Economy

Kenyan workers face pension deductions on fixed allowances

pension

Union of Kenya Civil Servants secretary-general Tom Odege speaks at a past press conference, flanked by national chairman Noah Rotich (left). Civil servants are expected to be affected most by the new NSSF rules requiring formal sector employees to make pension contributions on their fixed allowances. Photo/FILE

Formal sector workers will from June start to make mandatory pension contributions calculated using the value of fixed allowances, not just basic pay, when new National Social Security Fund (NSSF) rules come into force.

The rules are expected to affect civil servants — who currently don’t make pension contributions and account for the majority of Kenyan workers with huge allowances — particularly hard.

The list of allowances that government workers earn includes commuter, car, housing, hardship and entertainment that are typically excluded from pensionable earnings.

The NSSF chief executive Richard Langat told the Business Daily that the fund will soon pass regulations that will make fixed allowances part of pensionable earnings.

“All fixed allowances will be computed as pensionable earnings,” he said, adding that only variable earnings such as overtime and per diem will be excluded in determining pension deductions.

The NSSF Act 2013 defines pensionable pay as “monthly wages” and Mr Langat said this description still leaves doubt as to what type of compensation should be captured in determining pension deductions.

“The clarification will be made in regulations currently being discussed by stakeholders before they are gazetted,” he said.

Inclusion of fixed allowances in determining pensionable pay is set to lift hundreds of thousands of workers into higher wage bands, ultimately subjecting them to larger pension contributions.

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

If enacted, the rule is expected to have major implications for employers who may be forced to adjust the allowances to balance competing needs of motivating workers, cost containment and regulatory compliance.

Private sector employers have already rejected what they see as an attempt by Labour secretary Kazungu Kambi and the NSSF management to legislate by fiat, arguing that their views are being overlooked in implementing the new NSSF rules.

The NSSF Act 2013 also applies to the civil service where the government has delayed implementation of a contributory scheme it set up five years ago to lighten its growing pension burden.

The centre-piece of the legislation is the provision that requires workers to make higher contributions to the provident fund as well as the requirement that employers with private pension schemes contribute to the NSSF based on their income.

Previously, total contributions were set at ten per cent of monthly income up to a maximum of Sh400 per month, half paid by the employer and the balance by the employee. Most workers have been making a contribution of Sh200 to the NSSF per month.

Starting June, however, the lowest and highest statutory pensionable earnings have been set at Sh6,000 and Sh18,000 respectively and the contribution rate raised to 12 per cent. This means that NSSF contributions will rise to a minimum of Sh720 and a maximum of Sh2,160, half paid by employers and half by employees.

READ: NSSF monthly contribution set to go up fivefold

Given that the majority of formal sector workers earn a basic salary of more than Sh18,000, the impact of making fixed allowances part of pensionable income is likely to be felt in subsequent years when the upper pensionable income limit rises significantly.

Pensionable pay will rise every January of the next four years to peak at four times of national average earnings — currently at Sh36,000.

This means that the amounts liable to pension deductions will rise gradually up to about Sh144,000 in 2018, roping in thousands of workers with lower basic salaries but drawing substantial allowances.

With the upper limit of pensionable pay standing at Sh144,000, those in the upper bracket will contribute a maximum of Sh8,640 in 2018.

The inclusion of fixed allowances is seen as part of the NSSF’s bid to ensure that widespread use of the alternative compensation schemes does not lower employers’ pension liabilities.

The regulations indicate that the fund will be given discretionary powers to enforce pension savings compliance among employers.

Raising the contribution rates and including fixed allowances put the NSSF on the road to more than tripling its collections as it transforms from a provident fund to a pension fund.

Higher contributions

The NSSF currently collects an estimated Sh600 million monthly from 1.5 million members and the higher contributions are expected to boost the fund’s collections above Sh1 billion every month.

Among the problems that NSSF hopes to tackle with the pension scheme is old age poverty whereby in spite of saving throughout their working lives, the retirement pay-out for most pensioners averages Sh100,000. The NSSF will start offering an expanded range of social safety nets, including retirement pension, invalidity pension, survivors’ benefit, funeral grant (Sh10,000) and emigration benefits.

Retirement pension is to be paid from the pensionable age of 60 but those opting to retire early can access the benefit provided they are at least 50 years old. All monies paid before June this year into the old provident fund will be treated under the old rules. Funds paid in after June into the new fund go into pension accounts that will only pay annuities to pensioners or, for voluntary contributions, into a new provident fund. NSSF will, in the medium term, run both the provident and pension accounts. This will allow it to settle claims arising from its previous mandate as a provident fund, with the State-controlled firm migrating all contributing members to its pension accounts.

Members of the provident fund shall be entitled to age benefits at 50 years when they can receive a lump sum equal to their contributions plus accrued investment returns. The NSSF has in the past few years earned a return averaging five per cent on an annual basis and has lost billions of shillings through corruption and imprudent investments.