UNDERSTANDING THE NSSF ACT 2013 HIGHLIGHTS ON THE NEW NSSF ACT

Transcription

1 UNDERSTANDING THE NSSF ACT 2013 HIGHLIGHTS ON THE NEW NSSF ACT 23 January 2014

2 The National Social Security Fund Act, 2013 (the new NSSF Act) of the laws of Kenya was recently gazetted and repealed the previous National Social Security Fund Act Cap 258. This document answers some of the key questions regarding the new NSSF Act. The document has been prepared by Actuarial Services (E.A) Ltd, an actuarial and consulting firm. For further information and details please contact: Actuarial Services (E.A) Ltd 10th Floor, Victoria Towers Kilimanjaro Avenue, UpperHill P. O. Box NAIROBI, KENYA Tel: (0) Cell: (0) (0) Fax: (0) daisy.o@actserv.co.ke evelyn.n@actserv.co.ke

3 SOME KEY QUESTIONS REGARDING THE NEW NSSF ACT 1. When did the new NSSF Act commence? The new NSSF Act commenced on 10 th January However, the Cabinet Secretary responsible for matters relating to social security has through widely circulated communication deferred the implementation of key provisions of the Act to 31st May Who is expected to contribute to the NSSF? Any person employed in Kenya and subject to the Employment Act must contribute to the new NSSF. Every employer in Kenya must also make contributions to the new NSSF in respect of their employees. Existing members of the old NSSF (except for voluntary members) will become members of the new NSSF Pension Fund. 3. Are there any employed individuals exempt from contributing to the new NSSF? Yes. The individuals stated as exempt from contributing to the new NSSF are: i) Persons who are specifically exempt under any International Convention; and ii) Persons who are not ordinarily resident in Kenya employed for periods not exceeding 3 years at any one time and who contribute to a social security fund of any country approved by the Cabinet Secretary. 4. What about public servants, will they also be required to contribute into the new NSSF? Yes. The new NSSF Act requires that all persons subject to the Employment Act become members of the new NSSF. This would mean that all public servants, including the military and police, must contribute into the new NSSF. However, various pension related Acts in respect of public servants may have provisions that exempt certain public servants from contributing to the new NSSF. It is not yet established which of the Acts would take precedence over the new NSSF Act. Page 3

4 5. Can a person who is not required to make contributions into the new NSSF join and make contributions? Yes. Any person not required to contribute to the new NSSF can join and make voluntary contributions at a minimum of KES 200 per month. Voluntary contributions will be debited into the Provident Fund of the new NSSF to form the members Provident Fund Credit. Benefits from the Provident Fund are payable in the form of a cash lump sum when a member qualifies to receive benefits. 6. What is the contribution rate into the new NSSF? An employee is to contribute at the rate of 6% of pensionable earnings while the employer is also to contribute at the rate of 6% of the employee's pensionable earnings bringing the total contribution rate to 12%. These mandatory contributions are debited into the Pension Fund of the new NSSF to form the member's Pension Fund Credit. Benefits from the Pension Fund are in most cases required to be paid in the form of an annuity or income draw-down. 7. Are the contributions to be based on basic or gross salary? The contributions are to be based on ALL emoluments excluding fluctuating emoluments. This would mean that regular, defined allowances such as housing allowance would be included in the determination of pensionable earnings. Fluctuating emoluments such as commissions, bonuses and overtime would however be excluded from the determination of pensionable earnings. 8. Is there a maximum amount that is to be contributed by each employee and employer? The contribution rate is to be based on pensionable earnings upto a maximum of the Upper Earnings. The NSSF has set the current Upper Earnings at KES 18,000. An employee and the employer are not required to contribute on any amount of pensionable earnings above the Upper Earnings. 9. Is the Upper Earnings to be reviewed annually? Yes. The Upper Earnings in each financial year beginning 1 st July is to be reviewed annually. The Upper Earnings at KES 18,000 per month is about 50% of the National Average Earnings. In year 2, 3 and 4, the Upper Earnings will be increased to one time, two times and three times of the National Average Earnings as published in the Economic Survey by the Kenya National Bureau of Statistics. From year 5, the Upper Earnings will be increased to four times of the National Average Earnings. Page 4

