Double pension cut looms as new NSSF laws kick in

Kenyan workers and their employers are headed for a hard landing at the end of the month when a new legal regime that is meant to turn the National Social Security Fund (NSSF) – a provident fund – into a pension scheme comes into force.

The new law that was enacted last year comes with huge contributions and reporting obligations, which are expected to take a significant proportion of the workers’ incomes and expose employers to the risk of running double retirement schemes.

Though the full cost of the transition has yet to be quantified, analysts expect employers to spend millions of shillings on new ICT and accounting systems that can capture the new rates, ultimately passing on the costs to the workers.

Employers running gratuity schemes as retirement benefits, top the list of big losers in the new scheme of things that requires them to incur additional costs in pension contributions every month.

The new laws have no provisions for gratuity schemes, leaving the employers with the option of transforming them into pension plans or setting up separate pension schemes into which they will make parallel contributions.

READ: NSSF monthly contribution set to go up fivefold

Setting up such schemes will require a change in employment contracts of current employees to remove the gratuity provisions and avoid incurring double retirement costs.

Pension experts reckon that the complex nature of the new law that requires the opening and maintenance of several accounts for every employee means that fund managers and other service providers are likely to ask for higher fees and commissions, which will ultimately be passed on to the contributors.

“If you have to maintain two accounts per employee for example or adjust your systems to meet the new obligations, then you can see that costs can only rise. Even the fund manager might charge more,” said William Maara, the Aon Kenya Insurance Brokers general manager for life and pensions.

He said higher costs would also arise from any continued increase in each contributor’s obligations as their pensionable pay grows.

Mr Maara said that while the pensions sector has matured under the stewardship of the Retirement Benefits Authority, the new law has introduced a large complexity that increases costs for everyone involved except the NSSF.

Under the new regulations, employers will be required to remit a minimum of two months of their employees’ pension contributions to the NSSF before they are legally allowed to opt out.

“The earliest an employer can contract out of the NSSF scheme is from August because one must apply and wait for 60 days before the go-ahead is granted,” RBA’s supervision manager Charles Machira said of the scheme that whose rollout is expected next month.

Employers are strongly opposed to the NSSF law, arguing that it has deliberately ignored their views.

READ: NSSF rules out early exit from pension plan by employers

Some pension experts fear that employers could shift to lower pension obligations once the monthly contributions rise by the fifth year as proposed in the law.

“It is likely that as the contributions rise towards the fifth year under this law, employers will shift towards the cheaper options and avoid having to pay more,” said Mr Machira. He was speaking at a workshop organised by Aon Kenya Insurance Brokers in Nairobi.

Under the new rules, the minimum pensionable pay is set at Sh6,000 and the ceiling at Sh18,000 translating to total deductions of Sh720 and Sh2,160, respectively.

The upper limit of pensionable pay is expected to rise gradually before peaking at four times the national average wage of Sh36,000 in the fifth year.

Mr Machira said the legislation also raises tax matters that are potential areas of conflict. While the Income Tax Act still holds that pensioners must pay tax after hitting certain thresholds, the new law says any retiree seeking their pension will not be subjected to taxation.

“There is a conflict between the new NSSF law and the Income Tax Act. Under the NSSF, there is no tax on pension, but the Kenya Revenue Authority expects compliance with the Income Tax law, exposing pensioners to legal risk,” said Mr Machira.

There is also concern that small and medium-level pension schemes would be swamped by costs, especially as the contribution amounts rise towards the fifth year.

“The best option for small and medium-sized schemes is to come together for purposes of cutting costs under an umbrella fund,” said Mr Maara.

Workers are also questioning the NSSF’s prudence in managing the billions of shillings that will accrue from the increased contributions given its scandalous past.

The fund lost billions after the collapse of brokerage firm Discount Securities and its procurement practices have come to question over the recent controversy relating to the development of infrastructure at Nairobi’s Tassia estate.

Many employers, who previously did not care about pension, have now been forced to put it as part of their staff costs, more so as the number of workers increase and the amount paid rises with the passage of years.

One of the major issues the employers have raised, even as they accept to live with the new laws, is the method of transition to the new dispensation.

The 60 days that are supposed to elapse before an employer is exempted from compulsory contribution to NSSF is seen as too long and forcing all employers and their employees – whether or not they have an operational occupational defined contribution scheme – to surrender their contributions to the NSSF in the transition stage.

The cash surrendered, which is a maximum of Sh2,160 per employee, will not be returned to the occupational scheme even after the scheme is allowed to contract out of the NSSF.