Firms freeze workers Sh2bn pension contributions

Employers suspended contributions to their workers’ pension schemes running into nearly Sh2 billion between April and September, citing the economic disruptions brought by the Covid-19 pandemic.

The Retirement Benefits Authority (RBA) allowed employers to suspend, modify or terminate their pension contributions following the outbreak of the respiratory disease in mid-March.

The decision, which allowed employers to avoid the usual penalties for pension defaults, was made to give them financial flexibility in light of the adverse economic conditions that were not anticipated.

For employees of the companies and organisations that took advantage of the regulatory break to reduce their pension burden, the process of accumulating a nest egg has been slowed down.

“We had 44 occupational schemes that suspended employers’ contributions,” RBA’s chief executive, Nzomo Mutuku, said.

“For the occupational schemes, the quantum involved was Sh1.94 billion. Some were suspending [contributions] for three, six, and nine months.”

The pensions regulator in April allowed employers in hardest hit sectors such as travel and hospitality to notify it of measures taken to contain costs, including suspension, reduction of contribution rates or stoppage.

Most of the defaults were seen in sectors of the economy that suffered the most from the pandemic such as tourism and education, Mr Mutuku said.

The economy has taken a major hit from the panic induced by the pandemic besides restrictions taken to control it.

The government imposed a series of measures, including closure of schools, bars, ban of international travel and lockdown of Nairobi, Mombasa, Kilifi, Kwale and Mandera counties.

The restrictions have been gradually lifted since August but their impact is expected to linger on even as rising cases of coronavirus raise the spectre of new controls.

The economy contracted 5.7 percent in the second quarter, the most in nearly two decades.

Terminating, reducing or suspending pension contributions were some of the actions taken by companies to stay afloat as their revenues plummeted in the heat of the crisis.

Others were retrenchments, pay cuts, unpaid leave and renegotiating of contracts with suppliers, landlords and banks.

RBA gave employers a wide range of options in dealing with the pension liabilities.

“Where an employer is seeking to temporarily suspend contributions, the employer is advised to seek consensus of the members either directly or through their representatives, evidenced by member signatures or a joint affidavit by the employer and the trustees,” the regulator said its advisory to employers in April.

“… To suspend either or both employer and employee contributions to the scheme for a specified period. When the said period lapses, the employer shall automatically resume contributions/start to accrue liability to contribute to the scheme.”

Employers who sent their workers on unpaid leave were allowed to stop contributions of both parties for the period the staff were away.

Workers whose salaries were reduced also suffered an automatic cut in their pension pot, with most employers pegging retirement contributions as a fixed percentage of the base pay.

A person earning a gross monthly salary of Sh100,000, for instance, is deducted Sh7,500 which is matched by the employer for a total of Sh15,000 if the pension rate is 7.5 percent.

If the worker takes a 10 percent pay cut, the deduction drops to Sh6,750 or a total of Sh13,500, including the employer’s contribution.

The pandemic has hurt workers’ fortunes on multiple fronts this year.

The thousands of employees who were retrenched due to the disease accessed part of their pension resources at a time when returns on the savings had taken a hit from falling interest rates and the bear run on listed equities on the Nairobi Securities Exchange.