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Can Kenya's NSSF handle new weight? Kenya's National Social Security Fund, set up in the 1960s to provide for pensions and other retirement benefits, has lurched from crisis to crisis. Under new legislation, the pot under its control could amount to $2bn annually. Can this body efficiently manage funds of this scale? Aamera Jiwaji has been finding out.

The 1st July deadline has come and gone and there is still no clarification on how Kenya's state-run social security fund will manage annual contributions of $2bn.

Employers and workers unions are usually pitted against each other, but united by their opposition to Kenya's new social security act, the two foes have entered into a marriage of convenience and a total of 28 law suits have been filed against state-run National Social Security Fund (NSSF).

But despite doubts about NSSF's trustworthiness, it is powering ahead with demands for increased monthly contributions.

NSSF was initiated by workers' and employers' representatives in the 1960s to address the problem of those retiring without adequate terminal benefits or income. Members benefited on age, invalidity and death. Contributions were set at 5% for employer and employee, but a monetary ceiling was set, which meant that the real value of the contribution was being eroded by inflation.

While the 1965 Act established a provident fund into which all employees were required to pay a flat rate a month (initially Sh40, then Sh80 and most recently Sh200 ($2.30), the new Act, passed in December 2013, establishes a provident and pension fund.

Membership for all employed persons between the ages of 18 and 60 is mandatory, and offers a retirement pension, an invalidity pension, a survivors' benefit, a funeral grant and an emigration benefit.

Contributions are divided into two tiers. Tier I is based on the minimum wage, as published by the Cabinet Secretary for Labour. Tier II contributions are based on amounts above the lower earnings limit, and employers have the option of contracting out by offering an approved retirement benefit plan with benefits equal to or better than those provided under the NSSF.

Fine print

Under the previous Act, each employer and employee was required to contribute Sh200 ($2.30) a month each. If a person had worked over 30 years, this totals to a paltry Sh72,000 ($820) plus interest income for retirement. According to the new Act, the employer's contribution is 6% of the employee's monthly pensionable earnings and is matched by a 6% contribution by the employee.

The new structure is among the lowest in the region. Tanzania has a 10%-10% ratio; Uganda levies 5% on employee and 10% on employer. Internationally, Kenya is benchmarked close to the US's matching 6.2% contribution by employer and employee.

This new structure translates to Sh360 ($4) a month for Tier I during the first year of implementation, with equal contribution from their employers, and the first increment was scheduled to take effect on 1st July.

A five-year transitional period will take place before the full contribution rate is achieved, during which contributions will increase progressively such that the full 12% will strictly apply from 2018.

It will see minimum contributions under Tier I rise from Sh360 to Sh420 ($4.70) in the second year, and then to Sh480, Sh540 and Sh600 ($6.80) in subsequent years. Meanwhile under Tier II, remittances to private schemes will rise from Sh720 ($8) in the first year to Sh1,740, Sh3,840, Sh5,980 and then Sh8,040 ($91).

This change in legislation relating to social security means that the contributor base for NSSF will have to increase more than five times from 2.4m members currently to 12.7m, which is the working population in Kenya.

This, coupled with the increase in contributions, means that NSSF, which currently receives $13m monthly, will receive contributions of $171m a month in the sixth year, amounting to $2bn a year. This is more than any firm listed on the Nairobi Securities Exchange makes in annual earnings, and makes it one of the richest funds on the continent.

These increased inflows to the NSSF Fund will stimulate capital and money markets towards better returns and investment opportunities. The increased pool of funds may also see government borrow less from international markets, stabilising interest rates, and making it a net lender rather than a net borrower from foreign markets if the fund is managed well.

A downside, however, is that if insufficient investment instruments are available locally, Kenya may need to increase its offshore investment restriction from the current 5%, meaning that money best placed for the national development agenda will leak into other jurisdictions.

These, however, are long-term considerations. Immediate concerns focus on whether NSSF is the right custodian for the country's contributions. The institution has been riddled with fiduciary mischief, and has made investment decisions that have resulted in poor performance of asset growth and losses of billions.

Past trespasses

Many of the concerns stem from its investments in real estate, where the majority of its investment portfolio lies. For instance, a month after the passing of the NSSF Act, COTU called for a probe of the multibillion-shilling tendering scandal at the Tasia project where the NSSF board is alleged to have increased the cost of developing a housing project in Nairobi's Tassia II Estate from $41m to $5701 despite lack of board quorum.

The tender was suspended by Cabinet Secretary for Labour, Kazungu Kambi, and is currently under investigation by Parliament and the Ethics and Anti-Corruption Commission (KACC).

The pensions manager is also facing a chain of legal suits, estimated at $205m, which could see it lose up to a quarter of workers' pension savings. Should it lose these cases, it would require liquidation of a significant portion of its capital to pay debts and may prompt a repeat of pensioners being subjected to long delays when collecting retirement benefits.

NSSF also stands to lose about $22m that it invested in the stock market through Discount Securities, which was placed under statutory management, and is estimated to have lost $34m due to bad investment decisions and doubtful transactions, according to a November 2008 audit conducted by KACC and the Inspectorate of State Corporations.

A second concern about granting the NSSF an even larger pot of money to manage revolves around leadership. Previously, board membership was shared between COTU, FKE and the government, and even then unilateral decisions were being made by government representatives.

The new structure compounds concerns about NSSF's ability to make prudent decisions free of influence from the Executive since absolute discretion has been yielded to a board of trustees, together with the principal secretaries for Finance and Labour. These concerns are underlined by the quick turnover of managing trustees: four in the last five years.

A third concern was the effect of granting the NSSF a monopoly in the provision of pension and social security services in the country since at draft stage, NSSF was to manage both Tier I and II contributions, and the effect this would have on private pension providers.

The opening up of Tier II to the private sector has eased the situation and provoked a scramble between NSSF and private retirement funds for Tier II contributions; the private sector may be forced to up its game if NSSF embraces increased transparency in its dealings.

A related concern is that employers may close down current pension and social security schemes, which obligate them to contribute more than 6% of pensionable earnings.

Concerns such as these continue to thwart the country's upgraded pension sector, even as the NSSF prepares to rake in the billions from the first adjustment. And while Kenya's move towards universal social security is significant in a world where more than 70% lack proper social protection, doubts about the state administrator's management are yet to be addressed. And this will determine whether the NSSF Act 2013 offers Kenya's economy a new lease or just another avenue to fleece taxpayers.

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Membership for all employed persons between the ages of 18 and 60 is mandatory, and offers a retirement pension, an invalidity pension, a survivors' benefit, a funeral grant and an emigration benefit

12.7m

The change in legislation relating to social security means that the contributor base for NSSF will have to increase more than five times from 2.4m members currently to 12.7m, which is the working population in Kenya
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Title Annotation:SOCIAL SECURITY; National Social Security Fund
Comment:Can Kenya's NSSF handle new weight? Kenya's National Social Security Fund, set up in the 1960s to provide for pensions and other retirement benefits, has lurched from crisis to crisis.
Publication:African Business
Geographic Code:6KENY
Date:Aug 1, 2014
Words:1342
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