All KiwiSaver providers will have to cut transfer times by more than two-thirds under new legislation just referred to select committee.
Among other items, the Taxation (KiwiSaver, Student Loans and Remedial Matters) Bill would require all schemes to shift members to rival providers within 10 working days after receiving a transfer request compared to the current general standard of 35 working days.
“When a KiwiSaver member decides to transfer schemes, the old provider must transfer funds and information within 10 working days for default providers and 35 days for non-default providers,” the legislation digest says. “The Bill proposes that this period be reduced to 10 working days for all providers.”
Whether all KiwiSaver providers have the administrative efficiency to meet the proposed 10-day standard, however, remains moot given some have struggled to comply with the existing 35-day deadline.
Indeed, the sluggish transfer times have previously prompted industry efforts to develop KiwiSaver messaging protocols – including a proposal from Calastone and Australian back-office facilitator Oban Solutions – to speed up the process.
Myles Allan, Mosaic Financial Services Infrastructure founder, said the proposed 10-day transfer standard would likely require many providers to either hire more staff or automate the process.
“There’s no reason that transfers can’t be done in a few days with automation – and there are a number of solutions to do that,” Allan said. “The 10-day proposal just feels like aiming for mediocrity. Australian super funds, for example, can do rollovers in three days at the outside.”
He said the Australian Tax Office (ATO) regulates and enforces rollover service standards, which now sit under the ‘Superstream’ infrastructure messaging protocols.
“By contrast, transfers in NZ have been left to providers, resulting in inconsistent service standards and, frankly, some very poor customer outcomes,” Allan said. “If transfers had been included in the Inland Revenue Department business-to-business messaging infrastructure this would have avoided the subsequent problems. Government agencies had the opportunity and tools to address the transfer issue at the start of KiwiSaver in 2007, but chose not to.”
Over the 12 months to the end of May this year over 146,000 KiwiSaver members shifted schemes, according to Inland Revenue Department (IRD) figures.
It is understood each transfer incurs an estimated cost of between $10 to $20 in admin time.
But the new tax bill includes a host of other KiwiSaver tweaks designed to accelerate cash flow across the system and “improve the administrative efficiency and enhance members’ experience with the scheme”, the digest says.
Most of those proposed obligations, though, would fall on employers and the IRD (which is already gearing up for KiwiSaver back-office enhancement under the next phase of its ‘digital transformation’ program scheduled for 2020).
For example, the IRD would be required to start accruing interest on member and employer KiwiSaver contributions from the exact time of payment until funds reach the end-scheme destination.
“When KiwiSaver was introduced Inland Revenue’s systems could not calculate interest from the employee’s payday without imposing compliance costs on employers,” the digest says. “The introduction of payday filing overcomes this obstacle.”
Furthermore, the bill cuts the provisional holding period for default-enrolled member funds to two months. Under the existing law, the IRD holds on to auto-enrolled member contributions for three months (the ‘opt-out’ period) before forward to the carousel-selected KiwiSaver provider.
The IRD will also be able to forward KiwiSaver employer contributions to schemes before it actually receives them
“This would improve the administrative efficiency of the KiwiSaver scheme and members would receive the benefit of their contributions being invested with scheme providers sooner,” the digest says. “The change would align with the existing treatment of employee contributions.”
Other proposed changes in the bill include:
- allowing employees to change contribution rates direct via the IRD or their scheme rather than the current employer-only route; and,
- removing the three-month ‘grace period’ for invalidly-enrolled KiwiSaver members to gain NZ residence
The draft legislation also attempts a fix for the prescribed investor rate (PIR) fiasco on portfolio investment entity (PIE) funds – including KiwiSaver – that came to light earlier this year.
In June the IRD revealed 1.5 million PIE members – roughly half the KiwiSaver population – had wrong PIRs split between 950,000 on a too-high rate and 550,000 who had underpaid tax on their investments.
During the tax bill’s first reading last week, Labour Minister, Stuart Nash, said the proposed law “would allow Inland Revenue to notify the KiwiSaver scheme or other managed fund providers using an incorrect rate for an investor and alert them to the need for change”.
“Being on the correct prescribed investor rate will help ensure the correct amount of tax is deducted in the future. The issue does, however, require further work,” Nash said. “Under the current law—in place since 2007—people on too low a rate are required to pay a shortfall, while those on too high a rate are not entitled to a refund. Clearly, this should be reviewed and I’ve asked my officials to investigate options.”
However, National Party MP, Andrew Bayly, called on the government to include a refund mechanism in the bill for all those who have overpaid tax due to incorrect PIR settings.
“This is a huge bill and it would have been very easy for a Supplementary Order Paper (SOP) on that,” Bayly said. “Because the Minister doesn’t seem to know how we’re going to go about it, I think we’re going to have to write the SOP and put an addendum to this bill when it comes back into the House, because we need to address this issue where people have paid too much money to the IRD. The IRD should pay it back and the Minister who has just spoken should make sure that happens, because it’s not right.”
Submissions on the draft legislation are due by September 4 with the Finance and Expenditure Committee final report slated for January 2020.