kiwisaver

Reports of delays in employer contributions coming into KiwiSaver schemes has some questioning whether money is being lost in the system. Matt Baker, associate director in the tax department of Staples Rodway, which runs a KiwiSaver scheme, says the irregularity of contributions coming from the tax department mean it is a major challenge for providers to reconcile KiwiSaver accounts.

Baker reckons almost half of the employer contributions coming in since January have not yet made it to his scheme and since the compulsory employer contribution started in April the problem has worsened. "It's the result of double the number of people joining than what they expected. The IRD have been overwhelmed by the sheer number. The result has been effectively lost money. But they say it will balance over time."

He is hoping it will all be sorted by the end of this year but in the meantime he recommends people sign up to the Inland Revenue's account balance service to check how much money is getting to the IRD and if there is a problem to talk to their employer about sorting it out. However Inland Revenue says there are no delays that it is aware of in regards to employer contributions and people should be aware that it takes time to process payments.

Inland Revenue collects contributions for KiwiSaver members via the Employer Monthly Schedule, a system which has been in place for several years. This schedule is lodged with Inland Revenue either twice monthly or monthly for the payment of PAYE and now KiwiSaver contributions. These are lodged a month in arrears, so there is always a time lag between the contribution being deducted from salary or wages by the employer, and then passed to Inland Revenue for processing, and then on to the scheme provider for investment for the KiwiSaver member. You can sign up to get the account balance service with the IRD on www.kiwisaver.govt.nz.

FAIR PLAY
Moves by the Government to stop employers from paying those who join KiwiSaver less than their colleagues have been welcomed by some, but others say the changes will introduce even more headaches for bosses. Labour Minister Trevor Mallard has announced plans to amend the Employment Relations Act to make it illegal for employers to offer lesser terms and conditions to KiwiSaver members.

Mallard had become concerned following a number of employers who had docked the pay of staff members by using their money to pay for the employer contributions to KiwiSaver while pocketing the $20 tax credit given to employers by the Government.

Michael Chamberlain, principal of KiwiSaver provider Aventine, says he agrees with the minister that reducing the pay of employees who join KiwiSaver to cover the employer contribution is against the spirit of KiwiSaver but the changes may cause even more problems. "I have real concerns that the proposals announced by the minister may lead to major complications and unintended consequences with managing employment relations and remuneration strategies. "I believe the changes will penalise the good employers by the imposition of additional compliance and system costs."

Chamberlain says the Government should allow employers to go ahead with building KiwiSaver into total remuneration packages but should focus on stopping employers that have docked the pay of their staff to cover KiwiSaver contributions. He says if the minister proceeds with the changes the worst case scenario is that costs to employers will increase significantly while those who can't afford to join KiwiSaver may be discriminated against because those who can join have to be paid 4 per cent more. "I am concerned the minister is using the proverbial sledgehammer to crack a nut."

Staples Rodway associate director Matt Baker says the new policy will completely contradict legislation brought in by the Government in December allowing employers to offer staff a total remuneration package. "As long as the agreement was entered into on or after 13 December 2008, and the agreement was negotiated in good faith, this was entirely lawful. In fact the legislation was passed specifically to allow this option, via amendments to the KiwiSaver Act."

He says if Mallard's proposed changes go ahead there will be a clear conflict between the Employment Relations Act and the KiwiSaver Act. A date has yet to be set on when the act will be amended in Parliament.

SAVERS FEEL PINCH
Finance Minister Michael Cullen takes the opportunity to trumpet the growing numbers of people joining KiwiSaver at every opportunity he gets. At a function last week he slipped in a line about KiwiSaver numbers reaching nearly 770,000 and just a few weeks ago he told a room full of bean-counters he believed the number joining could top one million by the time the election comes around.

But what Cullen doesn't mention is that some people are also being forced to pull out of the Government's savings scheme because of tougher times and higher living costs. Figures for the first year of KiwiSaver show 3506 people have had to take a contribution holiday because of financial hardship.

Sure, that's just a small number compared to the total but now that KiwiSaver has been around for a year predictions are that more people will join them.

Only those who can prove they are under financial hardship are allowed to opt out after being in the scheme for less than a year. But after a year in KiwiSaver anyone can opt out for up to five years - renewable as many times as they like.

