Category Archives: pension schemes

An Intern can be Richer than his Boss

Young Kenyans don’t realize how rich they are. While they face higher unemployment, and older people ‘hold them back’ from higher paying jobs and leadership roles, they have something in their favour that others don’t -, and that’s  “Time!”

With time, they have longer to save for their retirement, and it only requires a very small savings amount. Stats from the Kulegalega campaign, being done by the Retirement Benefits Authority (RBA), show that, if someone saves Kshs 1,000 per month, and that savings investment earns 10% per year, it will be worth over Kshs 2 million after 30 years. This is not another pyramid scheme or a lucky lotto number – it’s real-life math.

 The answer is in the power of compounding interest. The interest they earn each year grows and is reinvested, to magnify the original investment. In the above examples, the savings a young man or woman makes will only add up to Kshs 360,000 (Kshs 1,000 invested 12 times a year, for the next 30 years). But over 80% (Kshs 1.6 million) of the above amount will come investment income and not from the initial contribution.

It’s more important to save when young, than what the amount that you save. An intern in a company should be able to save Kshs 1,000 per month. But, yes there are some who can, and should save much more than Kshs1,000 per month. If the intern has a boss who earns 10 times more than the intern and who saves 10 times more each month, he will end up with slightly more than his intern, because he started later. The intern’s boss will get slightly more than the intern’s Kshs 2 million even if he earns Kshs 100,000, but only starts to save Kshs 10,000 per month in the 10 years before he retires.

Finally, a common mistake people make when they retire is to start a business. RBA stats also show that 90% of business started by retirees will fail within 2 years. Retirement is not the time to start a business. So start investing and taking risks while you’re young and strong, and put something aside every month to be comfortable in retirement.

Plan For Your Retirement

Kenyans have been saving more each year for their retirements. From about Kshs 50 billion in 2000, assets in the retirements benefits industry have risen to about Kshs 814 billion in 2015. However, the Retirement Benefits Authority (RBA) estimates that fewer than 15% of the population will be secure in their old age.

This low number this probably ties in with the people who were employed in formal sectors.   That is people whose employers enrolled them in occupational pension schemes, and made deductions from their salaries, and remitted amounts for their retirement to be managed at statutory (i.e NSSF) or other pension schemes. Most employers only enroll their employees in NSSF; however, it’s not enough to just contribute to the National Social Security Fund (NSSF) (here’s why) if one wants to have a comfortable, decent retirement, one in which they are independent, and able to enjoy their own pursuits.

retire in style

Kulegalega is a campaign that aims to educate and encourage more young Kenyans to start taking charge and enhance their savings and investment, from a young age, and long before they consider retiring.

While access to pensions services, alongside other financial services like banking, remains a challenge, there are now more opportunities to save with secure service providers that are regulated by the RBA.  It’s also important to demystify the idea young people have that they can’t afford to save, or that they will only be able to invest and save when they are older and have risen in the work place and have higher income. It is important to start saving as soon as possible, and get into the habit of saving today, to enjoy tomorrow.

Kenya Pension Fund Managers: Who does What?

We have four professionals involved in the running of a pension scheme, namely: 

  • Trustees who are responsible for management of the scheme and act in the best interests of the beneficiaries. 
  • Fund Managers to provide investment advice as well as investing the scheme funds.,
  • Custodians for the safe custody of scheme assets and title documents. 
  • Administrators who carry out administrative duties including keeping members records.

The lines above are excerpts from a speech by Edward Odundo, CEO of the Retirement Benefits Authority, at the rebrand and launch, of Liberty Pension Services, one of the leading independent pension fund administrators, which has now rebranded as Enwealth. He also said that the retirement benefits industry assets have grown tremendously from Kshs 50 billion in 2000 to Kshs 814 billion in 2015, and should reach Kshs 1 trillion by the end of 2016.

All the above entities are licensed by the Capital Markets Authority.

$1 = Kshs 100

 

NSSF and SME’s Part II

This weekend, the National Social Security Fund ran an advertisement in the newspapers clarifying amounts that employers and employees will pay now that changes to the NSSF act are legal.

Earlier media, and social media, reports had NSSF taking as much as 12% of an employee’s earnings. But the NSSF ad introduced the phrase pensionable salary on which the deduction is based – so it’s a percent of Kshs. 18,000 (pensionable salary) and so if someone earns Kshs. 100,000 ($1,175 per month) and their employer has no current pension scheme, their deductions are: 

Tier 1

  • Kshs 360 from the employer.
  • Kshs 360 from the employee.

Tier 2

  • Kshs 720 from the employer. 
  • Kshs 720 from the employee.

So the total payment for that employee, that an employer will remit to the NSSF is Kshs 2,160 – and not Kshs 12,000. This still amounts to a payment that is five times what a typical company was making to the NSSF last year (Kshs 400 per month, per employee)  

From a note at Alexander Forbes Financial Services: The effective date (of the NSSF Act) was 10 January 2014, literally giving employers no time to apply for the opt-out. They thus will have to remit both Tier 1 and Tier 2 contributions to NSSF until the opt-out is granted…also that these amounts will increase each year for the next 5 years.

EDIT – Jan 21: The Government has deferred the commencement of the new NSSF Act to the end of May 2014. This means that the contributions to the fund will be made at the old rate.  Read more.

EDIT February 2023: 

Kenya SME Options after the 2013 NSSF Bill

The new NSSF Bill enhances the level of mandatory retirement savings to be made by, and on behalf of, an employee. It classifies the contributions made towards retirement savings into various tiers for which each tier has a different treatment. For instance, the first tier must be contributed into the National Social Security Fund (NSSF) while the second tier may be contributed to a private retirement fund if certain requirements are met.

To illustrate, in year 1, the contributions to NSSF will increase from Kshs 400 (Kshs 200 each done by the employer and the employee) to Kshs 720 (Kshs 360 each done by the employer and the employee).

The balance of the 12% of earnings (6% each done by the employer and the employee) may be contributed to a private retirement fund subject to conditions detailed therein.

Thus, there are various options available for an employer seeking a retirement solution. E.g. for an employer with a staff base of 10, setting up one’s own retirement fund may not be prudent due to time and cost considerations. It is instead advisable that they consider joining an already existing retirement fund under an umbrella arrangement or under a personal pension plan. They are further encouraged to use a fund that is registered by both the Retirement Benefits Authority and approved by the Kenya Revenue Authority. A list of umbrella funds and personal pension plans registered by the RBA can be found at their website.

Lastly, Alexander Forbes has a wealth of experience in structuring retirement solutions that are customized to suit the needs of an SME – and that between our umbrella fund (the Alexander Forbes Retirement Fund) and our personal pension plan (the Alexander Forbes Vuna Pension Plan), we can find an exciting solution for SME’s. We are also pleased to meet with companies and talk further through the changes to the NSSF Act and its impact.

Adapted from Angela Okinda of Alexander Forbes