Can Kenya’s NSSF handle new weight?

Can Kenya’s NSSF handle new weight?

Kenya’s National Social Security Fund, set up in the 1960s to provide for pensions and other retirement benefits, has lurched from crisis to crisis. Under new legislation, the pot under its control could amount to $2bn annually. Can this body efficiently manage funds of this scale? Aamera Jiwaji has been finding out.

The 1st July deadline has come and gone and there is still no clarification on how Kenya’s state-run social security fund will manage annual contributions of $2bn.

Employers and workers unions are usually pitted against each other, but united by their opposition to Kenya’s new social security act, the two foes have entered into a marriage of convenience and a total of 28 law suits have been filed against state-run National Social Security Fund (NSSF).

But despite doubts about NSSF’s trustworthiness, it is powering ahead with demands for increased monthly contributions.

NSSF was initiated by workers’ and employers’ representatives in the 1960s to address the problem of those retiring without adequate terminal benefits or income. Members benefited on age, invalidity and death. Contributions were set at 5% for employer and employee, but a monetary ceiling was set, which meant that the real value of the contribution was being eroded by inflation.

Membership for all employed persons between the ages of 18 and 60 is mandatory, and offers a retirement pension, an invalidity pension, a survivor’s benefit, a funeral grant and an emigration benefit

While the 1965 Act established a provident fund into which all employees were required to pay a flat rate a month (initially Sh40, then Sh80 and most recently Sh200 ($2.30), the new Act, passed in December 2013, establishes a provident and pension fund.

Membership for all employed persons between the ages of 18 and 60 is mandatory, and offers a retirement pension, an invalidity pension, a survivors’ benefit, a funeral grant and an emigration benefit.

Contributions are divided into two tiers. Tier I is based on the minimum wage, as published by the Cabinet Secretary for Labour. Tier II contributions are based on amounts above the lower earnings limit, and employers have the option of contracting out by offering an approved retirement benefit plan with benefits equal to or better than those provided under the NSSF.

Fine print
Under the previous Act, each employer and employee was required to contribute Sh200 ($2.30) a month each. If a person had worked over 30 years, this totals to a paltry Sh72,000 ($820) plus interest income for retirement. According to the new Act, the employer’s contribution is 6% of the employee’s monthly pensionable earnings and is matched by a 6% contribution by the employee.

The new structure is among the lowest in the region. Tanzania has a 10%-10% ratio; Uganda levies 5% on employee and 10% on employer. Internationally, Kenya is benchmarked close to the US’s matching 6.2% contribution by employer and employee.

This new structure translates to Sh360 ($4) a month for Tier I during the first year of implementation, with equal contribution from their employers, and the first increment was scheduled to take effect on 1st July.

A five­-year transitional period will take place before the full contribution rate is achieved, during which contributions will increase progressively such that the full 12% will strictly apply from 2018.

It will see minimum contributions under Tier I rise from Sh360 to Sh420 ($4.70) in the second year, and then to Sh480, Sh540 and Sh600 ($6.80) in subsequent years. Meanwhile under Tier II, remittances to private schemes will rise from Sh720 ($8) in the first year to Sh1,740, Sh3,840, Sh5,980 and then Sh8,040 ($91).

This change in legislation relating to social security means that the contributor base for NSSF will have to increase more than five times from 2.4m members currently to 12.7m, which is the working population in Kenya.

This, coupled with the increase in contributions, means that NSSF, which currently receives $13m monthly, will receive contributions of $171m a month in the sixth year, amounting to $2bn a year. This is more than any firm listed on the Nairobi Securities Exchange makes in annual earnings, and makes it one of the richest funds on the continent.

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Written by Aamera Jiwaji

Aamera Jiwaji is a Nairobi-based business journalist who writes for the East African and MENA markets. A graduate of South Africa's Rhodes University, she returned to the media in 2011 after working in Kenya's publishing and public relations scene. Tweet her on @amijiwaji.

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