The Retirement Commission has already been fielding questions from people worried about how they can afford to stay in KiwiSaver and has recently updated its www.sorted.org.nz website to answer questions like "Can I still afford KiwiSaver?" and "Should I change schemes?"

TAX CREDITS COMING
Those waiting to see when their $1043 Government tax credits will hit their KiwiSaver accounts can be assured it could be anytime now. According to Inland Revenue KiwiSaver scheme providers will apply for the tax credits on your behalf and can do so from July 1 onwards. The IRD then has 30 days to process the application. Those who contribute at least $20 per week are eligible for the tax credit, up to $1043 per year.

CROSSING THE DITCH
Those thinking of moving across to Australia will be glad to know the Government is happy for you to take your retirement savings with you.

Officials from both countries are expected to finalise a deal by the end of October that will allow New Zealanders to take their retirement savings - including KiwiSaver - with them when moving across the Tasman and vice versa. The basic framework has been agreed to but the details still have to be worked out.

The new PIE tax rules, which came into effect yesterday, have much to recommend them. Geordie Hooft, a taxation partner at Grant Thornton, looks at some of the issues.

New tax rules could give investors a larger slice of the pie. The Portfolio Investment Entity, or PIE, aims to apply a kinder rate to investments – 30 per cent instead of 39 per cent for top earners.  The PIE compares with the traditional Collective Investment Vehicles (CIVs) which have been used for investment for a long time.

By pooling funds, investors are able to spread their risk through diversification and they are also able to participate in opportunities that might not have been possible at an individual level.  However, CIVs suffer from a couple of disadvantages. Firstly, they are taxed on "capital" gains because they are generally in the business of trading shares, making such gains taxable.  In contrast, a person holding shares directly is usually taxed only on dividend income. Secondly, the rate of tax paid by a CIV is generally based on the company tax rate, currently 33 per cent.  For lower-income investors, this makes investing through a CIV rather unattractive.

The aim of the PIE is to better protect the interests of those investing in CIVs so that they are no worse off than had they invested directly.  In many cases, investing through a PIE could be better than investing directly.  The introduction of the PIE rules is tied in with KiwiSaver, which started on July 1.  All KiwiSaver funds will be PIEs. How will it work?

PIEs will pay tax, based on the applicable rates of tax advised by the investors in the fund.  The top rate of tax that can be applied is based on the company tax rate of 33 per cent (which is being reduced to 30 per cent from April 1 next year).

Investors need to advise their fund manager of their Portfolio Investor Rate. This is based on the following criteria:
# Nought per cent for charities, PIEs, companies and superannuation funds. This rate also applies to trusts, unless they elect to use a rate of 30 per cent.
# 19.5 per cent for individuals, as long as they had in either of the two years immediately before the current year:
    (i) taxable income of $38,000 or less; and
    (ii) a total of $60,000 or less in taxable income and PIE income.
# Thirty per cent (the new rate) for all other taxpayers. Effectively, this will be individuals who do not meet the criteria for the 19.5 per cent and trusts choosing to use this rate. Investors on 0 per cent will still need to include the income they receive from a PIE in their own tax returns, along with any tax credits attached to that income.

For other investors, the tax is paid by the PIE and does not need to be included in their personal tax returns.

This has the following advantages:
# Investors earning $38,000 or more (from April 1), will benefit from the lower tax rate applied to their PIE income.
# The investment income earned through the PIE will not be factored into calculating entitlements to Working for Families, or child support or student loan obligations.

Any other social benefits that depend on declaring taxable income will be similarly unaffected by PIE income.  PIEs will also be able to take advantage of the same tax rules introduced in April this year relating to the taxation of investments in foreign companies.  (This calculates the taxable income derived from investment in companies other than New Zealand and certain Australian companies as 5 per cent of the opening value of the investment.

Direct investors have the option of using the actual gains as the amount of taxable income if that amount is less; PIEs will not have that option).

Here are a couple of examples.

Deborah is a solicitor earning $100,000 a year. An investment in her own name earns income of $20,000 a year. Based on her effective marginal tax rate of 39 per cent, she would have to pay tax of $7800 on the investment income.  If her investment was held via a PIE, it would be taxed at 30 per cent, with $6000 payable. The $20,000 would not be included in calculating her student loan repayments.

