Retirees face tough future as companies suspend pensions

A growing number of companies have applied for the suspension of contributions to pension schemes, throwing thousands of workers into a black-hole of reduced retirement incomes.

On April 23 this year, the Retirement Benefits Authority (RBA), the pension industry regulator, sent out a notice allowing cash-strapped firms reeling from the Covid-19 pandemic to discontinue or suspend contributions until the crisis diminishes.

In an interview, RBA Chief Executive Officer Nzomo Mutuku confirmed to The Standard that a number of companies have applied for suspension of pension contributions.

Mr Mutuku said some of the companies that have submitted applications come from the hardest hit sectors such as hospitality, aviation and manufacturing. Media companies too have joined the fray.

The suspension periods vary, with some firms applying for up to nine months. The situation for retirees has also been exacerbated by proposals published last week in the Finance Bill 2020, seeking to tax monthly or lump sum pension emoluments for persons aged 65 and above. The retirees’ were previously exempt from taxation.

The Finance Bill has also not spared the Sh251 billion National Social Security Fund (NSSF) that safeguards retirement cash for millions of Kenyans. The bill seeks to tax income earned by the State entity.

The RBA notice allowing suspension of contributions, and the havoc visited on investments made by pension schemes by Covid-19, have all rattled the Kenyan pension industry.

Pension assets under management stand at Sh1.2 trillion. According to experts in the pension industry, their value will be impacted by the slowdown caused by the pandemic.

The suspensions will also further hurt pension penetration that already stands at a 20 per cent low in both the formal and informal sectors.

The industry has been growing at an average of 14 per cent. In the past ten years, assets under management have grown from Sh288 billion to the current Sh1.2 trillion.

This means that retirement benefits assets as a percentage to the Gross Domestic Product (broadest measure of economic output) average at 15 per cent.

The contributions are a voluntary arrangement between the employee and employer. They offer motivation to workers as they envision a secured retirement.

Pension deductions

Contribution rates are split between the employer and the employee. Workers are now left with NSSF, where it is mandatory for companies to remit pension deductions.

NSSF contributions - unless topped up - are small. Many workers have expressed shock once they retire only to find little savings at NSSF, after many years of work.

Mutuku dismissed concerns that companies would use the pandemic as an excuse to avoid pension contributions all together.

He said that the requests he received on his desk were “very genuine”, especially noting that some companies had even closed shop. “These companies really have no choice,” he said.

A survey by Kepsa last week showed companies in the tourism and manufacturing sectors have reported losses of up to Sh40 million per firm owing to the Covid-19 pandemic.

Other guidelines that RBA issued during this pandemic period include a directive where employees who are on unpaid leave, temporarily suspended their contributions.

Where employees are earning slashed or full salaries, employers are expected to remit based on either the full or reduced pay.

RBA also said that employers were free to vary contribution rates. RBA stressed that where employers sought to discontinue contributions, the pension scheme will be forced to wind up or it will operate as a closed fund.

Mutuku, however, said that no firm was yet to apply for a discontinuation, with most opting for temporary suspension.

Octagon Pension Services Managing director Godwin Simba said the applications for suspensions of contributions were expected given the impact the pandemic has had on the economy.

He said that the economic slowdown has hurt many employers’ revenue which is in turn has put the retirement security of most employees in jeopardy.

He noted that the pension industry would see a decline as a result of the pandemic, owing to its huge investments. “We are most likely to see decline in overall growth,” said Mr Simba.

However, Mutuku differed with Simba asserting that the suspension of contributions would have a minimal impact on the pension industry, because the biggest pension schemes were in the more resilient sectors such as finance and banking which are weathering the crisis.

Simba noted that such a pandemic was not envisioned in the RBA Act that guides pension schemes, while explaining how the unexpected Covid-19 pandemic has caught the world economy unaware.

“Companies will have to be careful on how they handle these suspensions since they may trigger legal battles,” he said. Simba cautioned that the crisis may take long before it is dealt with, and urged Kenyans not to forget their retirement future.

He urged workers to practice financial restraint; cut down on expenditure, and be on the lookout for extra income generating activities.

“In such a situation, people can only tighten belts and save as much as possible,” he said. Simba, however, noted that retirement income is dictated by factors such as age and salary. “Young people can defer and pick it later but those approaching retirement have to be very careful,” he said.