The Act repeals the previous NSSF Act (Cap 258) and introduces a new Pension Fund and Provident Fund to replace the previous Provident Fund, which is now closed. The Act increases the coverage, range and level of benefits provided by the NSSF, allows for contracting out of making second tier contributions to the NSSF and introduces measures to strengthen the corporate governance of the NSSF.
The Act has implications on all employers, employees and existing retirement funds in the country.
The purpose of these FAQs is to serve as a guide for employers and help answer many of the questions employers may immediately have on the Act and how they may comply with the Act.
When is the Act effective?The Court of Appeal reinstated the Act in its Judgement on 3 February 2023. Hence, the Act is effective immediately from this date and the statutory contributions at the higher rates are effective from the month of February 2023. Hence, employers need to ensure the statutory contributions under the Act are deducted and paid starting from February 2023.
A notice of appeal has been filed indicating the intention of the County Pensioners Association to seek a review at the Supreme Court against the Court of Appeal's judgement. However, no formal application has been filed to the Supreme Court to delay the implementation of the Act.
Registration and Compliance
What is the registration process under the Act? Do we need to re-register?The Act requires every employer who under a contract of service, employs one or more employees to register with the Fund as a contributing employer and also register his employee(s) as members of the Fund.
Employers who are already registered with the NSSF do not need to re-register. However, they need to ensure that all their employees are registered with the NSSF.
All existing individual members of the NSSF do not need to be re-registered.
The Act provides that proof of registration with the NSSF will be a precondition of dealing with or accessing public services.
What are the new contribution rates?The rates of contribution to the new Pension Fund are at 12% of Pensionable Earnings (split 6% by employees and 6% by employers).
Pensionable Earnings are defined in the Act as all emoluments payable to an employee other than fluctuating emoluments, but subject to a ceiling (called the Upper Earnings Limit in the Act which is equal to four times National Average Earnings as published by the Kenya National Bureau of Statistics in the Economic Survey each year).
There total contribution is then split into two tiers as explained below.
Are the new rates calculated on gross/basic pay?The Act defines monthly wages to include all allowances (except fluctuating allowances) and would thus suggest that the new rates be based on the gross consolidated pay excluding fluctuating emoluments. However, the Regulations under the Act appear to have an error in drafting which will for the time being enable contributions to be deducted based on basic pay excluding allowances. This is however still subject to legal interpretation and clarification.
What are the two tiers of contributions under the Act?There are two tiers of contributions under the Act as follows:
- Tier I Contributions - contributions on earnings up to the average statutory minimum monthly wage (called the Lower Earnings Limit in the Act)
- Tier II Contributions - contributions in respect of earnings between the minimum wage and the earnings ceiling (called the Upper Earnings Limit in the Act).
Tier I contributions need to be paid directly to the NSSF. Tier II contributions will also be paid directly into NSSF, unless the employer elects to opt out and, in such case, the Tier II contributions can be remitted to a retirement scheme chosen by the employer.
How are the statutory contributions to be phased in?The original Act provided for the contributions to be phased in over a period of five years. We are seeking clarification on whether the original phasing in will now be applied.
However, based on the communications being issued by the NSSF, it is our understanding that at least for the first year, the original transition is being retained.
Hence the maximum contribution payable under the Act by employers for the first year is K Shs 1,080 of which the Tier I Contribution will be K Shs 360, and Tier II Contribution will be K Shs 720. The same amounts will apply for employees as well. This is based on an Upper Earnings Limit of K Shs 18,000 and a Lower Earnings Limit of K Shs 6,000 in the first year.
Note for employees earning less than K Shs 18,000 per month, a lower amount will apply.
Will the contributions be deductible for tax purposes?Yes, the Act provides for the statutory Tier I and Tier II contributions to be deductible for tax purposes.
Do contributions need to be made for staff employed on contract terms?The Act applies to all employees regardless of whether they are contract staff or not and the statutory contributions will apply.
What does integration with NSSF mean and how can my scheme be integrated?A retirement benefits scheme might be described as 'integrated' if its Rule provide for the contributions payable under the scheme to be net of statutory contributions to the NSSF. For example, in an integrated scheme, the contributions will be defined as '10% of pensionable salary, less any contributions made to the NSSF'.
For employers with schemes that provide for integration with NSSF, the impact of the new statutory contributions is mitigated because, for most cases, the increases in the required NSSF contributions are automatically offset by a corresponding reduction in the required contributions to the retirement scheme.
An employer who participates in a scheme in which the contributions are not integrated may amend the rules to provide for such integration.
What does ‘contract out’ or ‘opt-out’ mean?Employers who operate their own scheme or participate in an alternative scheme (e.g. a multi-employer umbrella fund or personal pension plan) will have a choice to contract-out or opt-out of making Tier II contributions to the NSSF. This does not mean the employer does not need to make Tier II contributions. Specifically, it means that the employer can remit Tier II contributions to their separate scheme instead of remitting these to the NSSF. Tier I contributions have to be remitted to NSSF.
