The Inland Revenue Department (IRD) has mopped-up the remaining spillover from a KiwiSaver technical glitch that saw payments to up to 750,000 members delayed during a system transition last year.
In a note to providers last week, the IRD confirmed the final tranche of ‘ex gratia’ payments – approved by Cabinet this February – would hit member accounts on Friday (June 11).
Cabinet set aside up to $10 million to fund the clean-up after the IRD KiwiSaver update to the new START system last April left about 750,000 payments, mainly employer contributions, stranded.
The IRD had identified the data problems prior to the START changeover date (or April 17, 2020), isolating the affected member money into a ‘quarantined payments’ batch to be processed post-transition.
“Approximately 85% of the held contributions were passed on by 31 May 2020. Inland Revenue has now released the majority of the remaining 15% of contributions to scheme providers,” the February Cabinet paper says. “There are still a small number of contributions Inland Revenue is working through. Many of the things that have caused delays are transitional and Inland Revenue expects to continue to improve the average speed with which contributions are passed on.”
Cabinet deemed all KiwiSaver payments processed after May 31 would be subject to a discretionary top-up from government to recognise investment returns foregone during the out-of-market period.
While the IRD pays interest on KiwiSaver member cash held on its account, the rate was set at 0 per cent as of May 8 last year.
Revenue Minister David Parker says in the Cabinet note: “I believe it is appropriate that Inland Revenue compensates the KiwiSaver members that have had contributions held by the department for a significant period of time by making ex gratia payments to them. The investment market has performed well during the period these contributions have been held by the department.”
The IRD concocted a “generic” formula to calculate the extra payments based on the average “percentage change in unit price figures for growth funds from the default KiwiSaver scheme providers” for the last days of each month from May to October 2020 (plus the same figure as at November 12).
“This would result in members, on average, being slightly overcompensated but it would vary from member to member,” the Cabinet paper says.
In practice, the average ex gratia payment amounts to about $10 per individual with the IRD only required to notify the roughly 5 per cent of affected members who received $50 or more from the administrative patch.
The $10 million budgeted ex gratia payment would ultimately be “fiscally neutral”, the Cabinet note says, to be absorbed by “operating efficiencies” generated by the IRD “business transformation programme” over the next few years.
Parker says in the February Cabinet paper: “I do not see any ongoing fiscal risk, as Inland Revenue’s new systems and processes will ensure members’ future KiwiSaver contributions are passed on to scheme providers in a timely manner.”
The IRD, too, says it “does not see this [ex gratia payment] as creating a precedent” for future government changes that may result in KiwiSaver members missing out on market returns.
Nonetheless, the government faces another major transition challenge later this year with up to 380,000 members and potentially $3 billion plus set to change default providers (and asset allocation) via the IRD system on November 30.