Relief as minister suspends new NSSF contributions law

The government Tuesday moved to relieve employers with private pension schemes from a looming burden of double contribution to their employees’ retirement savings with a four- month suspension of the new NSSF rates.

Labour secretary Kazungu Kambi gave employers until May 31 to adjust their payrolls in readiness for the new pension rates, gratuities and salary scales.

“The Labour Cabinet secretary has deferred the date of commencement of the Act from January 10 to May 31,” a statement from the ministry said, adding that the offer was meant to ensure NSSF’s smooth transition from a provident to a pension fund.

NSSF contributions are expected to rise by between 80 per cent and 440 per cent starting June.

Workers and their employers were to start making the new National Social Security Fund (NSSF) contributions this month, setting employers with private pension schemes up for double contribution to their employees’ retirement savings.

Mr Kambi suspended the effective date after employers lobbied to avoid the high costs of immediate compliance with the new regulations.

The Federation of Kenya Employers (FKE) had argued that employers needed more time to review their compensation structures in order to comply with the new law in a cost-neutral manner.

Employers with private pension schemes are expected to respond to the higher NSSF with a raft of payroll engineering measures including deduction of higher NSSF contributions from existing contributions to private pension schemes.

Some employers may even go further and cut their contribution to private pension and gratuities schemes.

Employers and workers with private pension schemes currently contribute an average of six per cent of the employees’ gross salary.

These contributions to private schemes are relatively higher than the new NSSF rates, which are pegged at six per cent of pensionable pay based on the minimum wage bands.

“Review of existing remuneration structures will enable employers to comply with higher NSSF deductions in a cost-neutral way,” said Sundeep Raichura, the CEO of Alexander Forbes, which manages pension funds for 130 companies.

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The suspension of the new NSSF rate has in itself saved employers and workers in private schemes from a higher pension burden that loomed in higher NSSF rates beginning this month.

The risk of double pension contributions lay in the 60-day gap that the law provided between the time employers may apply to opt out of NSSF and the Retirement Benefits Authority’s (RBA) granting of such exemptions.

Workers in private pension schemes and their employers faced the prospect of making higher contributions to NSSF for at least two months as they waited for RBA’s response to their request for exemption.

NSSF Act 2013 came into force on January 10 meaning that mid-March was the earliest any employer could opt out. Formal sector workers have been making a flat statutory NSSF contribution of Sh200 per month, but this was to rise to a minimum of Sh360 and a high of Sh1,080 at the end of the month. The Sh360 must be paid to NSSF and matched by employers, bringing the total to Sh720.

READ: NSSF set to raise workers’ monthly contributions

Deductions above this can be paid to NSSF or retained in private schemes, which must however wait for the 60-day approval window. RBA reserves the right to accept or reject any opt-out application.

It is not a guarantee that opting out will be approved, meaning that some employers and their workers may have to decide whether to remit higher contributions to NSSF in addition to their private pension schemes.

Kenya has 1,500 employer-sponsored schemes and 13 owner-sponsored schemes, according to RBA.

The new law also applies to the Civil Service where the government has delayed implementation of a contributory scheme to lighten slowdown its growing pension burden.

Any private scheme applying for exemption is required to demonstrate that it can match or beat the range of benefits that the NSSF has promised including retirement pension, invalidity pension, survivors’ benefit, funeral grants, 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.

Employers seeking to opt out will be notified within 30 days, but the actual opt-out must observe the 60-day window.

The new pension law has broken with the tradition of a flat monthly deduction and has instead moved all workers to six per cent of pensionable pay whose boundary will shift over the next five years.

Beginning this month, the minimum pensionable pay is set at Sh6,000 resulting in the mandatory or Tier I deduction of Sh360 from each worker that goes to NSSF.