Allow employees to quit NSSF, say pension firms

 

Transition Authority chairman Kinuthia Wamwangi speaks at the Kenya School of Government in Nairobi during a seminar for county teams. Photo/ANTHONY OMUYA  NATION

PETER MUNAITA
The EastAfrican

Service providers in Kenya's pensions sector want the government to contributors to other registered pension schemes allowed to opt out of the National Social Security Fund (NSSF), which is being restructured in readiness for conversion into a national pension scheme.

The Association of Retirement Benefit Schemes (ARBS) says employers are anxious that their contributions to pension benefits will rise once the new scheme takes off, especially employers who already sponsor private schemes for their employees.

Presently, employers top up an employee's contribution to the existing scheme, limited at 15 per cent of gross pay for income tax relief purposes, and are already worried that NSSF conversion into a national pension scheme will entail additional contributions.

Employees also make graduated payments to the NSSF up to a maximum of Ksh200 ($2.8) per month, which the employer also tops up with a similar amount. It is estimated that up to a fifth of the payroll will go towards pension contributions compared with a 10th in Uganda, making the country's labour market less attractive to investors.

Opting out from the NSSF is one of the key proposals that ARBS is refining for consideration in the June budget following changes made to the Retirement Benefit Act last year.

The changes now allow early retirees access to only their own contributions towards retirement, leaving the benefits topped up by the employer until the official retirement age is reached.

"Early retirees now put their money in expensive projects that leave them with no regular income or venture into unsustainable businesses," James Murigu, the chairman of the Association of Retirement Benefit Schemes, toldThe EastAfrcan.

"What they need are opportunities to build their retirement kitty while out of employment before they get the next job," Mr Murigu said. The association is proposing that this can be achieved through incentives that make self employment more fulfilling, increasing contributions to retirement through individual pension plans.

It is estimated that out of 10.2 million Kenyans in gainful employment, only 200, 000 are members of a formal Retirement Benefit Scheme. The government has announced plans to enable contributors to assign their benefits to obtain mortgages as an incentive but this is yet to get parliamentary approval.

For starters, ARBS wants the Income Tax and Retirement Benefits Acts harmonised so that the relief on pension contributions is adjusted for inflation or expressed as a percentage of a contributors' income. Last year, this amount was raised from Ksh17,500 ($243) per month to Ksh20,000 ($278) per month.

The association says expressing the relief in absolute terms has not helped it keep pace with inflation, which would be the case were it expressed as a percentage of the salary, since employers adjust payments each year to compensate for inflation. Kenya's annual inflation stands at around 5 per cent.

The freezing of pension benefits from the employer largely hurts Kenyans leaving for opportunities abroad who may not want to leave their money behind or retain association with the scheme, a key grievance against the enactment made by the Central Organisation of Trade Unions (Cotu).

ARBS argues that the system stagnates the pool of funds available for investment despite being favourable for tax collection. The association also proposes that benefits not be subjected to taxation as is the case in Uganda, where only contributions are taxable.

At present, one is allowed a lumpsome payment of Ksh480,000 ($6,667) tax free with a pension benefit of up to Ksh15,000 ($208) per month not taxable. A manager with Group Life and Pension at British American Insurance, David Kuria, said the taxes on pensions discouraged many from investing heavily in pension plans.
 

Although one can claim another Ksh11,000 ($153) tax free – the basic income in Kenya that is not subject to tax – a pensioner would have to prove in the annual tax returns that the benefit was the only source of income.

During a quarterly seminar for its 120 members held in Nairobi last week, Fred Waswa, executive director Kingsland Court Trusts and Benefits Services Ltd, which houses the ARBS secretariat, proposed that the preservation of benefits until the retirement age of 50 years should have a cut-off date of June 2005 so that it is not applied in retrospect.

Mr Murigu said that the alternative of transferring the funds to personal retirement benefit schemes that were authorised two years ago should be considered, so that retirees do not feel tied down to their employer-sponsored schemes.

The proposals will be forwarded to the government for consideration during the Finance Bill 2006 to be presented with the budget in June. Mr Murigu said accelerating job creation would be a key facet in securing a better retirement.

"We want early retirees to see job loss as a temporary thing so that the need to liquidate their retirement benefits is minimised. Creation of more jobs, especially through the ICT and infrastructure sector, is one way of ensuring this."