Kenya's Court of Appeal has given a long-awaited nod to the National Social Security Fund Act, 2013 which will enhance basic social security protection and increase the adequacy of social security benefits paid out by the National Social Security Fund (“NSSF”). The implementation of the Act was delayed since it was challenged in court.
NSSF contributions are now capped at 12% of an employee's monthly pensionable earnings where the employer is required to contribute 6% and the remaining 6% is contributed by the employee. The employer makes direct payments to the NSSF. Employers must apply the new rates immediately and to pay the enhanced contributions by the 9th day of each month.
The Act has also introduced two separate tiers of contributions, a Tier 1 Fund for pensionable earnings up to the lower earnings limit and a Tier 2 Fund for pensionable earnings higher than the lower earnings limit. The lower earnings limit is prescribed as the average minimum monthly basic wage while the upper earnings limit is the level of earnings equal to four times the national average earnings.
For the first year of implementation, the lower earnings limit is KES6 000 while the upper earnings limit is KES18 000. As such, the maximum total monthly contribution in the first year for employees earning up to the lower earnings limit is KES720 monthly while the maximum total monthly contribution for employees earning above the upper earnings limit is KES2 160.
The prescribed upper and lower earnings limit will increase annually until the fourth year of implementation after which the lower earnings limit will be prescribed by the cabinet secretary and the upper earnings limit fixed at four times the national average earnings.
The Act allows employers who wish to pay Tier 2 contributions into a private benefit scheme to opt out of the NSSF in respect of tier 2 contributions and instead register for a private contracted-out pension scheme. Employers cannot opt out of the Tier 1 contributions for all employees.
Employers who wish to opt out of the NSSF Tier 2 contributions are required to submit a written application to the Retirement Benefits Authority. The private contracted-out scheme must meet certain prescribed requirements such as providing benefits that are broadly equivalent or better than the benefits provided by the NSSF scheme to members at a normal pension age and continuing for life, in order to qualify to receive Tier 2 contributions.
The expectation is that the higher contributions to the scheme will facilitate better returns on pension savings to enhance social protection and contribute to the country's inclusive growth.
Reviewed by Mahesh Acharya, an Executive at the ENSafrica Kenya office.
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