How NSSF Act 2013 will impact on retirement schemes

In a recent seminar for our pension scheme members, the administrator couldn’t give satisfactory answers to several questions on the NSSF Act 2013, much to the chagrin of the participants.

And, I can’t recall having seen your comments on this issue either. Help me understand the new NSSF law.

— Bedan, N. K., Nairobi

Bedan, at the outset, let me say that the failure of your pension scheme administrator to answer some questions on the new National Social Security Fund (NSSF) Act 2013 is not due to deficit in skill but rather, the jury is still out on several issues in this legislation.

The law has a number of grey areas that require clarification, hence the reason why the start of the proposed deductions was pushed to June 1.

Among the outstanding issues, is ‘contracting out’ of Tier II contributions. Equally, clarification from the Kenya Revenue Authority is still awaited on Tier III contributions’ taxation.

Because NSSF is now to be converted from a provident fund to a pension scheme, there are considerable implications for retirement benefits schemes that are currently provident funds.

As a whole, the new law causes serious dislocation to privately arranged retirement benefit schemes and the debate on this centralist move by the government is ongoing. Obviously, the authority concerned was lyrical about the need to take social security to the next level.

But, on the other hand, the private sector and the pensions industry in particular remain skeptical about the government’s competence in handling the increased fund granted the level of graft in NSSF today.

Moreover, centralism goes against the grain of liberalisation. The principle of subordination holds that governments only undertake projects the citizenry cannot handle and leave what can be done by the people to them.

Clearly, the move concerning NSSF is a reversal of this principle. Of note here, is the efficiency of private retirement benefits schemes in delivering superior returns.

For example, guaranteed schemes (that is, insured schemes) that are administered by life insures have posted higher returns than others in the last two, or so, years. This is to say nothing of the innovativeness and flexibility engendered by competition in the private sector that results in greater effectiveness and efficiency than state-controlled entities can deliver.

However, considering that the state is determined to implement the new changes, the debate over the advisability of the move is now overtaken by events.

The move only leaves the option for trustees of private retirement benefits schemes to adjust their schemes to conform to the NSSF Act 2013.

Scheme administrators have been up to their task in informing all concerned about the way forward.

Despite the obvious disadvantages to life insurance companies that run a considerable book of pensions business, the silver lining in the cloud is that their annuity line will be greatly boosted by the law.

Under the Act, a life annuity, guaranteed for at least 10 years, will have to be purchased from an insurer. As two thirds of the NSSF benefits will be accessed as monthly pension, there is a vast scope for development of annuity business by life insurers.

Also, with greater imagination, there is scope for increasing penetration of products that enhance retirement nest egg.

As for scheme members, let’s only hope their retirement kitty will be safeguarded by whichever provider. Only, don’t be passive, Kenyans, and on this score, Bedan, I thank you for enquiring.

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