5 10. Will contributions earn interest in the new NSSF? Yes. However, there is no minimum or guaranteed interest rate that will be earned on contributions made into the new NSSF. 11. What benefits are payable under the new NSSF? Pension Fund: A member who has contributed into the Pension Fund will be entitled to receive benefits based on their Pension Fund Credit upon: a) Their retirement at age 60, or b) on early retirement from age 50, or c) on retirement due to permanent incapacity; or d) in the event of disability that results in a member being unable to earn a reasonable livelihood. In most circumstances the benefits will only be accessible by buying an annuity from a licensed insurer or be paid as an income draw down. A survivors benefit based on a member's Pension Fund Credit plus a funeral grant of KES 10,000 will also be payable if a member dies before accessing their benefits. A member emigrating permanently from Kenya may also receive his benefit in the form of a cash lump sum. Provident Fund: A member who has been contributing into the Provident Fund shall be entitled to receive as a cash lump sum their Provident Fund Credit upon: a) attaining the age of 50 years; or b) if the member ceases to be self-employed; c) or in the event of permanent incapacity or d) in the event of disability that renders the member unable to earn a reasonable livelihood. A survivors benefit equal to the member's Provident Fund Credit is also payable as a cash lump sum to the beneficiaries of a deceased member. 12. What is an income draw down? An income draw-down is an arrangement where the benefit to a member is paid in the form of regular amounts for example, on a monthly basis. The balance of the benefit that remains in the pension scheme continues to accrue interest. However, the amount of the regular payment is not guaranteed and may be increased or even reduced if investment returns of the pension scheme, amongst other factors, are significantly differently from expected. Page 5

6 The Retirement Benefits Authority ('RBA') has issued guidelines detailing the manner in which income draw-downs may be paid from a pension schemes including the NSSF. 13. What happens to my contributions made into the old NSSF? Contributions that were previously made into the old NSSF will not be transferred to the new NSSF. However, they will continue to earn interest and be paid out as benefits as per the provisions of the old NSSF and in line with any Regulations gazetted by the Cabinet Secretary. 14. If I am a member of my employer's pension scheme or any other scheme registered by the RBA, do I still need to contribute to the new NSSF? Yes. Contributions in respect of pensionable earnings that are up to the Lower Earnings must be made into the new NSSF. The Lower Earnings is currently set at KES 6,000. These compulsory contributions are referred to as contributions. 15. What about contributions in respect of pensionable earnings above the Lower Earnings? An employer will need to write to the RBA to obtain approval to remit contributions into a scheme registered with the RBA in respect of contributions based on pensionable earnings above the Lower Earnings but up to the Upper Earnings. These contributions are termed as contributions. 16. Will the Lower Earnings also be reviewed annually? Yes. The Lower Earnings currently at KES. 6,000 will be reviewed annually to KES. 7,000, KES 8,000 and KES 9,000 in year 2, 3 and 4 respectively. From year 5, the Lower Earnings is to be determined as the average of the minimum monthly basic wage as gazetted by the Cabinet Secretary. 17. Which pension schemes will the RBA consider for approval to receive contributions? A pension scheme that will pay out benefits arising from contributions in a similar manner as provided for in the new NSSF Act will be considered for approval by the RBA. Such a pension scheme must also be registered as exempt by the Kenya Revenue Authority. Page 6