Murray, an apprentice welder earns $35,000.  He has invested an inheritance in a managed fund and the income from that of $15,000 is taxed at the fund's rate of 30 per cent, resulting in tax payable of $4500.  If Murray's fund qualifies as a PIE, and he advises the fund that his investor rate is 19.5 per cent, his investment income will be taxed at that rate, resulting in tax payable of only $2925.  Further, he will not have to include the $15,000 in his Working for Families application.

Trustees that have investments in a PIE have to decide which investor tax rate to use: 0 per cent or 30 per cent.

Choosing 0 per cent means the PIE income will be taxable to the trust at the trustee rate of 33 per cent, unless it is distributed by the trust to beneficiaries to be taxed at their marginal tax rates.  There would be an advantage in doing this if there are low-income beneficiaries on a 19.5 per cent tax rate.

Choosing 30 per cent means that the trust will not have to include the PIE income in its tax return.

A beneficiary of a trust receiving PIE income also does not have to return that income in their tax return.  This is an advantage if income is to be retained in the trust or distributed to beneficiaries on higher incomes.

There is a warning, however, that choosing the 0 per cent rate could result in you becoming a provisional taxpayer.

Not any fund can be set up as a PIE. Special rules apply.  For instance, the PIE must be a company, superannuation fund or group investment fund. It must be resident in New Zealand.  The PIE must have at least 20 unassociated investors for each class of investment.  Additionally, there are rules about what a PIE is allowed to invest in – 90 per cent of its investments must be "passive", such as land or financial arrangements (for example, deposits and share investments).

Given the many investors that a PIE will have, each with their own particular investor rates, the tax calculations for a PIE are extremely complex.

The default position is that PIEs need to carry out tax calculations, based on an allocation of income and expenses, on a daily basis.  PIEs will also need to deal with reallocating investment units to maintain fairness between investors.

# Geordie Hooft is a partner, specialising in taxation, at accountants and business advisers, Grant Thornton. ghooftgtch.co.nz

Unions, lawyers and employers all predict difficulties with employment contracts under the KiwiSaver scheme, starting on July 1.  Council of Trade Unions economist Peter Conway said one of the main issues of concern was the 4 per cent entry level contribution, which could be a tough ask for low wage earners.

He said a 2 per cent entry level for low wage employees with a matching payment from employers was a preferred option.  It was an issue the union would raise before a final bill on the scheme was passed, he said.

Simpson Grierson law partner and superannuation specialist Neil Cameron said the traditional "total remuneration" concept was a sticking point with KiwiSaver.  He said some employers traditionally approached employees from a total remuneration package point of view, where a salary was made up of pay, and allowances for extras such as vehicles.  The KiwiSaver concept of gross salary wages was one that didn't sit well with that concept, he said.

Contract arrangements were also likely to be complicated by the fact some employees would join the KiwiSaver scheme and others would not.  The situation was in some cases likely to present difficulties when it came to wage rounds.  "In that case you've taken it into account in the wage round but you aren't actually paying it because half your employees haven't joined up," he said.  Mr Cameron said there would be some initial confusion as people tried to word employment contracts to "do all sorts of gymnastics" but believed the issues would eventually sort themselves out.

Business NZ chief executive Phil O'Reilly said after the budget the scheme's voluntary nature would cause difficulties.  He said people could opt into KiwiSaver after initially negotiating a salary without it.  If a person who did choose to opt in later agreed to have their wages reduced by the amount of employer contribution unions could argue this was "contracting out" under the law and take the employer to court.  Mr O'Reilly said wage bargaining would become very complex with some opting into the scheme and others not.  But Mr Conway said he was not convinced the scheme would lead to bargaining complications.  "It's hard to see that because really for anyone on $52,000 or below, the first couple of years of contributions are completely covered by the government."

While employers would not be fully subsidised a few years down the track or when it came to contributing to high wage earners, the subsidies for employers were still significant.  "So I don't really see that there has to be a negative impact on bargaining, there could be a positive one, but I can't see a negative one."  He said it appeared most employees were getting more and more positive about KiwiSaver but that it was important they knew all the facts and individual options before joining.  "At this stage the focus is to get as much information as possible in front of workers for them to make their own minds up."

Treasury has predicted there will only be an initial take-up of 20 per cent of workers signing to KiwiSaver, rising to 50 per cent over 10 years.

Outraged at criticism of the savings industry by Gareth Morgan, six of the nation's most powerful money men hit back at the accusations.

