What is the difference between a pension scheme and gratuity?

Q: Two weeks ago, I quit my job as an auditor for an international auditing firm. I was a permanent staff for six years. During the period, one of the deduction on my payslip was my pension scheme. My employer was also contributing towards my pension scheme. After submitting my resignation letter, I was informed that I would get my contributions and naught from my employer. Could you explain more on pension scheme and gratuity please?

Pension is a scheme where the employer and employee contribute towards a fund to ensure that employees save for their retirement. Gratuity is usually contributed by an employer to the employee to appreciate their length of service. It’s often contractual or dependent on policies that vary from one employer to another. Check if your contract provides for gratuity, it’s not an automatic entitlement.

The Retirement Benefits Act of 1997 provides how pension schemes should be managed. That Act established the Retirement Benefits Authority (RBA) for the regulation, supervision and promotion of retirement benefits schemes in Kenya.

The regulations established by the RBA under the Act stated that an employee who leaves employment before attaining the retirement age of 50 years has an option to receive his full contributions and half of the employer’s contributions. The remaining half of the employer’s contribution is retained in the fund and continues accruing interest until the employee attains the retirement age.

There was a legal gazette notice earlier this year which proposed that employees receive their contributions only and not access the employer’s portion until they reach retirement age, however, this was annulled after Parliament rejected it, therefore the status quo remains.

However, there is a process of claiming the pension withdrawal and mostly this takes one month to process after you submit your documents. 

Fill out the forms and submit to your employer who should give you official response on the claim. Inform your employer that you are still entitled to 50 per cent of employer’s contribution. In case they don’t comply, seek redress from the Pension Scheme Trustees. If this does not yield any results, you can contact your pension administrator for guidance before you escalate as a complaint to RBA.

It is your right to access the funds. However, I would advise that you retain the money in the current scheme or transfer the same to your personal pension plan. It will continue earning interest. You should also note that the tax levied on the withdrawal is usually punitive before the retirement age, therefore, you also save when you don’t withdraw the money until retirement age.

There is a school of thought that argues that one should access the money before retirement age to fund income generating projects for the future. Make the choice depending on your current financial needs, after assessing the returns of the projects you intend to invest the money into.

Jane Muiruri - Senior HR Manager, Nation Media Group; [email protected]