The National Social Security Fund (NSSF) spent half of the workers’ contributions on administration in the period ending June 2015, according to a new report.
The state-run pension scheme used Sh105 to manage each Sh200 monthly contribution, translating to 52.51 per cent of collections, the latest financial statements show.
With costs amounting to 3.73 per cent of total assets, NSSF is in breach of the set two per cent ceiling. This reduced the amount of cash available for investments and ultimately squeezed retirees’ returns.
“The fund has not fully operated within its approved budget estimates,” said Auditor-General Edward Ouko who issued a qualified opinion on NSSF’s books of accounts.
A qualified opinion refers to gaps in book-keeping meaning a true picture of the scheme was not presented.
NSSF’s inefficiency saw returns to pensioners shrink to an all-time low of three per cent last year from 12.5 per cent in 2015. The fund’s expenses stood at Sh6.1 billion in the year, against collections amounting to Sh11.7 billion in the period under review.
This means that NSSF was left with only Sh95 to invest out of each member’s monthly contribution of Sh200.
NSSF acting managing trustee Anthony Omerikwa did not respond to queries on how the scheme intends to reverse the situation.
The publicly funded pension scheme has a bloated staff of 1,401 employees, despite two rounds of job cuts meant to reduce operating expenses and lift returns to retirees.
About 500 jobs were shed at NSSF between 2013 and 2014. A Sh904 million provision related to a tax dispute with the Kenya Revenue Authority was though partly to blame for the spike in expenses, according to the scheme.
The NSSF Act (2013) requires administrative expenses be below two per cent of its total assets for the first five years of becoming law, which would translate to a cap of Sh3.3 billion in the year under review.
“The board shall thereafter take necessary measures to ensure that the percentage reduces and is capped at 1.5 per cent in the sixth year,” reads section 50(2) of the law.
Alexander Forbes Kenya chief executive Sundeep Raichura said Nairobi’s average annual cost of managing private pension schemes was between one and 1.5 per cent of the value of assets under management depending on size of scheme.
“There has been reduction in fees due to competitive pressures which has led to unsustainable low prices compared to other jurisdictions around the world,” said Mr Raichura in an interview with the Business Daily.
This is broken down as between 0.25 to 0.3 per cent of total assets in fund management fees with another one per cent being incurred in administrative costs such as staff costs, audit, legal and custodial fees, trustee allowances, and investor relations.
As a rule of thumb administration costs as a proportion of total assets tend to decline as the fund gets larger, meaning that the operating expenses for Sh165 billion-worth NSSF scheme should be lower or at par with private schemes.
By converting into a pension scheme, NSSF is obliged to make monthly payments to retirees unlike the previous case where it paid a measly lump sum on retirement.