Why questions persist on NSSF financial health

National Social Security Fund (NSSF) faces renewed scrutiny following questions in the Auditor General’s report and its own release of the annual report for the 2015/16 financial year a fortnight ago.

In the report, which looks at NSSF’s accounts for the year to June 2016, Auditor General Edward Ouko raises alarm about lost opportunities for the fund to get a good return for the money contributed by millions of Kenyans to cushion them after retirement.

Phrases such as “no explanation has been given” and “value for money has not been realised” are a common feature in the report. In a nutshell, the Auditor General found major issues that are of concern about how the State-run pension scheme has been doing its business. It is not the first time that such issues have been raised. In fact, during its most recent annual general meeting, NSSF members pressed the management to explain why numerous queries on the same issues keep cropping up in the Auditor General’s report every year.

However, the management, led by acting Managing Trustee Anthony Omerikwa, said they have been opening up the fund to public scrutiny and hence queries from the public are bound to arise.

Outside the report by the Kenya National Audit Office, other issues facing NSSF include stalled mega projects, minimal rental income from projects that cost billions to acquire or put up as well as operating expenses that are about half of the money that is contributed by Kenyans.

In all these scenarios, there is a real risk of contributors not getting the best value for their contributions. In his report, the Auditor General gave the fund a qualified opinion, which meant that explanations to audit queries were not satisfactory by the time the report was compiled.

We look at some of the persistent issues dogging NSSF.

Employers not remitting workers’ contributions and a growing suspense account

Among the concerns raised by the Auditor General include lost opportunities, in that a number of employers have not been remitting contributions to the fund. This is despite such firms making deductions from employees, which are supposed to be placed with NSSF and paid to the employees once they hit retirement age.

According to the Auditor General’s report, a sample from different NSSF branch offices across the country showed that employers had not remitted more than Sh700 million in the financial year to June 2016 alone.

This was just a sample of a few firms, which raises questions as to how many more companies are not remitting money that they are deducting from the employees. The report notes that NSSF only acted, by way of issuing demand letters, after the Auditor General raised concerns.

Mr Ouko adds that demand letters should be sent to all other firms that have been defaulting on remitting their contributions.

“Examination of 20 sampled employer files maintained in nine NSSF branches disclosed that contributions totalling Sh755 million had not been remitted in the stipulated period (2015/16 financial year. Demand letters should be sent to all the other defaulters not included in the sample taken in order to enforce compliance,” said the Auditor General.

But NSSF says the hard economic times over the last two years had seen a few employers fall back on remitting contributions and that it was pursuing employers whose accounts are not up to date.

“Due to economic reasons, some employers are unable to, or delay remittances; that reflects as a decline in active members. However, any pending contributions that are already deducted from members are not lost as the NSSF will demand the same from employers. Members contributions are also protected as NSSF is guaranteed by the Government,” said Dr Omerikwa in response to questions posed to him last week.

The auditor also noted a growth in the amount of cash held in NSSF’s suspense account. This is money remitted but without the details of the contributor. The total amount had substantially reduced in the last couple of years but is on the rise again.

According to NSSF’s annual reports, the money held in its suspense account had gone down from a high of Sh6 billion as at June 2012 to Sh748 million in the year to June 2015. It, however, grew by Sh16 million to Sh764 million in the last financial year.

The upward growth is contrary to the expectations by the auditor, who notes that the money should have further gone down and with time, have none left in the account.

“No explanation has been provided… as to why the suspense account balance increased instead of reducing, and the mechanisms to clear the balance,” said the audit report.

Dr Omerikwa said the fund had been making efforts in tracking down the owners of the money held in the suspense account.

“Contrary to some perception, there is no actual cash held in a suspense account, such that it can be put to some questionable use. All contributions received are invested for the benefit of members and continue to accrue interest regardless of whether the contributor’s records are available,” he said.

“Nonetheless, NSSF continuously makes effort to trace the contributor or beneficiaries, including public awareness through various channels.”

Rental income and irregular disposal of land

NSSF has numerous residential and commercial houses that are supposed to be earning it substantial amounts in rental income but it has been earning little from some projects.

These include the Hazina Plaza in Mombasa. The pension scheme in 1994 bought the Polana Hotel in Mombasa for Sh450 million and renamed it Hazina Plaza. The fund has over the years leased it to hotel operators, who were expected to remit rent to NSSF. While in initial years the hotel earned NSSF Sh60 million a year as rental income, it has for about 16 years failed to give much return to the fund. According to the Auditor General, the hotel had since 2001 remained partly shut as the tenant failed to meet rent obligations, now running into hundreds of millions.