The savings industry welcomes and encourages analysis and commentary on the range of new KiwiSaver products that will be available to investors.

But it does expect analysis and commentary to be based on fact, to be current and accurate. The savings industry totally rejects recent comments by Gareth Morgan, of Gareth Morgan Investments, accusing the savings industry of "naughty behaviour", by implication, in KiwiSaver products. (Gareth Morgan Investments offers a KiwiSaver scheme.)

We accept that Morgan has achieved recognised standing as a trusted investment authority with the public.

This position requires that comment he provides is current, free of bias and factually correct. Instead Morgan has used his position as an industry commentator to promote his own KiwiSaver scheme, at the same time painting his competitors in a negative light through comments that do not reflect current industry practices - either in respect specifically to KiwiSaver or the industry more generally.

We encourage investors to ask questions and to seek independent advice before committing their hard earned savings to KiwiSaver.  However, investors can take great comfort from the safeguards that government and officials have built into the KiwiSaver approval and governance process:

1. KiwiSaver will be governed by strict regulations that place considerable onus on fund managers to manage the funds in the best interests of investors.
2. All KiwiSaver schemes are reviewed by the government actuary before approval and registration to ensure all fees and charges are fully disclosed and are not unreasonable. The government will also make a contribution to subsidise fees.
3. The six default providers (AMP, AXA, ASB, ING, Mercers and Tower) have been reviewed by an independent government- appointed panel and carefully selected before being formally appointed by the Minister of Finance.
4. The KiwiSaver Act contains provision for the government actuary to apply for cancellation of registration of a KiwiSaver scheme that fails to operate in an acceptable manner.
5. KiwiSaver products will be managed in accordance with a trust deed. Each product will have an independent trustee who must ensure that the plan is administered in accordance with the trust deed and the law.
6. Reporting to investors will be required to meet standards prescribed by the KiwiSaver legislation and regulations.

Any suggestion that the industry will not be working in the best interests of investors and consumers or that they offer KiwiSaver products and service that is not best practice, simply does not stand up to scrutiny.

Investors can be confident that hidden fees and expenses simply cannot occur.  The Securities Act and Regulations and the KiwiSaver process require full disclosure of all fees and charges payable from KiwiSaver schemes. Trustees are responsible for management of KiwiSaver funds. Individual member contributions to KiwiSaver cannot be channelled into any "reserve".

Reserves only arise in very specific circumstances involving invested employer contributions in participating funds and then only in accordance with the trust deed under the control of the scheme trustees.

Unit pricing errors have occurred in some funds from time to time, but with equally as many in favour of the investor - the important point is where errors have occurred they have been promptly remedied and the investor put into the correct position.

Pooling of funds for investment purposes is an accepted worldwide practice. Pooling provides cost efficiencies (ie, each transaction costs less), asset/security diversification and access to specialist fund managers.

All represent major advantages.  For example, the most efficient and effective way for individuals to invest in property is to invest through a pooled managed fund providing exposure to a number of properties.

Pooled funds provide accurate and independently verified statements to individual investors. Pooling is recognised as a significant advantage to investors in managed funds.

Investors can be confident that the investment savings and insurance industry has responded to the challenge of providing transparency, full disclosure, quality advice and sensitivity to its consumers.

We provide best practice standards which - coupled with the safeguards government and officials have built into the KiwiSaver design, approval, and governance processes - combine to provide great assurance and comfort to investors. There will be a range of KiwiSaver products on offer and investors need to ensure that they select the product with the level of diversification that suits their circumstances and risk profile.

Decisions regarding the investment fund for KiwiSaver should be reviewed regularly to ensure it continues to fit individual requirements. Advice will be available from product providers, financial advisers and sites such as the Retirement Commission website www. sorted.co.nz. Greg Camm, managing director, AMP Financial Services.

Marc Lieberman, chief executive officer, ING (NZ) Ltd.
Tony Hildyard, chief executive, Tower Asset Management.
Ralph Stewart, chief executive, AXA New Zealand.
Sean Carroll, managing director, Asteron Life NZ.
Milton Jennings, chief executive, Fidelity Life Assurance.

Wellington economist Gareth Morgan is calling on the Government to clean up the fund management sector and make KiwiSaver "safe" to invest in.  "This government has to clean up the industry before it hands the heads of four million Kiwis to it on a platter," Dr Morgan said.

