NSSF rules out early exit from pension plan by employers

What you need to know:

NSSF now demands that those with private schemes must contribute to it beginning from June then ask for permission to opt out.
This means workers and employers with private pension schemes will have their money tied up at the NSSF for months before they can have it transferred to preferred fund managers if their application for exemption is accepted.
The Retirement Benefits Authority (RBA) reserves the right to accept or reject any opt-out application.

Employers with private pension schemes will make double contributions to their employees’ retirement savings starting June when the new NSSF regulations come into effect, it has emerged.

The National Social Security Fund (NSSF) on Monday said all employers wishing for exemptions are initially expected to make full statutory contributions to the fund then apply to opt out for amounts exceeding the mandatory minimum of Sh360.

This means workers and employers with private pension schemes will have their money — running into billions of shillings — tied up at the NSSF for months before they can have it transferred to preferred fund managers if their application for exemption is accepted.

“You cannot opt out of a fund that does not exist yet,” Richard Langat, the NSSF chief executive told the Business Daily. “Application for opting out can only be made after May 31 when suspension of the relevant provisions of the NSSF Act 2013 ends.”

Mr Langat added that draft regulations meant to fine-tune the Act will have no effect on implementation of the new rates in terms of opting out and commencement dates.

READ: NSSF monthly contribution set to go up fivefold

The Federation of Kenya Employers (FKE) on Monday faulted Labour secretary Kazungu Kambi for failing to address the stakeholders’ concerns, including the rules on opting out.

FKE executive director Jacqueline Mugo said employers were concerned that the rules and regulations meant to ensure smooth implementation of the Act have not been agreed and gazetted yet even as the effective date draws closer.

“Failure to address issues such as rules on opting out and pension deductions for casual employees will defeat the purpose of postponing the commencement date to June 1,” she said.

Previously, contributions were supposed to be ten per cent of monthly income capped at Sh400, with employers paying half and employees the rest. Formal sector workers have been making a flat statutory contribution of Sh200 to the NSSF per month, but their share will rise to a minimum of Sh180 and a maximum of Sh1,080 from June. This is based on 12 per cent of pensionable income, with lower limits of Sh6,000 and an upper limit of Sh18,000.

Up to Sh720 of this (a maximum of Sh360 each from the employer and employee) will be paid into a mandatory Tier I account. Deductions above this level (a maximum of Sh720 each from the employer and employee) will also be paid to the NSSF and placed into an optional Tier II account, but may later be transferred to private schemes upon getting the permission to opt out of the provident fund.

The NSSF regulations stipulate that it will take at least two months to apply and get the green light to opt out.

Employers intending to opt out of the higher NSSF contributions must apply to the Retirement Benefits Authority (RBA) at least 60 days before the date they intend to stop contributing to the fund.

This effectively means that any employer who gets the RBA’s permission to opt out of the NSSF scheme could only do so in August at the earliest. Applicants must satisfy the RBA that their privately run pension schemes meet the same criteria as NSSF’s new pension fund. The RBA reserves the right to accept or reject any opt-out application.

The new rules and the accompanying higher contributions will see the NSSF transform from a provident fund to a pension scheme, offering an expanded range of social safety nets as opposed to the current lump-sum payouts. All payments paid before the new fund is created will continue to be paid out in lump-sums or as annuities: payments from the new fund to be created in June will only be available as annuities.

The statutory contributions are graduated and will rise every January of the next four years before they become due for revision. Contributions are currently set at 12 per cent of a worker’s pensionable pay based on the minimum wage bands, with workers paying half the amount and employers the rest.

Starting January 2015, the minimum statutory contribution will be Sh420 and with a ceiling of Sh1,740. Any amounts exceeding Sh420 may be kept with private fund managers subject to the RBA’s permission.

The rates will keep rising until January 2018 when workers and employers will each contribute a minimum of Sh600 to the NSSF. The highest mandatory rate at the time will be Sh8,040.

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

Though some employers expressed fear that the new rules may increase the burden of contributing to their employees’ pension savings, pension scheme managers said a proper re-engineering of the schemes should leave the new deductions cost-neutral.

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

Ms Mugo noted that the NSSF Act is silent on existing provisions on gratuity, arguing that the vacuum exposes employers to paying both gratuity and NSSF contributions over and above their private pension schemes.

Workers and employers in private pension schemes each contribute an average of six per cent of the employees’ gross salary, implying a higher compensation burden for employers if they don’t make adjustments to their payrolls.

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

The new law 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.

READ: New civil servants pension plan deferred for the third time

Any private scheme applying for exemption is required to demonstrate that it can match the range of benefits that the NSSF has promised, 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.

Employers seeking to opt out will get a response from the RBA within 30 days but the actual opt-out must observe the 60-day window if their application is successful.

The NSSF will in the medium term run both the provident (old fund) and pension (new fund) 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 haemorrhaged billions of shillings through corruption and imprudent investments.

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 currently collects an estimated Sh600 million monthly from its 1.5 million members, with the higher contributions set to boost the fund which is a major investor in Kenya’s property, equities and money markets.