Understanding the NSSF Act: Costs and consequences

By Kagure Gacheche and Emmanuel Were

Kenya: Tom*, 30, has changed jobs four times in the last five years.

Over this period, the IT specialist has contributed between 7 and 10 per cent of his basic pay towards private pension schemes run by his employers. The companies matched whatever his contribution was.

As soon as he left each of his previous employers, Tom immediately started the process of claiming his pension, usually receiving his cheques two weeks after filling in the necessary forms. But no sooner had he received the cash than he had used it up.

“I used most of it on things I don’t recall now, but I also put some of the money in business,” he said, estimating that in total he has received about Sh300,000.

His dues

But Tom has never really followed up on his dues with the National Social Security Fund (NSSF), the Government-run social security provider.

“Every employer tells you to provide your NSSF number and I just assume NSSF is keeping the accounts updated,” he said.

Tom has been paying Sh200 every month to the NSSF and should have so far accumulated at least Sh12,000. But he, like many other employees across the country, cannot say with certainty exactly how much is in his account since NSSF does not send statements to members.

And with the NSSF Act coming into force from June, Tom is among the many worried about contributing more of their cash to a State-run fund they know better for being dogged by financial impropriety allegations than anything else.

“We keep hearing from the media the scandals that have been in the NSSF. How sure are we that our increased contributions will be safe?” he asked.

The new law seeks to raise the amount of cash employees will part with to six per cent of their monthly salaries, up from the current Sh200 flat rate.

These new measures are aimed at creating a social security net for Kenya’s mostly youthful population. The cash is to be invested by the NSSF in various areas, including real estate projects and at the stock market, to get members a return on their contributions. 

Tier I contributions are based on the minimum wage, which was Sh12,000 last year. NSSF is working with 50 per cent of this figure — which is Sh6,000, termed the lower earning limit (LEL) — for the first year of implementation of the new Act.

Employees earning above Sh6,000 will part with 6 per cent of this, which is Sh360, with their employers matching the contribution — NSSF will therefore receive a total Sh720.

Under Tier II, which is the larger contribution, the deduction starts at 50 per cent of  national average earnings in the first year. Based on the Economic Survey 2013, the average earnings of a worker in Kenya is Sh36,000. The NSSF is working with half this figure, which is Sh18,000 — termed the upper earning limit (UEL).

Employees earning Sh18,000 and above will part with Sh1,080, with employers matching this figure, so the total amount NSSF will receive is Sh2,160.

However, this Tier II contribution will not be submitted to the NSSF if an employer has a scheme that has applied for and received a contracting out certificate from the Retirement Benefits Authority. The notice period to opt out of the new NSSF scheme is 60 days.

Mr Ian Okwado, a trustee in a private pension scheme, explains that for employees with private schemes, the difference in their payslips may not immediately register.

“If you have been contributing 10 per cent of your basic pay to a private scheme, and NSSF is going to start collecting 6 per cent, that 4 per cent difference will go to the private pension scheme. So your net pay remains unaffected.”

Let us assume you earn Sh100,000 and contribute 10 per cent of your salary to a private pension scheme. This means your contribution is Sh10,000 a month.

But from June, NSSF will require a Sh1,080 contribution from you, which will leave Sh8,920 for your private scheme. However, if your private scheme receives a contracting out certificate, then NSSF will collect Sh360 and your scheme will receive Sh9,640

Winners and losers

So does the NSSF Act make private schemes the losers?

“Not necessarily. There will still be money. Private schemes will continue to receive Tier II contributions if they are contracted out of NSSF, in addition to any extra contributions made by members. The accrued balances over the previous years will also continue being invested,” Mr Okwado said.

Further, companies that do not have private schemes are allowed to contribute Tier II deductions to either personal or umbrella schemes that have contracted out of the NSSF.

The graduated nature of the new mandatory pension scheme means that in the second year, NSSF will calculate the 6 per cent deduction on 100 per cent of the national average earnings.

In the third year, the UEL will be two times the national average earnings. In the fourth year, it will be three times average earnings, and in the fifth year, the upper earnings limit will be capped at four times the national average income.

“The reason for this is to ensure contributions move with the economic times. So the figure contributed will vary, depending on what the national average earnings will be then,” said Mr Fred Waswa, the managing director of pensions service provider, Octagon Pension Services Limited.

However, for Tier I contributions, lower earning limits have been fixed at Sh6,000, Sh7,000, Sh8,000 and Sh9,000 from 2014 to 2017, respectively.

After the fifth year, contributions will be based on the prevailing minimum wage.

The fears

But taking what people earn today and ensuring they are better off a few years down the line requires prudent investment, which is something many analysts — and workers — fear NSSF cannot do.

“Restructuring the NSSF scheme is something to welcome, especially for those workers without private pension schemes, who are in the majority. The higher the amount they contribute, the better the benefits they get. But NSSF must sort out its governance issues,” Mr Waswa said.

Further, the provision that employees cannot access their pension until they reach retirement age is set to be particularly unpopular with the younger generation of workers who regularly change jobs.

“If you get the money when you retire, you could die soon, and the family you leave behind will find it difficult to get your benefits,” said Tom. “Having that money now is much better.”

*Last name omitted to protect his identity.

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