The retirement benefits industry in Kenya is composed of the civil service scheme, the National Social Security Fund (NSSF), occupational schemes and the individual pension schemes. The main features of the types of schemes in thecountry are outlined in the table below:-
Scheme TypeCivil Service SchemeNational Social Security FundOccupation al SchemesIndividual SchemesLegal Structure
Act of ParliamentAct of ParliamentTrust DeedTrust Deed
All civil servantsFormal sector workers in companies with 5+Formal sector workers in companies that have schemesIndividuals formal/informalsector join voluntarily
Exempt from the AuthoritySubject to the AuthoritySubject to the AuthoritySubject to the AuthorityThe coverage of the pension schemes is currently estimated at less than 15% of the total labour force. The distribution of membership in the schemes as a proportion of the total membership in retirement benefits schemes in the countryis shown in the table below: The NSSF has the highest proportion of membership at 67% with estimated membership of 800,000 followed by the civil service pension scheme at 22%. The occupational retirement benefits schemes andindividual retirement benefits schemes, which are currently about 1350, account for about 11% of total scheme membership in the country.Prior to 1997, the retirement benefits industry was largely unregulated. The only regulations governing the sector was those inscribed in the Income Tax Act and Trust Laws and these tended to be broad regulations which did notencompass developmental objectives.Some of the problems that the pension industry faced before a clear regulatory framework were put in place and which led to the enactment of the Retirement Benefits Act in 1997 include:• Mismanagement of schemes’ funds.• Schemes were not adequately funded.• Arbitrary investment of funds without independent professional advice.• Records and books were not well kept.In the absence of a regulatory framework the industry was characterized by lack of protection of the interests of members and dominance of sponsors (employers) in scheme affairs. In addition, many schemes were run throughinsurance companies that tended to operate in a non-transparent manner. As a result investment decisions were in many cases made in the best interest of vested parties and not in the interest of members or of the economy as a whole.
Occupational RetirementBenefits Schemes10.4%Individual RetirementBenefits Schemes0.6%Civil Service PensionScheme22.0% National Social SecurityFund67.0%
The RetirementBenefits Act
The Retirement Benefit Act was enacted to provide a regulatory framework for the retirement benefits industry. This regulatory framework was needed to streamline the industry and gain the required confidence from stakeholders andemployees to enable them save more for retirement and contribute towards the national effort of raising the domestic savings rate.The Act created the Retirement Benefits Authority to oversee the industry’s management and development in a prudent and appropriate manner. The Authority’s operations are vested in an independent Board of Directors with amajority private sector representation and the autonomy to run the industry with-out undue state interference.Some of the key requirements introduced in the Kenyan pension reforms that are currently being enforced by the Retirement Benefits Authority include the following:• Retirement benefits schemes are required to be adequately funded and have separate assets independent of the sponsor.• Trustees are responsible for the running of the scheme addairs and are held responsible for any action taken.• All schemes are required by law to appoint an independent fund manager registered by the Retirement Benefits Authority to invest the scheme funds.• It is now mandatory for schemes to appoint an independent custodian registered by the Retirement Benefits Authority to hold financial assets of the scheme and effect all transactions.• Investment of scheme funds is supposed to be carried out as per investment guidelines which prescribe maximum proportions as to the proportion of the scheme funds that can be invested in any particular broad asset class.Since the enactment of the Retirement Benefits Growth, the industry has experienced remarkable growth, with fund managers holding shs 120 billion in retirement benefit assets by September 2005 compared to shs 63 billion inSeptember 2002.
Reason for Growthin the Retirement Benefits Industry
Cases of abuse of scheme assets by trustees or other parties have declined markedly, if not ceased completely, in the recent past as a result of the oversight role which the Authority play, and the “whistle-blowing” role of the variousstatutory service providers. There is also an increased awareness and direct participation of Members in the affairs of the scheme.The growth in the retirement benefits industry is attributed to:• Increased confidence in saving for retirement due to the oversight obligation of the Retirement Benefits Authority;• Increased member aware-ness through mandatory annual statements, mandatory annual general meetings and public education;• Increased member participation as schemes required to have 1/3 (in defined benefits scheme) or fifty percent (in defined contribution schemes) member nominated trustees in their Boards;• Improved investment port-folio returns and diversification as a result of the use of independent investment managers;• Security of scheme assets following the separation of asset custody from the sponsor to independent custodians; and• Greater transparency and accountability through annual audited financial statements and other statutory returns.
Recent Changes in Legislative framework for Retirement Benefits Industry
In order to further protect the interest of the members of retirement benefits schemes and strengthen the development of the industry, the Minister for Finance, introduced a number of changes during the fiscal year 2005/06. Theseinclude:• Members whose benefits are not paid within 90 days after they fall due will earn an interest on their benefits not less than the interest earnings declared by the scheme in the year the payment was due.• The vesting period for employer contributions for employees in individual pension schemes has been harmonized with other occupational schemes at three years.• In cases where a schemes provide for the purchase of annuity on retirement, members will have the opportunity to select their preferred annuity provider.• Pensioners will be entitled to an annual pension increases as advised and determined by the scheme actuary.However, the most important and far reaching change was the introduction of new rules aimed at preservation of retirement benefits. With effect from June 2005, the law was amended to provide that members of retirement benefitsschemes who with-draw from a scheme before attaining retirement age would not be allowed to access the portion of retirement benefits accruing from employer contributions. This portion would be retained in the scheme and investedon behalf of the member and then paid out to the member on attainment of retirement age in accordance with the rules of the scheme.
Rationale for Preservation of Benefits
The objective of retirement benefits schemes is to enable the scheme members to accumulate adequate savings which can be drawn in retirement to enable them maintain fairly same standards of living when they retire from activeworking. Retirement benefits schemes are neat institutionalized tax incentive based vehicles through which members can save some proportion of their income to ensure they have adequate income after the paid employment periods of their lives are completed.Much as the retirement benefits are a form of savings, in this case the longest term individual savings, they are not ordinary savings accounts for members to spend when financial obligation arises. The savings are founded on solidobjectives which should be honoured and maintained. In a country with poor savings culture and financial myopia, it is important that retirement benefits be secured and preserved for survival during old age to avoid poverty during thistime in life.Preservation of retirement benefits means members’ accrued retirement benefits cannot be refunded upon leaving employment even though the benefits are vested in the member. Whereas vesting endows entitlement of benefits rights tothe members, the rights to possess or receive the benefits are earned upon attaining the retirement age stipulated in the scheme rules and not any earlier. The preserved benefits are retained in the scheme and continue to be investedtogether with other members’ contributions in order to grow. Membership to the scheme is not undermined in any way. Owners of preserved benefits retain and are entitled to similar rights as other members. They can elect trustees, beappointed to serve as trustees, and attend to other scheme duties.
Preservation of benefits,inter alia:
• Ensures that the original intent of the employer, to provide retirement benefits, is achieved even if members transfer the money to another scheme;• Ensures retirement benefits remain protected from creditors;• Ensures a larger benefit at retirement due to the power of compounding over a longer period;
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