How new NSSF rates could affect the future of private pension schemes

Savings dilemma. Some employers could with time fully migrate their employees to saving for retirement with NSSF, ditching the private pension schemes. [iStockphoto] The implementation of the remaining clauses of the National Social Security Fund (NSSF) Act, 2013 is set to drastically transform the local pensions industry. Among the major changes is the possibility that some employers could with time, fully migrate their employees to saving for retirement with NSSF, ditching the private pension schemes they have been sponsoring. This is likely to shrink the local private sector pensions industry, which is currently valued at about Sh1.6 trillion. The new rates require a monthly contribution equivalent to 12 per cent of an employee's monthly salary. This comprises a six per cent contribution deducted from the employee's salary that is then matched by a six per cent contribution paid by the employer. It is, however, subject to an upper limit of Sh1,080 employee deduction that is then matched by the employee to make the total NSSF contribution Sh2,160 per month for employees earning over Sh18,000. Secretary General Association of Pension Trustees and Administrators of Kenya (APTAK) Boniface Mwangangi said implementation of the remaining clauses is also likely to rob some employees of their savings, noting that there are many whose savings are high at the moment but are likely to be eroded in case employers migrate them fully to NSSF. Cutting expenses "Under the Act, contributions to NSSF will keep growing until the fifth year when they reach a maximum of Sh2,160. At some point, employers might be conflicted as to whether to continue with contributions to the private scheme. They might consider contributions to the private schemes as an expense that can be cut and mostly likely discontinue sponsorship of these schemes and contribute to NSSF instead," he said. "These are business entities and they will want to keep their expenses to the minimum... they will see these schemes as unnecessary expenses and if anything, they will have satisfied the law by contributing to just NSSF. Your scheme might not exist in its current form in another five or so years to come." He noted that should this happen and companies stop contributing to their private pension schemes and instead continue with NSSF, many employees will have lost out as the contributions to NSSF will in many instances be lower than those made to the pension schemes at the moment. Employee salary Mr Mwangangi added that this happened in Uganda where contributions to the country's NSSF were increased to 15 per cent of employee salary, consisting of five per cent by the employee and a further contribution of 10 per cent by the employer. "When that happened, the employers did not see the point of continuing with other pension schemes. In Uganda, there are no pension schemes. Contributions to NSSF became too high and employers felt they could not sustain contributions to both the private schemes and the NSSF," he said. Uganda has less than 200 private pension schemes, while Kenya has nearly 1,200 pension schemes with a value of Sh1.6 trillion. The Ugandan government operates a separate pension scheme for public workers, whose benefits are entirely funded by the State. Implementation of the new rates follows last month's ruling by the Court of Appeal that the NSSF Act of 2013 is legal, giving the State the go-ahead to require NSSF members to make higher contributions. The Act sought to increase monthly contributions from Sh200 to Sh2,160 but faced hurdles as employees and employers fought it in court. The Employment and Labour Court had in September last year declared the Act illegal and unconstitutional. The court ruled in a case filed by the Kenya Tea Growers Association together with other employer and employee associations, which had noted that the National Assembly had enacted the law without public participation and had also not involved the Senate. NSSF however appealed the decision and successfully argued that the Employment and Labour Court did not have jurisdiction to hear the dispute and that the case did not have an impact on counties and hence did not need the involvement of the Senate. Following the decision by the Court of Appeal, NSSF on February 9 said companies should start complying with the law immediately. Mr Mwangangi noted that other than the impact this will have on the pensions industry, implementation of the contentious clauses for nearly a decade presents other complications, arguing that the deductions would be tantamount to an employer changing the terms of employment with their employers without their consent. "The reason why you contribute money to a scheme is because of employment. It is a term of service under employment law. The employment law says you cannot change the terms of service without the consent of the employee," he noted. "Also, under the law of contract, it is a cardinal rule that you do not change a contract alone. When you start making contributions to NSSF as an employer, you may be breaking the law because, in employment, you do not reduce someone's salary or send their salary somewhere else they have not consented to. You will be breaking the terms of service." "It is also contrary to the Constitution where articles 40 and 41 guarantee the right to property and where you are not supposed to take away someone's property without consent and compensating them." Grow savings The backers of the NSSF Act, 2013 have argued that there is a need to grow savings in the country, pointing out that many Kenyans face poverty in retirement with the Sh200 a month they have been saving with NSSF being too little to give them any dignity in old age. Mr Mwangangi said while this is a sound argument, it should not be applied blanketly as some Kenyans save a decent amount of money that guarantees them relative comfort in retirement. He added that the focus should be getting more people to save. "The objective of being asked to contribute more money to NSSF is to enhance savings for your retirement, that is a correct statement. But then, how do you apply it? Take for example, an employee contributing six per cent of their salary, which in many instances, is higher than the maximum Sh2,160 to NSSF," he said. "By all standards, this requirement is not reasonable. The employee is already saving for retirement in a superior scheme. Why do you want the employee to save in another scheme at a lower rate and one that also gives a lower return?"

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