“The fund has not realised value for money from the investment of Sh450 million in Hazina Plaza Mombasa since 1994 nor has prudent financial management been exercised in the contract,” said Mr Ouko.

The hotel was last year leased to another operator.

Another property that the fund has not been getting rental income from is in Milimani Estate, Kisumu. Despite having eight two-bedroom apartments and three standalone maisonettes, rental income stood at Sh66,000 in the year to June 2016, an amount far below what the fund should be collecting every month from the property.

Despite the tenants not paying rent, NSSF has for years provided security and other services to the residents. The property belonged to the then Municipal Council of Kisumu and was swapped to offset a Sh150 million debt owed to NSSF in 2012.

“No explanation has been given for the failure to review the rent payable since taking over the property. Consequently, value for money has not been realised since the year 2012 from the investment worth Sh178 million,” said the Auditor General.

Stalled projects

When work started on redevelopment of Hazina Trade Towers in Nairobi - which houses the Nakumatt Lifestyle branch - expectations were high that the city would not only host one of the tallest buildings in the region but also an architectural masterpiece inspired by a Maasai moran standing with a crossed legged and balancing on a spear, a signature pose among the Maasai.

After the contractor reported to site to resume work and complete what was to be a 38-floor building, it faced challenges that have stalled works on the building and there are doubts as to whether it will be completed as per the initial plans. These have included tenants that have argued that construction is putting off customers as well as engineers from the County Government who have concerns about whether the foundation can support a 38 floor building. NSSF has recently said it is considering doing away with the 38-floor plans and finishing the building at 15th floor, which have already been constructed.

“These are legacy issues that have persisted over the years but are being addressed through various channels including courts,” said Omerikwa.

High operating expenses

During the year to June 2016, NSSF received Sh12.9 billion from its 2.14 million members. After deducting the benefits payable to retired members that stood at Sh3.1 billion, the fund was left with Sh9.7 billion as the net contributions.

The pension scheme, however, spent a chunk of the contributions on running costs. According to its annual accounts, Sh5.5 billion was used as operating costs, which included salaries to employees and administrative expenses. Despite this high expenditure compared to the amount being collected, the fund is still unable to meet many of its core obligations, including ensuring compliance among employers to remit contributions.

NSSF expenses are guided by the NSSF Act of 2013. The Act states that expenses should not exceed two per cent of the fund’s assets, which stood at Sh172 billion as at June 2016.

The Act adds that the expenses would be further brought down and capped at 1.5 per cent of the total fund’s assets by the sixth year of the implementation of the Act that came into place in 2013. “The fund’s costs are prescribed in the NSSF Act. In the five-year implementation period, costs were to be brought down gradually to 1.5 per cent of total assets. Currently, expenses are at three per cent,” said Omerikwa.

Contracts to China Jiangxi International Kenya Ltd

The Chinese firm has bagged contracts to undertake major works on behalf of NSSF, some of which have been controversial, with stakeholders claiming tendering processes were flawed and ended in courts as well as become subject of discussion in Parliament.

It is the company that is building some of NSSF’s stalled projects and where the Auditor General has raised concerns that the fund could lose money already invested in the projects.

The firm was awarded the contract to complete Hazina Trade Towers. It has also been building the Nyayo Estate in Embakasi that was expected to be completed in less than two years but is still to hit the quarter project mark as of last year with only 52 out of 324 houses having been built.

A former managing trusting at NSSF in 2014 told National Assembly’s Public Investments Committee that NSSF had lost Sh500 million following the revision of costs from what the firm had put in its bids during the tendering process.

The firm had varied the costs for five projects by about Sh100 million from the original bid prices, after being awarded contracts to build five housing projects. During an annual general meeting, a member of NSSF’s board of trustees voiced concerns about the firm. Cotu Secretary General Francis Atwoli questioned China Jiangxi’s capacity, noting the numerous projects that it had to bring to conclusion within time and budget. Omerikwa said the dealings with the Chinese company have been above board and added that NSSF would not do business with rogue firms that operate outside the confines of the law.

Court cases

NSSF is currently fighting numerous legal battles that could see the fund lose billions of contributor’s money, should the outcomes be unfavourable to the pension scheme.

Among the major cases currently before court include a suit by Mugoya Construction Company that is claiming Sh7 billion from NSSF. Mugoya has since then been placed under receivership due to a heavy debt burden. The firm had been awarded the contract to build Nyayo Embakasi Phase One in 1998 but did not deliver and the contract was terminated in 2004. The contractor sued NSSF for Sh7 billion in damages but the fund made a counter claim of Sh9.8 billion.