Savers might be seduced by tax breaks and employer levies in the form of KiwiSaver announced in last week's Budget, Dr Morgan said.  Dr Morgan called for government regulation to protect savers from fund managers contracting out of their fiduciary positions of trust and creating reserves that might be lost to some savers.

He is offering his own KiwiSaver scheme and has pointed out that money in KiwiSaver schemes is not government-guaranteed.  "There is no guarantee as to the safety of your money, no undertakings whatsoever as to the returns you can expect, and it is delivering you holus-bolus into the arms of the long-term savings sector."

Finance Minister Michael Cullen confirmed last week that KiwiSaver would not be government-guaranteed, and a spokesman pointed out yesterday that there was no government guarantee in Australia either.

The spokesman for Dr Cullen said no one was being forced to save.  "If you have a guarantee, that would surely reduce the incentives for the fund managers to perform."

The Government had added requirements that KiwiSaver schemes be registered with the government actuary, and have certain disclosure and reporting conditions consistent with international standards.

Dr Morgan said if KiwiSaver underperformed, lost people's money or even took it, then that was "tough - buyer beware".

Fund managers have rejected Dr Morgan's recent criticism of the sector, saying KiwiSaver would be governed by strict regulations putting considerable onus on fund managers to operate in the best interests of investors.

KiwiSaver schemes were reviewed by the government actuary before approval, to ensure all fees and charges were fully disclosed and were not unreasonable.  The six default providers (AMP, AXA, ASB, ING, Mercers and Tower) have been reviewed by an independent, government-appointed panel.

The KiwiSaver Act contains provision for the government actuary to apply for cancellation of registration of a KiwiSaver scheme that fails to operate in an acceptable manner.

KiwiSaver products will be managed in accordance with a trust deed.  Several fund managers said recently that any suggestion that the sector would not be working in the best interests of investors and consumers or that it offered KiwiSaver products and service that were not best practice did not stand up to scrutiny.

Dr Morgan said yesterday that the Government had to make KiwiSaver safe to invest in, but that did not involve a government guarantee.

The life insurance sector should be forced to accept a fiduciary duty to its investors through KiwiSaver and should not be allowed to contract out of that through trust deeds.  The companies should not create reserves from savers' money that savers would never see again if they left the scheme or changed provider.

Those on lower incomes will miss out on many KiwiSaver benefits, reports Rob Stock.

The poor may have to take some circumspect routes to participate in KiwiSaver.

KiwiSaver, a government-devised universal workplace savings scheme starting on July 1, was devised with contribution rates at 4% and 8% of gross salary - effectively just over 5% and 10% of take-home pay.

That's a chunk many lower-income New Zealanders would struggle without.

As a result, many lower income families will have little choice but to opt out of KiwiSaver, and miss out on the $1000 new account subsidy, annual fee subsidies and possibly tax breaks on contributions - all things middle income and rich savers will get, and need far less.

It could turn out to be worse. Should the next round of company pay rises be offered as KiwiSaver contributions by employers (some say this is likely as employers could offer 5% pay rises costing them 2.5%), the poor who want the money in their pocket could easily end up getting 2.5% less than others as they cannot afford to save into KiwiSaver.

Elliott Burcher, who is helping set up a KiwiSaver scheme for credit unions, said there was a strong argument for a 2% savings rate to encourage those on lower socio-economic rungs to participate, though the unions' plea for it was brushed aside by Wellington.

The credit unions' 176,000 members include many on low incomes, so their scheme was designed with partner Mercer with the intention of making it easier for them to participate.

The Credit Union Association hopes the scheme will have a minimum contribution of $5 a week, so even beneficiaries could participate. It will also make it attractive for grandparents to open up accounts for grandchildren.

Strategies for poorer families to get benefits from KiwiSaver could include:

Get a second job and open a KiwiSaver account attached to it: One of the minor, but potentially useful loopholes in KiwiSaver is that in some circumstances, a person with two incomes only need save into KiwiSaver from one. That is, someone who does not believe they can afford to save could get a second, part-time job - say delivering marketing fliers or local newspapers a couple of evenings a week, or buffing car-lot cars on a Saturday - and open a KiwiSaver account making contributions from the money they earn from that. There's no requirement they also make contributions from their main salary. Should the family move onto a firmer financial footing in the future, they could change that and save more. That second job could put the family in so much better a position that the most profitable thing to do could be to start saving from their main salary, getting them whatever employer contributions come from that.

