Employers move to cushion against increased NSSF contributions

Converting existing provident funds into pensions is one of the ways employers are cushioning themselves against the enhanced contributions to the National Social Security Fund (NSSF), which are set to double this month.

While these contributions, courtesy of the contentious NSSF Act, 2013, are said to have propelled pension assets beyond the Sh2 trillion mark, they have stretched employers who have to match the enhanced contributions of their employees.

The NSSF Act, 2013 increased the Sh200 standard rate across all income levels that has been in place since 2001 to a graduated contribution amounting to 12 per cent.

Just like the Sh200, which was matched by the employer, the same applies to the new increased contribution.

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This not only reduces the net income of employees but also increases overhead costs for the employer who needs to match the figures.

However, to reduce these overhead costs, some employers have devised ways to reduce this spending, one of them being converting provident funds to pensions. A provident fund, while it forms part of employees’ retirement plan, is not considered a pension.

This is a pot contributed to by employees and sponsored by the employer or affiliates. When one retires, they are paid an agreed lump sum.

“If you are running a provident fund, for the private sector, that would mean diminishing the existence of the (provident) fund,” said Albanus Muthoka, assistant general manager, Enwealth Financial Services, a licensed pension administrator during a recent meeting to discuss regulations in the sector.

Mr Muthoka referenced a circular from the National Treasury dated July 10, 2024, directing the conversion of all provident funds for government workers to pensions.

“All existing public service provident funds shall be required to convert to pension schemes within five years from the date of this circular,” said National Treasury Principal Secretary Dr Chris Kiptoo in the circular.

The circular also stipulated that all schemes’ expenses shall be met from the scheme’s funds, and the employer shall meet the costs of setting up a new scheme, which is seen as a way of the government also cushioning itself from the increased contributions and its effects. “Any new scheme established by public sector institutions shall seek clearance from the Secretary/Director of Pensions, National Treasury before registration by the Retirement Benefits Authority,” reads the circular.

Mr Muthoka adds that some employers have opted that both NSSF tier I and II will be part of their share of contributions, which previously went to private schemes.

“And, therefore, what they are doing is segregate the two, deduct the NSSF tier I paid to NSSF and II, which is managed by the scheme if it has received approval,” said Mr Muthoka.

Others, however, have chosen to continue sponsoring pensions, which makes the NSSF tier I and II an addition to the private pension fund.  

“Therefore, tier I and tier II will be in addition to what we are contributing to the private pension funds,” he said.

By June 2024, pension assets according to data from the Retirements Benefits Authority (RBA) had hit Sh1.9 trillion.

These assets are from 1,031 schemes. Coverage now stands at 26 per cent, translating into 4.5 million active members.

John Keah, RBA’s assistant director of market Conduct and industry development, noted that from the returns seen by the regulator, the amounts have surpassed Sh2 trillion.

“We are all aware of the increased contributions required by the NSSF Act. The authority supports those increased contributions because they translate into increased savings. And those increased savings contribute to adequacy of benefits in the pension sector,” said Mr Keah.

He added: “It will be welcome when a member of NSSF goes home with a much more improved retirement benefit amount as compared to that Sh400 that we used to pay every month.”

Mr Keah said as the regulator, they continue to collaborate with NSSF to ensure they comply with the RBA Act even as they enforce their own.

He said there has been growth in umbrella schemes registered.

“This has a direct correlation with the implementation of recent legislation, particularly the NSSF Act, 2013, whereby employers are looking for alternative ways to manage the tier II contributions so umbrella schemes are proving to be a very popular option as opposed to the establishment of inhouse or occupational scheme,” he explained.

In a recent interview, Federation of Kenya Employers (FKE) Chief Executive Jacqueline Mugo said while the umbrella body supports increased NSSF contributions, as it will improve employees’ lives on retirement, she noted how stretched their pay slips have become.

“We support NSSF increase because Kenyans were retiring with no money as their pension was ridiculously low, but it is the totality of all the payroll deductions that we are raising an alarm about. It is too high,” she said.

Ms Mugo said employees need decent pensions on retirement, citing global benchmarks, which Kenya has not met.

These benchmarks were recently referenced in a statement supporting the enhanced NSSF contributions by the Central Organisation of Trade Unions (Cotu) Secretary General Francis Atwoli.

“The ILO (International Labour Organisation) recommends that retirees should receive at least 40 to 60 per cent of their pre-retirement income which underscores the importance of strengthening NSSF as a mandatory savings scheme,” he said, defending the expected enhanced deductions commencing this month.

“While the NSSF rates in Kenya are set at 12 per cent (six per cent from the employer and six per cent from the employee), Uganda mandates 15 per cent (10 per cent employer, five per cent employee) and Tanzania has a much higher contribution rate of 20 per cent (10 per cent employer, 10 per cent employee).”

In January, FKE released data showing how the increased cost of doing business has led to more than almost 6,000 employees losing their jobs.

Difficulty with complying with the Employment Act regarding the two-thirds limit set on payroll deductions is among the challenges employers face, pushing them to offload employees.

“We have had 57 of our (FKE) members who have declared redundancies over the last three years. Out of this, some 5,567 employees were affected,” said FKE’s Ms Mugo.