When the government announced in Budget 2025 that default KiwiSaver contribution rates would rise to 3.5% from April 2026 and 4% from April 2028, it looked like progress. For a large chunk of the workforce, it was nothing of the sort. Under total remuneration contracts, the employer’s KiwiSaver contribution is baked into the salary package rather than paid on top. When the rate goes up, the employer simply rebalances. The employee’s retirement savings don’t move.
This is not a grey area. It is legal, it is widespread, and it renders the headline policy change meaningless for the workers it is supposed to help.
A loophole that swallows the policy whole
RNZ has previously reported that almost half of employers use total remuneration for at least some staff, with a quarter applying it across their entire workforce. That means the contribution rate increases legislated in Budget 2025 will deliver precisely zero additional retirement savings to a significant portion of New Zealand’s employed population.
The fix requires a single legislative amendment. It has broad support across the political spectrum. KiwiSaver providers have called for it. The Retirement Commission has flagged it. Yet the government’s regulatory impact statement for the Budget 2025 reforms did not address it.
For employers already paying contributions on top of salary, banning total remuneration structures costs nothing. For those using the loophole, it would represent a genuine cost increase, which is precisely why it hasn’t happened. But a policy that can be legally neutralised by half the employer base is not a policy. It is a press release.
Budget 2025 gave with one hand and took with the other
The contribution rate increase was only half the story. From 1 July 2025, the government halved the member tax credit from 50 cents per dollar contributed to 25 cents, dropping the maximum annual payment from $521.43 to $260.72. The fiscal savings were substantial, with Crown expenditure on the government contribution running at over $1 billion annually and forecast to hit $1.228 billion by 2028/29.
Academics at The Conversation calculated in May 2025 that the reduced member tax credit alone “could shave more than $70,000 off your KiwiSaver balance” over a working life. Their verdict was blunt: “There’s never a good time to undermine a long-term savings scheme, but doing it during a cost-of-living crisis is especially reckless.”
The targeting argument has some legitimacy. The regulatory impact statement showed 52% of government contribution expenditure went to earners above $70,000. But the blunt instrument of halving the credit for everyone earning under $180,000 punishes the lower-income savers who needed it most.
$123 billion in savings, $37,000 per person
The FMA’s 2025 annual report showed KiwiSaver had reached $123 billion under management across 3.33 million members by March 2025. Impressive in aggregate. Per member, the picture is grim. The Conversation put the average balance at around $37,000, noting it was “barely enough for a couple of years’ worth of modest top-ups, let alone funding a comfortable retirement.”
Worse, the FMA found 30% of working-age members are not contributing at all, up from about 20% in 2010. Among those who had made an active fund choice, 1.2 million were not currently contributing. After 18 years, KiwiSaver has near-universal membership and deeply inadequate balances.
In May 2025, Booster chief executive Di Papadopoulos identified the scale of the missed opportunity: “While it’s a good start to increase KiwiSaver contributions, it’s clear that there is a much bigger opportunity to be had if both employees’ and employers’ contributions were doubled to where Australia’s is about to go; 6% from both employees and employers.” Her modelling showed that reaching 6% from both sides would deliver an extra $220,000 at age 65.
Why business owners should care about more than the payroll line
The employer cost angle is obvious. The 3.5% rate from April 2026 is a real increase for businesses paying contributions on top of salary. The Retirement Commission’s June 2025 recommendations called for at least 4% default rates with employer matching, plus employer contributions for over-65s and under-18s. If adopted, the cost trajectory is clear.
But the less obvious angle matters more. KiwiSaver’s $123 billion pool funds New Zealand equities, bonds, and infrastructure. It is the single largest source of domestic patient capital. If balances stay anaemic and non-contributing membership keeps climbing, that pool grows more slowly than it should. For a small, capital-hungry economy, the depth of domestic savings directly affects the cost and availability of capital for the businesses that draw on it.
1News reported this month that self-employed individuals operating through companies and paying themselves PAYE can claim employer-side KiwiSaver contributions as a tax-deductible expense, a useful mechanism that remains underused.
The simplest reform is the most revealing
The total remuneration fix is the test case for whether New Zealand can reform KiwiSaver at all. It requires no new spending. It has no serious policy opponents. It would ensure that legislated contribution increases actually reach the retirement accounts they are supposed to fill. Every year it doesn’t happen, the gap between the scheme’s promise and its performance widens. The government found the political will to halve the member tax credit inside a single Budget cycle. Closing a loophole that benefits employers at the direct expense of retirement savings apparently requires more time.
Sources
- FMA: KiwiSaver Annual Report 2025 (2025-09-10)
- Budget 2025 KiwiSaver Changes Factsheet (2025-05)
- Regulatory Impact Statement: Reforms to KiwiSaver (2025-05)
- The Conversation: KiwiSaver at a crossroads (2025-05-22)
- Scoop: Budget 2025 KiwiSaver Changes A Good Start, But Bigger Opportunity Missed (2025-05-22)
- Retirement Commissioner calls for changes to KiwiSaver (2025-06-13)
- 1News: Now is not the time to miss out on the easy KiwiSaver cash wins (2026-05-16)
- RNZ: KiwiSaver trick that providers say shortchanges members