Split the contributions with the boss: If an employer is willing, a worker can contribute 2% of the 4% minimum. It will cost employers about 67c for each dollar they put in because of tax breaks. The chances are, some bosses will accept this only if their contribution is part of the next pay rise they offer people, but it is a way which could limit the impact on take-home pay.

Non-working partners: Getting round the 4% problem is a biggie, but for families with one non-working parent who cannot afford to save much, there is a route. Instead of opening an account for the worker, open one for the non- worker. 4% of nothing is nothing, so contributions can be as low as the scheme provider allows. Of course, should they get a job, they would have to start saving 4% or 8% of their salary automatically, though after 12 months, they could take contributions holidays.

Skip a generation: Some parents may decide there is not much they can do for themselves, but that they can help their kids climb the wealth ladder. Credit unions say grandparents are likely to be interested for this reason. The first of their weekly $5 contributions for grandkids would effectively be a $1005 contribution, and all it would cost them would be 52 contributions of $5 - just $260. Children would be able to get subsidies of up to $5000 when they buy their first home, which could one day help bridge the affordability gap. It could mean kids instantly have savings worth more than their parents have ever managed, though parents/guardians must open the account, and the child must save at least 4% of their salary into it when they start working, though they could take a perpetual contributions holiday.

Beneficiaries: It is expensive being poor. Power is more expensive (no early repayment discounts), credit is expensive (rates of 30% or so can apply), and soon saving will be more expensive thanks to the KiwiSaver tax breaks wealthy and middle-income earners will be getting. But at $5 a week, saving into a KiwiSaver account will be possible for beneficiaries who are careful with their pennies, says Elliott. Once again, when they find work, they will be obligated to save, though anyone who has learnt to live on less could find it much easier to save from a salary.

SORT ME: A FINANCIAL WARRANT OF FITNESS

Hundreds of thousands of New Zealand families may need a financial overhaul to take advantage of KiwiSaver, and the Retirement Commission has launched an online financial healthcheck to help them do it.

Sort Me launches this weekend on the commission's website at www.sorted.org.nz six weeks before the launch of KiwiSaver, and that timing is more than a happy coincidence, says Retirement Commissioner Diana Crossan.

"We would have done it anyway," says Crossan of the Sort Me launch, "but the timing now is perfect.

"Before the launch of KiwiSaver, which may or may not be suitable for individuals, people need to look at their needs and current situation." The truth is, she says, "A lot of people don't know what their current financial situation is, and before they can decide if Kiwisaver is for them, they need to find out."

Sort Me asks users to answer questions on eight areas of their finances: goals and dreams, income and making ends meet, debt, saving and investing, protecting their assets, keeping their affairs in order, preparedness for big life changes and retirement.

In each area the users' answers are graded either "sorted", "sort of" or "sort it out" and suggestions are made on sensible action to take. There are also links to budgeting tools, further information and calculators.

Joan Baker, co-creator of Sort Me, says the majority of New Zealanders could afford to save into KiwiSaver, if they had more control over their finances.

Sweetners to encourage half the workforce to sign up to the state's KiwiSaver retirement savings scheme will ensure its success, fund managers say.

Workers will receive up to $20 a week in tax credits if they contribute the minimum 4 per cent of their gross income.  In the other significant change, employers will be forced to match the employee contribution, phased in over the next four years, starting with 1 per cent next year.

PricewaterhouseCoopers chairman John Shewan said the changes effectively made KiwiSaver a compulsory scheme because "you would be a bit silly" not to opt in. "There seems to be an increasing appetite for compulsion and in practicable terms that is what we have got now."

The controversial compulsory employer contribution would take some of the shine off the corporate tax cut, despite being partly offset by a $20 a week subsidy from the Government, Mr Shewan said.

Investment Savings and Insurance Association chief executive Vance Arkinstall said the changes to KiwiSaver would ensure its success.

"There is now no doubt that the proposition offered by KiwiSaver is so attractive that virtually all New Zealanders must consider joining. Even employees not changing jobs should consider opting in."

Mercer, which is one of six Government-appointed default providers for the scheme, expected the added benefits would result in the number of people opting into KiwiSaver to at least double from its previous estimate of 20 per cent over the next seven years.

