KISERO: Don’t kill private pension schemes - Daily Nation

Don’t kill private pension schemes to prop up a behemoth like the NSSF

Tuesday October 16 2012



Why is government trying to kill the private pensions industry and prop up the National Social Security Fund?

Why do you want to kill a thriving pensions industry just to give an expanded mandate to an organisation which is always in the media for the wrong reasons? 

The most controversial aspect of the NSSF Bill is the proposal to increase contributions to 6 per cent of an employee’s monthly income, a massive increase from the current level of contributions.

Experience has shown that retirement benefits systems designed to give a State-controlled entity such as the NSSF a big role in the retirement benefits sector, and where mandatory contributions levels are high, just don’t work.

Look at what is happening in Uganda and Tanzania where mandatory contributions to the NSSF has been kept too high? They don’t have a private sector retirement benefits industry to talk of.

Once you force an employer to contribute large amounts to the mandatory scheme, the natural thing to expect is that the employer will opt out of a private scheme and only contribute what it must under the law.

Which employer will contribute 6 per cent to the NSSF and at the same time pay more money to keep its employees in a private pension scheme?

In the Bill, an attempt has been made to camouflage the whole thing by pretending that employers and employees will still have the liberty to opt out of the NSSF.

This is blatant deception. Indeed, the procedure in the Bill for opting out has been made so complex and cumbersome as to discourage employers from doing so.

You have to be vetted by the NSSF and the RBA and made to go through “a reference scheme test” before you are allowed to opt out. And, the Cabinet Secretary in charge of the NSSF will have powers to introduce other regulations.

Clearly, the framers of the Bill wanted to make it easier for employers to choose the NSSF at the expense of occupational schemes.

Mark you, the trend right now is that what employers contribute is much more than the 6 per cent the NSSF Act is proposing. How do you expect companies to behave when they have the leeway to contribute less?

Currently, we have a total of 1,200 occupational schemes registered by the Retirement Benefits Authority with a membership of about 400,000.

As at June 2011, total assets of these schemes amounted to Sh500 billion. These schemes have superior benefits and are run much better than the on by the NSSF.

In addition, there are 54 registered service providers in this sector – fund managers, fund administrators, and custodians. With employers being forced by the Bill to contribute only to the NSSF, we will have killed the businesses of these service providers.

Private retirement benefits schemes play a key role in sustaining our financial markets. This is the money the government has been borrowing through infrastructure bonds to build roads.
We can’t afford to destabilise what works in order to throw more money on what doesn’t.

Admittedly, the management of the NSSF has improved lately. But clearly, these are times to consolidate on gains made, not to expand mandates and start new experiments.

They even say in the Bill that they want to expand benefits to include invalidity pensions, funeral grants, and emigration benefits. Why would the NSSF want to go into areas where others have better capacity and experience?

The NSSF should start by reducing administrative costs to bring down the share of contributions consumed by the salaries paid to a bloated workforce.

Secondly, let the fund clear the huge suspense accounts in its books. As at June 30, 2011, a whopping Sh6.5 billion was in suspense accounts.

Clearly, the Fund is in violation of RBA regulations with regard to keeping accurate records for every member.

Thirdly, the Fund needs to clean up its investments books. The proportion of assets held in immovable property is still way beyond what is stipulated in the guidelines by the RBA.