Proposed law bars Kenyan workers from getting cash before retirement

The NSSF building in Kampala, Uganda. There are plans to privatise the fund. Picture/File 

By DANIEL K KALINAKI The EastAfrican

 

By PETERSON WANJIRU, The EastAfrican

In Summary

• A Bill passed by MPs seeks to raise contributions to 6 per cent of a worker’s pay.

Kenya is proposing radical reforms to its pensions industry, whose end-result will be to stop employees from accessing their savings before retirement.

The suggestion is contained in a new National Social Security Fund Bill, which has been approved by parliament in the face of stiff opposition from employees and key trade unions. The Bill now awaits the assent of President Uhuru Kenyatta to become operational.

Currently, it is estimated that due to the ability to get one’s pension any time they change jobs (at least 75 per cent of it), the average income replacement — which refers to the fraction of the last salary that a retiree gets as pension every month — is only about 21 per cent, a figure that is way below the globally recommended 75 per cent.

The new rule is part of a raft of measures contained in the NSSF Bill, which among other things, raises the statutory minimum deductions by both the employer and the employee to 12 per cent of the latter’s monthly salary.

The six per cent deduction will not be imposed on employees immediately but will be increased gradually over the next five years. Employers will also be required to match the deduction by every employee.

“An average employee changes jobs at least seven times during his or her working life. Under the current law, he can access up to 75 per cent of his pension contribution.

“People misuse this provision so much such that at the end of the day, the pension they get is severely eroded,” said Sundeep Raichura, managing director of financial services firm Alexander Forbes and one of the key consultants in the formulation of the draft.

“We think that, with this new Bill, we can raise the figure to about 40-41 per cent,” said Mr Raichura.

The Bill has split the country’s pension industry, with some saying it will kill occupational schemes — company-offered pension plans — while others say the new minimum statutory requirements will raise contributions and help strengthen the country’s pension sector.

Under the current NSSF Act, the institution acts as a provident fund — paying workers one lump sum amount on retirement — with members contributing five per cent of their pay to a maximum of Ksh200. Employers are required to match this amount.

If the Bill becomes law, employees will not be able to access the statutory pension contributions before retirement, which experts say will guarantee a higher pension upon retirement. They also argue the amount will be big enough for retirees to invest in projects of their choice, helping stimulate the economy.

Critics, however, say that making NSSF a mandatory pension scheme will give private companies currently contributing more than the new statutory minimum pension contribution of 6 per cent to employee pension schemes an incentive to slash it and transfer employees’ contribution to the NSSF pension scheme.

“It opens an avenue for an employer seeking to cut costs to transfer their employees to the new scheme. Also, for companies offering less than 6 per cent, there is a risk that they may choose to cut down on permanent hiring to avoid the new costs,” argued Fred Nyayieka, a pension consultant.

Mr Nyayieka expressed fears that whereas there is an opt-out clause in the new Bill, it could prove hard for companies to get the necessary waiver to run their own schemes, an assertion that Mr Raichura disputes.

“The requirements for applying for the waiver are expressly provided for, as is the timeline for any inquiry. Besides, the application will be made directly to the Retirement Benefits Authority (RBA) and thus NSSF will have no role in it,” said Mr Raichura, denying claims that withdrawal from the fund is an elaborate process.

Under the new law, a member’s pension contribution will be divided into two parts, Tier One and Two.

Tier One will refer to pension deductions on the minimum wage (currently at Ksh8,648), while Tier Two refers to any pension deductions on an employee’s earnings that are above this amount.

Under the opt-out clause, the employer — with the consent of his or her pensionable staff — can apply to the RBA for a waiver if both his and the employee’s contribution exceed 12 per cent of the worker’s monthly pay. However, the opt-out only applies to amounts in Tier Two.

As the country moves towards implementing the proposed reforms, the NSSF will be expected to operate three funds — the current provident fund, the new pension fund and a new provident fund.

The old provident fund will be given five years to settle its dues to members, after which it shall be closed down. East Africa has been looking for ways to reform its pensions sector.

In Tanzania, for example, the NSSF is financed through contributions by both employer and employee. The employee is deducted 10 per cent of his or her gross income, with the employer matching the amount, making a total of 20 per cent.

Rwanda’s scheme

In Rwanda, workers contribute three per cent while employers pay five per cent to the government-run pensions body, Rwanda Social Security Board (RSSB), which manages both the workers’ contribution and health insurance.

Rwanda does not have private pensions’ schemes, with RSSB monopolising the industry, partly because there is no legal framework to operationalise private pension funds.

A draft Bill seeks to raise the voluntary retirement age from 55 to 60 years while involuntary retirement remains capped at 65 years.

It allows for the establishment of provident funds and occupational pension schemes, and insurance companies are likely to set up life insurance businesses to tap into the new opportunity.

Pensions are a key component of the country’s financial sector with assets worth Rwf334 billion as of December 2012, having grown from Rwf192 billion in 2011.

Other social security schemes in Kenya are the Government Employees Provident Fund (GEPF), PPF Fund (formerly Parastatal Pensions Fund, which now has members from the private sector), Local Authority Pension Fund (LAPF), Public Service Pension Fund (PSPF) and National Hosp Insurance Fund (NHIF).

The large number of schemes has prompted the Social Security Regulatory Authority (SSRA) to start a review of existing laws governing the schemes.

According to information from SSRA, it is also assessing the financial status of the different schemes to find out why some schemes offer better incentives to their members than others.

In Uganda, the NSSF’s management structure is somewhat schizophrenic — most of its money comes from workers who pay five per cent of their salaries, and employers who contribute another 10 per cent.

However, the government, whose civil servants are not contributors, controls the statutory contribution fund.

Additional Reporting by Joseph Mwamunyange, Rose Rwegamba and Esiara Kabona.