"If you can afford savings at all you are strongly encouraged now to do them," Mercer head of New Zealand Tim Jenkins said.

Mr Jenkins said employers should view compulsory matching contributions positively because they would have a year to adjust and receive a tax credit to soften the initial cost.

AMP's general manager of savings and investment, Roger Perry, expected the KiwiSaver take-up rate to hit 80 per cent in the next few years, similar to the United States, which also has automatic enrolment schemes.

Some existing workplace superannuation schemes that were previously available only to management would now have to be opened up to all employees.

Some schemes would expand rather than contract as a result of KiwiSaver, Mr Perry said.

Business NZ chief executive Phil O'Reilly said KiwiSaver would impose more costs on employers. "The proposals to make compulsory matching employer contributions for KiwiSaver, even with the tax credit for reimbursements, will load costs on employers that are not needed at this difficult time.

"Compulsory costs imposed on employers without their agreement or buy-in is not helpful given the significant negative elements in the current business environment."

But New Zealand Exchange chief executive Mark Weldon said the matching tax credits for employer contributions would give businesses an edge in attracting and retaining high-value staff.

Save now - spend later. Finance Minister Michael Cullen's eighth Budget has turned an economic necessity into a political gamble, with a promise of sweeteners to workers if they save for their retirement and the hint of a carrot next year in the form of tax cuts.

But employers will have to carry some of the weight. The Government rushed legislation into Parliament last night to force businesses to contribute to workers' KiwiSaver accounts. Those contributions start at 1 per cent of each worker's wage next year, rising to 4 per cent by 2011.

The KiwiSaver pill will be sugared by a 3 per cent cut in the corporate tax rate and a Government subsidy to business of $20 for every worker who signs up to the savings scheme.

It will be matched by a $20 top-up from the Government, straight into workers' accounts, more than doubling the retirement nest eggs of those who make the minimum contribution - and doubling what they can expect to get from the state pension now.

The changes will deliver about an extra $60 a week to someone on a salary of $50,000 and about $100 a week to someone on $100,000.

But the stick is that workers will have to forgo income now to become eligible for the subsidies.

They also face local government petrol levies to fund road and rail projects in Auckland and Wellington, and pressure from the Government and employers to limit wage demands as a tradeoff.

Dr Cullen has raised the stakes even further by whipping away his 2005 "chewing gum" tax cuts - which were to be worth between 67c and $10 a week and were pencilled in for next year.

Senior Labour ministers are touting the Budget as the Government's boldest yet. But it is a huge political gamble that fixing the country's savings crisis will not spark a backlash over the Government's failure for the eighth consecutive year to deliver tax-rate cuts.

The last attempt to legislate for compulsory savings was roundly rejected by voters in 1998.

But Dr Cullen has laid the groundwork for an announcement on tax cuts before the next election. He has admitted that the long run of large government surpluses - worth an estimated $22 billion over the next four years - is unsustainable.

He said tax cuts now would only stoke an overheated domestic economy and housing market.

Meanwhile, bold action was needed to reverse New Zealand's dismal savings record. "In my view, the choice was not a difficult one. Every dollar saved today is worth more in the future. A small tax cut now would be spent and then gone."

Dr Cullen today told Radio New Zealand there did not need to be a "huge tradeoff" between wage bargaining and employers' compulsory contributions to Kiwisaver.

He said the Government expected to contribute about 2 per cent of the 4 per cent compulsory contribution employers would make to their workers' Kiwisaver schemes after four years.

A "fairly ambitious" 50 per cent take-up rate would mean an employer's "total wage and salary bill would be 1 per cent higher after four years than it otherwise would be".

So, if there was just 0.5 per cent foregoing a total wage increase over that period, that would halve again the net cost to employers, Dr Cullen said. "So we're not talking about dramatic foregoing of wage increases and I think there's some sort of hysteria around industrial confrontation that's just getting a little bit silly."

Employers would get a lot out of Kiwisaver, Dr Cullen said. "Employers get structurally lower interest rates, they get stronger capital markets in New Zealand, they get greater employee loyalty and I think they'll also get a great tendency for New Zealanders to stay in New Zealand once they're saving into Kiwisaver and locked into savings," he said.

"Even a small trade off at the margin will mean that this is a fairly small net cost to employers and out of that they get a great deal over the long term."