Is the 'contract-out’ option (Tier II) in relation to employee contributions only or to both employee and employer contributions?The ‘contract-out’ option covers both the employer and employee contributions. The employer makes the application to opt out of paying the Tier II contributions into NSSF in respect of its employees if they participate or chose to participate in a contracted-out scheme or they opt to establish one and meet the requirements for contracting out.
How can I ‘contract-out’ as an employer?As an employer you can opt out of Tier II contributions if you have an established or participate in a registered retirement benefit scheme that qualifies for and is approved as a contracted-out scheme.
Should I contract out?This will depend on whether you wish to remit all the required contributions to the NSSF, or if you wish to remit a portion of these contributions to NSSF and a portion to another registered scheme.
If you already have an existing retirement benefits scheme you will probably want to contract-out so that the bulk of your pension contributions can continue to flow into your existing scheme. You will need to amend your current scheme rules for this purpose.
If you do not have an existing retirement benefit arrangement you may set up a retirement benefits scheme or join an existing umbrella fund for the purposes of opting out.
What are the requirements of contracting-out?The scheme receiving the Tier II contributions must meet a Reference Scheme Test, with the key requirements being that the Scheme:
- is registered with Retirement Benefits Authority and the Kenya Revenue Authority;
- is compliant with the investment guidelines under the Retirement Benefits Act;
- maintains an accurate record of the Tier II Contributions (which will be known as Protected Rights); and
- provides benefits that in the same form as required to be paid under the Act for Tier II contributions.
If my employer has ‘contracted out’ – does that mean I do not have to pay any contributions to the NSSF?No, an employer still needs to be Tier I contributions to the NSSF. Tier II Contributions may be paid to an alternative arrangement chosen by the employer.
What happens to the historic contributions that have been made to the NSSF by employers and their employees?The accumulated contributions to the NSSF will be retained in a separate fund (called the Old Provident Fund) for a period of five years and the benefits will continue to be processed from this Old Provident Fund. The Act is silent on whether the amounts in the Old Provident Fund will eventually be merged with the new fund, although this would be the likely expectation.
How will the benefits under the new NSSF be different to the old NSSF?The Old Provident Fund provided only lump sum benefits on retirement, death and permanent emigration.
The benefits under the new NSSF include a retirement pension, an invalidity pension, a survivor’s pension, an emigration benefit and a funeral grant. Members may elect to receive a part of their benefits as a lump sum at retirement (not exceeding one-third of the accumulated Tier II Contributions) with the balance paid as a pension. Retirement age has been set at 60 years with early retirement available from age 50. Members will have their pension secured as an annuity from an insurance company of their choice using the total funds in the individual member account. A member may also opt for income drawdown (or a phased withdrawal of the funds in their individual member account) from an approved drawdown provider.
Both the invalidity and survivor’s benefit provide for an enhanced benefit subject to a requirement that a minimum of 36 months’ contributions to have been made by the member. The enhancement is to the Tier I Credit which will be increased to allow for half the lost potential service (due to early ill heath retirement or death), subject to a maximum. The funeral grant is in addition to the survivor’s pension and is set at KShs 10,000. It requires the member to have made at least 6 months’ contributions.
What should the immediate next steps for an employer be?It will be necessary for all employers to review their existing arrangements (including remuneration structure, existing retirement benefit arrangements, end of service gratuity arrangements, etc).
Employers will also need to ensure that all their employees including “casual” and “seasonal” employees are registered and covered.
Employers who have or participate in existing retirement benefit arrangements will need to review the existing scheme provisions to understand what amendments will be required in order to have the scheme approved as a contracted-out scheme. The Act enables some time for modifications to existing retirement fund documents to be made (one year). Subject to the level of contributions in the current arrangement, it will likely be possible for an employer to completely mitigate the financial impact of the Act.
Those employers that do not currently participate in a retirement scheme will need to consider whether to make all contributions to the NSSF or join or establish a pension scheme that can become an approved contracted out scheme for Tier II contributions.
Employers who have end of service gratuity benefits will need to consider how best to provide for the accrued gratuity benefits and how to modify future gratuity accrual in light of the new Act.
All of this will need expert guidance to ensure that the right decisions are made.
How can Zamara help you?As the leading pension experts and the market leaders in our industry, Zamara is well positioned to assist you to comply with the provisions of the Act, including undertaking an assessment of your existing arrangements and for those employers who wish to contract out, offering a simple, seamless, efficient, cost-effective solution for contracting out through our flagship umbrella fund solutions.
Please email us on email@example.com to discuss how we can help you.