The Court of Appeal delivered its decision on the enactment of the National Social Security Fund (NSSF) Act 2013 on February 3, declaring it legal and constitutional and ending a prolonged legal battle that started in 2014.
This paves way for its implementation that will result in a significant increase in NSSF contributions by employers and employees over time since the formula applied is intended to increase progressively for the next five years.
The Act introduces a new contributions structure, which will be at 12 percent of the monthly employee’s pensionable earnings, with 6.0 percent deducted from the employee and 6.0 percent contributed by the employer.
The contributions are categorised into Tier I, based on the lower earnings limit, and Tier II, based on earnings above the lower earnings limit subject to an upper limit defined by a national average earning.
For the first year, Tier II contributions are based on 50 percent of the national average earning, set at Sh36,000. This will be progressively increased to 100 percent for the second year, 200 percent for the third year, 300 percent for the fourth year, and 400 percent for the fifth and subsequent years.
This means that assuming the national average earning is maintained at the same level over the years, then NSSF contributions are expected to increase by 43.2 times by the fifth year based on the current Sh400 monthly contribution.
For the year 2021, NSSF annual contributions amounted to Sh14.09 billion and are thus projected to reach over Sh600 billion in five years’ time.
Though the enactment of the Act is a welcome move for the pension industry, businesses will have to incur additional costs to comply.
Most employers may face cost and cash flow challenges in an already challenging economic environment.
However, there is a sigh of relief for employers who have already established occupational schemes or are contributing to umbrella or individual schemes (contracted-out schemes) as the Act provides leeway for employers who may opt to pay Tier II contributions to a contracted-out scheme.
The regulations require employers to apply to the Retirement Benefits Authority at least 60 days prior to the intended date of contracting out and also obtain a contracting-out certificate.
Employers are also required to notify the employees, trustees, administrators and all independent trade unions recognised in relation to employees concerned of the intention to apply to contract-out.
The contacting-out certificate will allow the employer to make an application to the NSSF for the transfer of Tier II fund credits from the NSSF to the contracted-out scheme.
Such transfers will not include the transfer of interest earned while the funds were held at the NSSF.
In light of the above, it is clear that there will be a significant increase in operational costs to businesses operating in Kenya with a greater impact on businesses that do not have private schemes.
Employers will also have to relook their pension contribution provisions for the occupational, umbrella or individual schemes with possible amendments to the scheme’s trust deed and rules to allow them to offset NSSF contributions against contributions to their schemes.