Dr Cullen said it was likely that few low income would opt in to Kiwisaver but when someone took on a new job, their Kiwisaver contributions would be automatically deducted.

"The question at that point is whether they can stay in that position and continue to forego that income, not having had it in the first place, given now the enormous advantages. "Because for a person on a low income their savings effectively can be trebled by means of the change in Kiwisaver."

National Party leader John Key said the Budget was a cruel hoax on business and a blow to those on the breadline. "Fifty per cent of New Zealanders will not take this up and I'll tell you who (they) are - they are the people who can't afford to, who don't earn enough," he said.

"And ... they're now being told, `Don't ask for a pay rise'. The lower-paid workers of New Zealand have to give up their pay rise so higher-paid workers can get a cut from KiwiSaver."
- With NZPA

While many moaned about what it lacks, some business owners think after eight consecutive budgets Michael Cullen is finally starting to learn.

Lower Hutt fire alarm manufacturer Pertronic managing director David Percy said a 3c cut in the business tax rate showed New Zealand was starting to "play catch up" with the rest of the world.

"The number one thing in terms of growing a business is retained earnings. It's a move in the right direction," he said.

New Zealand's per capita income was just more than half of the US, and the only way to increase it was to build successful businesses, he said. "Most countries recognise this and it has taken New Zealand a while to focus on having successful businesses."

More tax cuts would further increase New Zealand's global competiveness, Mr Percy said, a point Business New Zealand chief executive Phil O'Reilly agreed with. "We can't compete with Australia if you are just doing the same stuff, it's important that we move that downwards rapidly over the next two years," Mr O'Reilly said.

An extra $630 million in research and development funding was going to be positive for a lot of businesses too, Mr Percy said. However the positive gloss was immediately tarnished by the flip side of the Budget - compulsory KiwiSaver contributions and an obvious lack of commitment to tightening Government purse strings, Mr O'Reilly said.

"The positive things they are doing are likely to be less than they might have been otherwise, because you're still seeing government spending squeezing out private sector spending. It's a pretty negative point."

The compulsory contribution to KiwiSaver was an "unwelcome surprise" for employers, Mr O'Reilly said. Even with tax credits to dull the pain, the forced contribution was going to increase payroll costs already hit by extra holidays and higher minimum wages, he said.

Even worse, it seemed the Government was forcing employers to start doling out money for nothing. "Employers will be most unhappy that something that is nothing to do with them employee savings they have been roped into," Mr O'Reilly said.

But even with 50 staff in his Wingate factory, Mr Percy said he was relaxed about the KiwiSaver changes. "Ultimately it is part of the salary package, so it just forms part of the backdrop in terms of wage negotiations," he said.

The positive windfall from a tax cut would still miss about 60 per cent of small businesses, Massey University's Centre for Small and Medium Enterprise Research Claire Massey said.

And the rest of Dr Cullen's package held little for the sector to get excited about, she said. "It's not a day for celebrating for New Zealand small business."

Comparing Dr Cullen's announcements to 50 paragraphs of small business highlights in last week's Australian budget, Dr Massey said New Zealand small business owners would be indifferent. "I don't think they will be pissed off because they didn't have high expectations."

But the lack of a positive message to the owner-operators and small enterprises from Government was very "underwhelming", Dr Massey said. "I'm not talking about the neighbourhbood dairy but the small firm who do have growth prospects, whose owners are ambitious, what do they get out of this?"

Economists are warning that KiwiSaver could pump up the already soaring housing market when employees start withdrawing money for their first home.

From July 2010, KiwiSaver members will be able to put their and their employers' contributions toward a first-home deposit. At the same time, they will be eligible for a Government subsidy of $1000 a year, capped at $5000.

Experts are warning that the scheme could cause a flood of money into the property market, boosting already high prices.

BNZ chief economist Tony Alexander said any subsidy such as KiwiSaver would put upward pressure on house prices, though the extent of this was impossible to predict.

Westpac economist Donna Purdue agreed. "Any kind of subsidy to housing is obviously going to push up house prices."

Mr Alexander said there was a school of thought that once people saw their savings grow, the desire to own a house would subside - but warned that had not happened in Australia, which had compulsory superannuation.

Finance Minister Michael Cullen said Inland Revenue would get $14.6 million to get tough on property speculators, ensuring they are paying tax in a bid to dampen their effect on the property market.