Kenya’s retirement planning landscape has for a long time faced numerous challenges including low penetration, low savings rate, and governance issues among others which have necessitated changes over time.
Data shows that the country’s pension penetration remains below 25 per cent and the informal sector is largely excluded.
Additionally, our savings rate is one of the lowest in the East African Region at 17 per cent and the income replacement ratio upon retirement is below 40 per cent compared to the recommended 75 per cent.
With this, old age poverty in the country is imminent - a concern that has called for interventions both in the private and public sectors. It is with this background that we have now seen the NSSF Act 2013 implemented.
Some of the notable changes in the new NSSF Act include its structure, funding rates, and the channels of contribution that the working populations can utilise to save for retirement.
Now, the contribution rate has been increased to up to 6 per cent of an employee’s salary which is to be matched by the employer.
In addition, the newly enforced act will have a provident and pension scheme. The contributions are divided into tiers and employers have the option to opt out of Tier II contributions subject to approval by the Retirement Benefits Authority (RBA).
The move to increase savings contributions is welcome and much needed to ensure financial security in old age.
The Act has provided for an opt-out option for any occupational retirement benefits scheme including an umbrella retirement benefits scheme or an individual retirement benefits scheme that has been approved and registered by the RBA for purposes of receiving Tier II Contributions. This will give members more flexibility to take control of their savings.
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This is a welcome provision in the act for contributors who may want to opt out of the NSSF Tier II for various reasons such as the search for lower administration expenses and higher annual returns where private schemes have been able to deliver over 10 per cent, often double the returns of the NSSF.
Additionally, there is more transparency in the management of private schemes because members elect trustees and hold them accountable, can access their account statements with technology, and enjoy quick processing of claims supervised by the regulator.
However, to opt out the employer has to make a written request to the Authority at least 60 days before opting to contract out. This in my view is bound to make the opting out process unnecessarily complicated, which may hinder many workers from immediately enjoying the benefits meant by the act.
The overall goal is to increase pension coverage, raise the income replacement ratio and secure the future of retirees financially. Although the NSSF Act will play a part in the journey towards this objective, involving the private sector will make the road smoother.
The writer is the Enwealth Financial Services chief executive.