire $20 per week.
Information on employer contributions to KiwiSaver schemes was obtained by surveying all respondents in the LCI sample. As KiwiSaver is open to all employees, it was possible that any respondent in the LCI sample could be making employer contributions to superannuation schemes, including KiwiSaver, and therefore all respondents needed to be surveyed to collect this information. Summary information on the tax credit was obtained from administrative sources.
The remainder of this section looks at the June 2008 quarter results of the superannuation index, and the impact KiwiSaver and the tax credit had on these results.
Superannuation index results
In the year to the June 2008 quarter, the superannuation index rose 2.7 percent. This is down from the 4.2 percent increase recorded in the year to the June 2007 quarter. The latest increase is influenced by a 3.5 percent rise in salary and ordinary time wage rates as well as the introduction of employer contributions to KiwiSaver schemes, after tax credits of up to $20 per week per employee were taken into account. Factors that influence the superannuation index, apart from changes in salaries and ordinary time wage rates, are changes in employer contribution rates and employee participation rates.
In the year to the June 2008 quarter, the overall employee participation rate for organisations covered by the LCI sample increased. This was caused by the total number of employees receiving employer contributions to their superannuation schemes increasing more than the total number of employees covered in the LCI sample. Much of the increase in the number of employees receiving employer superannuation contributions was caused by employers now making contributions to employees' KiwiSaver schemes. There was also some increase due to new or existing employees joining existing employer-subsidised superannuation schemes. An increase in the participation rate has an upward impact on the superannuation index because more employees are receiving employer contributions to superannuation schemes, and therefore the cost to the employer is higher.
Changes in employer contributions also have an impact on the superannuation index. In the year to the June 2008 quarter, the full-time equivalent employee weighted average contribution was lower than that in the year to the June 2007 quarter. This can mainly be attributed to an increase in the number of employers making lower than average contributions to staff superannuation schemes, specifically KiwiSaver. These lower than average contributions had a higher weight in terms of number of employees receiving these contributions, and therefore the full-time equivalent employee weighted average contribution was lower, following the introduction of employer contributions to employees' KiwiSaver schemes in the LCI. Lower contributions have a downward impact on the superannuation index because the employer is contributing less to their employees' superannuation schemes, and therefore the cost to the employer is lower.
Impact of KiwiSaver
As mentioned previously, employer contributions to their employees' KiwiSaver schemes were introduced into the superannuation index for the first time in the June 2008 quarter. Contributions to KiwiSaver schemes (after tax credits of up to $20 per week per employee) were taken into account to ensure the cost faced by employers of providing employer subsidised superannuation schemes to their employees was accurately measured. The introduction of KiwiSaver contributions into the LCI (all labour costs) resulted in an increase of approximately 87,000 participating employees across organisations included in the LCI sample.
Although there were more employees receiving employer contributions to superannuation schemes in the June 2008 quarter, in many cases the contributions were relatively low. Compulsory employer contributions to employee KiwiSaver schemes were set at 1 percent from 1 April 2008. Two-thirds of employers participating in the LCI sample were contributing 1 percent to their employees' KiwiSaver schemes, with approximately one-third contributing over 1 percent.
Another factor that needs to be considered is the impact of the tax credit that employers could receive to offset their contributions made to KiwiSaver. Employers could claim a tax credit of up to $20 per employee per week to help cover the additional cost associated with making payments to employees' KiwiSaver schemes. In a lot of cases, this tax credit was enough to fully offset contributions made to KiwiSaver schemes, therefore resulting in no cost to the employer. In other cases, it offset some or most of the contributions made, resulting in only a small cost to the employer.
Summary administrative information was used to calculate how much of the employer contributions to KiwiSaver schemes were offset by the tax credit. Total employer contributions made to KiwiSaver schemes and total tax credit claimed, broken down by industry, was used to calculate a percentage of the contributions not covered by the tax credit. In the four months from April 2008 to July 2008, employers reclaimed, on average, about 70 percent of their contributions to KiwiSaver schemes. In some industries (such as retail trade and accommodation, cafes and restaurants), the proportion of contributions reclaimed averaged about 90 percent. In other industries, only about half of employer contributions to KiwiSaver schemes were covered by tax credits.
Another way KiwiSaver impacted on the superannuation index in the June 2008 quarter was through the switching of schemes. This occurred where organisations that had previously been making contributions to employer-subsidised superannuation schemes, switched their contributions from their previous schemes to KiwiSaver. By doing this, they were able to claim the tax credit and offset some of the superannuation costs they were not previously able to offset. In these cases, the cost to the employer of making contributions to their employees' superannuation schemes was actually lower in the June 2008 quarter than in the June 2007 quarter, therefore having a downward impact on the superannuation index.
Employer contributions to employees' KiwiSaver schemes were also exempt from Employer Superannuation Contribution Tax (ESCT). This exemption applied to any contribution up to the amount equal to what the employee was contributing, or 4 percent of the employee's gross salary or wages, whichever was lower. Any contributions over this level were subject to ESCT. As employer contributions to existing schemes are subject to ESCT, the cost to the employer can be lower if they switch their contributions to their employees' KiwiSaver scheme, which are not subject to ESCT. The contribution rate used in calculating the superannuation index in the LCI includes ESCT where applicable. Therefore, if an organisation switched from their existing scheme to KiwiSaver, the cost was lower as ESCT was no longer applicable. These switches had a downward impact on the superannuation index.
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Conclusion
Employer contributions to employees' KiwiSaver schemes were introduced into the LCI (all labour costs) in the June 2008 quarter to ensure the cost to the employer of providing superannuation was accurately measured. The increase in the cost of providing superannuation in the year to the June 2008 quarter (up 2.7 percent) was lower than the 4.2 percent increase in the year to the June 2007 quarter, and was mainly influenced by increasing salaries and ordinary time wage rates. The introduction of KiwiSaver contributions into the index meant the weighted average contribution rate was lower, and a lot of the extra costs faced by employers were able to be offset by the tax credit. The lower contribution rates and the offsetting tax credit resulted in a lower increase in the LCI superannuation costs in the year to the June 2008 quarter compared with the previous year.
More information about the LCI is available here or by contacting:
Nicola Argyle
Wellington 04 931 4600
Email: info@stats.govt.nz
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