7 18. My pension scheme provides cash lump sum benefits on retirement. Will it qualify for approval? No. If benefits arising from contributions are not provided either as a pension, or used to purchase an annuity from a licensed insurer or paid as an income draw down, then the scheme would not be considered to provide benefits in a similar manner to the new NSSF. However, upon retirement, a member may access one-third of the value of his benefit as a cash lump sum provided that the balance of his benefit is paid as a pension, annuity or income draw down. 19. If I resign or leave the service of my employer before my retirement age, my pension scheme allows me to receive a portion of my benefits as a cash lump sum. Will my scheme qualify for approval? No. The benefits arising from contributions must be retained in the scheme or transferred to the new NSSF or to another scheme approved to receive contributions. 20. What if my pension scheme provides a defined benefit that is based on a formula rather than the contributions made into the scheme? A defined benefit scheme may also be approved to receive contributions if it provides benefits broadly equivalent or better than a Reference Scheme that provides an annual pension at the rate of: 1 80 Three Year Average of Pensionable Emoluments above the Lower Earnings Number of months for which contributions were made An Actuary further needs to certify that a defined benefit scheme meets the minimum standards as specified for the defined benefit Reference Scheme. 21. What if the contributions towards the pension scheme are, say 7.5% each for the employee and employer respectively? Will the benefits still need to be provided in a similar form to those provided by NSSF? Only the benefits arising from those contributions that are upto 6% of pensionable earnings will be required to be provided in a similar form to those provided under the new NSSF. The additional contributions of 1.5% of pensionable earnings do NOT require to be provided in the same form as those provided under the NSSF. Page 7

8 22. What about contributions that are made from pensionable earnings above the Upper Earnings? Likewise, benefits arising from contributions that are made from pensionable earnings above the Upper Earnings will not be required to be paid in the same form as those provided under the new NSSF. Page 8

9 ILLUSTRATIVE CONTRIBUTIONS INTO THE NEW NSSF PENSION FUND The table below shows illustrative contributions that would be payable into the new NSSF Pension Fund. Lower Earnings Upper Earnings Year 1 Year 2 Year 3 Year 4 Year 5 6,000 18,000 Lower Earnings Upper Earnings 7,000 36,000 Lower Earnings Upper Earnings 8,000 72,000 EMPLOYEE MONTHLY CONTRIBUTIONS Lower Earnings Upper Earnings 9, ,000 Lower Earnings Upper Earnings 12, ,000 Pensionable Earnings Employee Employee Employee Employee Employee 5, , , , , , , ,200 50, , ,740 2, ,520 3, ,460 3, ,246 3, , , ,740 2, ,840 4, ,460 6, ,246 6, , , ,740 2, ,840 4, ,940 6, ,886 8,640 EMPLOYER MONTHLY CONTRIBUTIONS Pensionable Earnings Employer Employer Employer Employer Employer 5, , , , , , , ,200 50, , ,740 2, ,520 3, ,460 3, ,246 3, , , ,740 2, ,840 4, ,460 6, ,246 6, , , ,740 2, ,840 4, ,940 6, ,886 8,640 Page 9

10 Pensionable Earnings Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL MONTHLY CONTRIBUTIONS 5, , ,080 1, , ,800 1, ,800 1, ,800 20, ,440 2, ,560 2, ,440 2,400 1,080 1,320 2,400 1, ,400 50, ,440 2, ,480 4, ,040 6,000 1,080 4,920 6,000 1,509 4,491 6, , ,440 2, ,480 4, ,680 8,640 1,080 10,920 12,000 1,509 10,491 12, , ,440 2, ,480 4, ,680 8,640 1,080 11,880 12,960 1,509 15,771 17,280 Notes : 1. Average National Earnings have been assumed at Kshs 36,000 per month. 2 Times of Average National Earnings has been assumed at Kshs 144,000 per month 3. Current average Minimum Monthly Basic Wage has been assumed at Kshs 12,571 per month. Disclaimer Whereas every effort has been made to ensure the accuracy of the information presented in this document, Actuarial Services (E.A) Ltd makes no representations or warranties of any kind on completeness, accuracy or reliability with regards to the information contained in this document and will not be held liable for any action taken by any party based on the information contained herein. Actuarial Services (E.A) Ltd Page 10