HR Connect New Zealand Volume 1, Issue 2, 2012

Changes to Employer's Superannuation Contribution Tax (ESCT)

Since 2009, employers have been required to contribute 2% of employees gross salary or wage to their KiwiSaver account or a complying superannuation fund. This amount is on top of the employee's regular pay. Employers can choose to contribute more than the required 2% if they wish.

Up until 31 March 2012, compulsory employer contributions to a KiwiSaver scheme or complying superannuation  fund were exempt from the Employer's Superannuation Contribution Tax (ESCT). However, employer voluntary contributions above the minimum 2% were subject to the ESCT.

Employers could either calculate the ESCT as a flat rate of 33% or at the progressive rates.

From 1 April 2012, the ESCT rate will depend on the employee's income and only the progressive rate will apply. The table below shows the tax rates that will apply to both KiwiSaver and superannuation fund contributions.

There is an exemption for defined benefit funds, where employers can still use the flat rate of 33%.

Employers will need to make changes to their payroll systems to implement the new tax system. For large employers (ie employers with an annual group PAYE and ETC deductions are $100,000 or more) the new rates are to be used for their PAYE deductions on 2 April and 5 May. For small employers (ie employers with an annual group PAYE and ETC deductions of less than $100,000) the new rates will apply to their PAYE deductions from  20 May.

As employers deducted their ESCT payments from contributions being credited to members accounts, those employees who earn less than $84,000 will benefit from the lower tax rate if their employer previously used the 33% tax rate.

The new tax rates for KiwiSaver contributions mean that these schemes no longer have a tax advantage over superannuation schemes. Members who contribute to both types of scheme may therefore benefit from having all their contributions now paid into their superannuation account. These accounts are generally not locked in and members could save on fees.

Employers in the Aon Master Trust who have been paying a flat rate of 33% ESCT can contact their Aon Hewitt Account Manager for more information on these changes. 

Engaged workforce pays off

High levels of employee engagement can be linked to increased profit growth, Aon Hewitt's Best Employers study has found. In the 2011 study, 11 organisations were accredited Best Employers, with each achieving an engagement score of 65% or greater and meeting a range of additional criteria on their people and leadership practices.

Over the past two years, these Best Employer organisations achieved on average 23% profit growth, almost four times that of other organisations (6%). They also outperformed their competitors on overall revenue growth and total shareholder return.

'It is clear from our research that organisations that value, and are committed to, employee engagement see a quantifiable benefit and increased performance from their employees', says James Rutherford, Best Employers lead for Aon Hewitt.

Despite the proven link between engagement and profitability, Aon Hewitt research shows that many Australian and New Zealand organisations are struggling to achieve higher levels of employee engagement year on year. Over the last four years, only 31% of organizations recorded improved engagement scores.

'One of the key differentiators of Best Employer organisations is the continued focus that they have on the engagement of their people. When the return from an engaged workforce is as tangible as our findings suggest, it is surprising that so few organisations have that level of focus in reviewing and building engagement practices', says Rutherford. 'Employees who feel valued and connected to their organisation are far more likely to contribute discretionary effort and go above and beyond the basic requirements of their job'.

For more information on how your organisation can work towards improving engagement, contact Aon Hewitt on +64 9 362 9290.

KiwiSaver investment options

In the past 12 months, KiwiSaver funds under management grew from $2 billion to $11 billion, of which $950 million came from government subsidies. This is a substantial savings pool so are members choosing the best investment option for their situation? 

Thousands of KiwiSaver members have their money invested in the default option of their default scheme. These default options currently have a conservative investment profile with a relatively small proportion invested in equities and most of the money invested in fixed interest. Conservative investments have performed relatively well since the launch of KiwiSaver due to volatile equity markets. However, over the long term, these investment options are not expected to perform as well as those with a higher proportion of equities.

There is media speculation that the government is considering mandating that default investment options follow a life-cycle investment strategy. That is, the allocation to different asset classes changes based on a member's age. As a member gets older the proportion of their account balance that is invested in equities reduces and the proportion invested in fixed interest increases. The proportion in equities is generally quite high for a younger person as they have more years until their retirement to recover from any market falls.

Aon's KiwiSaver scheme, AonSaver, offers a range of investment options that include a life-cycle option as well as the more standard conservative and balanced options. You can see how well these funds are performing at www.aonsaver.co.nz. Authorised financial advisors can provide advice on suitable investment options. 

For more information about AonSaver, contact our helpdesk on 0800 266 463 or send an email to [email protected].

Using annual reports to analyse executive remuneration data

Annual reports provide easy access to executive remuneration data but they must be used with caution. Outlined below are some of the most common pitfalls associated with remuneration data in annual reports, and how to avoid them.

One-off payments and exceptions

It is crucial to ensure that packages shown in reports don t include one-off payments such as termination payments, sign-on bonuses or relocation costs. These amounts may be listed as separate items in some annual reports but this isn t always the case. Such benefits can be very high for key management personnel so their inclusion in remuneration benchmarking can seriously inflate data.

Actual vs. target

Another common source of confusion is that remuneration tables in annual reports usually show short term incentive (STI) actuals, not targets. While actual payments provide a snapshot for the year, target STI figures give a better indication of company policy and the outlook for the year ahead. Given that remuneration benchmarking is generally done as preparation for developing future remuneration packages, target STI values provide a better guide.

Accounting anomalies

Long term incentives (LTIs) can be particularly difficult to compare as different companies can use different valuation methods for reporting executives LTIs. When combining LTI data from different reports, it's crucial to ensure that LTI values are presented using the same methodology. The annual LTI value provided for executives should be the amortised amount rather than the potential full value, which may miss deductions related to performance hurdles etc. Occasionally, media reports on packages of CEOs and top executives include potential earnings over a period of time (i.e.3-4 years) rather than the target LTI for the 12-month period.

Other issues to consider

It is important to check the period covered by the remuneration data. If an individual was appointed or left the organisation within the reporting period then the data may not cover a full year or could be pro-rated. Also, on occasion reports may only cover a six-month period not a full year.

Remuneration packages for individuals in joint roles tend to include a premium as a result of their multiple functional responsibilities and capabilities. The data for these roles should therefore be used with caution.

Failure to check the above details can result in inaccurate comparisons and distort the quality and validity of your analysis.

Aon Hewitt has taken care in the production of this document and the information contained in it has been obtained from sources that Aon Hewitt believes to be reliable. Aon Hewitt does not make any representation as to the accuracy of this document and accepts no liability for any loss incurred by anyone who relies on it.  The recipient of this document is responsible for their use of it.