Pensions Administrator, Enwealth Financial Services, has welcomed the move to increase retirement savings contributions through the NSSF Act of 2013 as it will widen pension coverage and ensure financial security for Kenyans in their old age.
However, the pensions administrator notes there are still uncertainties around implementation that need clarity to protect both employers and employees. For example, one of the provisions in the act allows a full opt-out at the Tier II level of contributions for employers who have or are contributing to pension schemes approved by the Retirement Benefits Authority. But the process to opt out is flawed with bureaucracy.
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Enwealth Financial Services CEO, Mr. Simon Wafubwa called for simplicity of the opt-out option for schemes saying as it is, it will create a refunds nightmare between employers and NSSF. Employers are required to start making contributions this month yet their applications to opt-out will not be done immediately.
The Act has provided for an opt-out option for any occupational retirement benefits scheme including an umbrella retirement benefits scheme or an individual retirement benefits scheme that has been approved and registered by the RBA for purposes of receiving Tier II Contributions. The employer has to make a written request to the Authority at least 60 days before opting to contract out.
“In our view, there is a necessity to amend the act to be very simple in terms of opt out. If you have already complied with RBA regulations, there should be no requirement to apply to be exempted.
It should be by default. That should be an issue of compliance for audit, rather than applying and then waiting for two months or months to get approval and then pursue NSSF for refunds. It is just too much bureaucracy,”
said Mr. Wafubwa when Enwealth Financial Services hosted a forum for employers and trustees in Nairobi on Friday to unpack the enacted NSSF 2013 act.
Contributions in the first 5 years shall be deducted in accordance with the two-Tier system. Tier I contribution is to be pegged on the lower earnings limit and is required to be deducted and paid to the NSSF. Tier II contributions are calculated at 6% of the employee’s pensionable earnings between the lower-earning limits and the upper-earning limits as per the earning limits.
Many contributors may choose to opt out of the NSSF Tier II because of lower administration expenses looking for fees below NSSF’s which have been over 2%. Private schemes have been able to deliver annual returns of over 10% which is often double the returns by NSSF, as well as more transparency
in management and faster processing of claims. RBA ensures members receive their claims within 30 days of application after retirement.
“For employers who do not have a scheme, you may have to set up one or join an umbrella scheme which has been approved by the RBA for the purpose of obtaining an exemption for remittance of Tier II contributions,”
added Mr. Wafubwa.
Currently, there are about 3 million active contributors in pension including through NSSF, with the private sector having about 850,000 members. The NSSF act of 2013 targets to bring the informal sector into the pension fold estimating the memberships will increase to about 15 million. Kenya’s current income replacement ratio falls between 1-4% as savings are insufficient, and eroded by inflation and high administrative costs.
RBA’s Deputy Manager, Supervision, Caroline Wanjala Wabwire spoke during the event:
“This is a welcome move for the country as we have been grappling with issues of coverage with only about 25% of the labor force covered by a retirement benefits arrangement. Contributions to NSSF have been not affording Kenyans adequate benefits at retirement. This will increase the Income replacement Ratio to about 40% which is closer to International Labour Organisation’s recommended 50-60%”.
