PENSION ARRANGEMENTS &

OVERVIEW

Presented by: David Nyambok

Course Outline
1. PROVIDING FOR RETIREMENT
The Needs of the Employee in Saving for Retirement
The Options for Retirement Saving
Employee participation in Saving for Retirement

2. TYPES OF PENSION SCHEME IN KENYA

Occupational schemes
State government pension schemes
Individual pension plans
Gratuity
Course Outline….. Cont
3. JOINING AND CONTRIBUTING TO A PENSION SCHEME IN KENYA
Joining
Contributions
AVC

4. TAXATION AND REGULATION OF PENSION BENEFITS

Current pension tax regime
Administration of the scheme
Benefits tax computations
Income tax act on pensions
Course Outline….. Cont
5. RETIREMENT BENEFITS
Paying pensions
Retirement Benefits and options
Retirement on special cases (Ill Health, Death)
Transferring of benefits
Annuity and Income Drawdown

6. PRIVATE PENSION ARRANGEMENTS – TYPES AND DESIGN

Concept of Trust and Trustee
Group and Individual Personal Schemes
Occupation Schemes
Multi –employer Schemes
Course Outline….. Cont
7. PENSION ARRANGEMENTS IN EAST AFRICA - LEGISLATIVE
Legislations governing pensions
Pension arrangement and designs
Benefits provisions
Legislative reforms
8. SCHEME ADMINISTRATION
Contributions
Statement issuance
Agreements
Service providers
Benefit Computation
9. PUBLIC PENSION ARRANGEMENTS – TYPES AND DESIGN
Public servants pension schemes
NSSF
Lapfund
Laptrust
Cash transfers
NSSF Act
 ORIGIN OF PENSIONS FUNDS
• Pensions were initially intended as extra compensation meant to
entice people to enlist into the military. As early as 1636, before the
colonies were united as the U.S., the Plymouth colony offered a
pension for those who were disabled as a result of defending the
colony from the Indians (Native Americans).
• In 1789, the U.S. federal government passed legislation assuming full
responsibility for making the pension payments to disabled veterans
• In 1818, benefits expanded to all veterans for life.
• Then came the corporate pension in the U.S. was established by the
American Express Company in 1875.
• Pensions became the most popular during World War II. During this
period, workers were signing up for the draft instead of signing up for
jobs.
 PENSIONS FUNDS IN KENYA
• In 1927 – Colonizers established a pension system for Europeans in Kenya.
• In 1932 officially opened to Non-Europeans Civil Servants where pension
benefits and other allied benefits were paid
• In 1946 the Pensions Act (Cap. 189), of the laws of Kenya, came into operation
in its present form.
• After World War II big Commercial firms established in Kenya opened up pension
funds
• In 1965 NSSF Act was established by an act of parliament (DC)
• In the late 60’s after independence and early 70’s significant number of
employers then established pension arrangements mostly DB
• In 1977 the Widow’s and Orphan’s Pensions Act was established
• In 1997 the Retirement Benefits Act was established by an Act of parliament
• In 2000 the Occupational Pension Scheme Regulations established
• In 2020 the Umbrella Regulations established
 Purpose of Establishing a Retirement Scheme
1. Benefits to members on leaving service.
2. Benefits to members on attainment of retirement age.
3. Deferred compensation.
4. Stabilize financial wellbeing of retirees.
5. Provide financial protection and relief to members’ dependents on death in
service.
6. Provide disability benefits or ill health.
7. Government wants to enhance welfare of society.
8. Employer provides it for competitiveness.
9. Entice employees to commit and perform.
10. Grow the local economy
 The period of one’s
life during which
he/she is no longer
working, formally or
What is informally.
Retirement
Have you thought
about retirement?

Retirement Benefits are a type savings

What is Saving?
• Saving is putting aside for future use rather than spending it
immediately.

• Saving is a component of:

Saving = Income not spent + Interest

Income not spent:- What you earn/receive from employment or

business and put aside for future use.
Interest:- What would be received over and above the income
not spent. (In some cases there is little to no interest)
Why should you Save?

Emergencies Retirement Buying a House

Invest Luxury (Vacation, Car ……

Education
Types of Saving?

Short term saving: These Medium term saving:

Long term saving: These
are savings done for a These are savings done for
are savings done for a
period less than two years. periods between two years
period more than five years.
e.g savings to purchase car, to five years. e.g savings to
e.g savings to your
phone, furniture, purchase a house, sacco,
retirement, college fees….
emergencies…. personal….
Retirement Savings

How much do you thing you need to retire comfortably?

• Good guide is between 60% to 75% of your current salary.

• Why 60% to 75%?
i. Certain expenses are expected to have reduced
(transport, school fees, rent ….etc); and
ii. You pay less tax given preferential tax treatment as a
pensioner.
Retirement Planning
Why Should employers/employees consider planning for retirement
1. Living Longer/ Longevity.
2. Uncertainty of the future (loss of job, collapse of company……)
3. Unforeseen and increased medical costs.
4. Impact of inflation on time value on money.
5. Estate planning
Factors need to consider when preparing for retirement planning
1. Decide the age at which you wish to retire.
2. Decide the income you wish to receive (NRR)
3. Current investment Environment/Market
4. Average rate of inflation
5. Other investments and plans
Projection Tool Illustration
Illustration using the Retirement Projection Tool
• Age : 35 years
• Current Salary : 70,000 per month
• Avg rate of salary increase: 7% p.a.
• Avg rate of return : 10% p.a
• Avg inflation rate : 5% p.a

Retirement objective:
• Retirement at 60 years (25 years to save for retirement)
• Pension of 75% of pre-retirement salary

Assumptions:
• No other savings
• No accumulated fund credit prior to joining the scheme

C:\Users\Dnyambok\Desktop\Q3 2020\Projection tool.xlsm

Common mistakes made when Saving?
• Starting to save too late.
• Not preserving retirement benefits when changing
jobs.
• Retiring too early.
• Investing incorrectly.
• Not saving enough.
• Not increasing your savings inline with increase in
salary.
• Using savings for the wrong purpose. e.g gambling,
consumption…….
 Options for Retirement Saving
• Social Security Fund (NSSF)
• Government Sponsored Schemes
• Occupational Pension Scheme (Umbrella Schemes)
• Individual Pension Plans
• Gratuity Plans
• Other Products such as Annuities, Post-Retirement Medical
Schemes, Income Drawdown Funds…
➢89% of members retiring at 55 years of age are dependent on
their family.

➢20% is the average Net Replacement Ratio (NRR) of

members.
Parting Short
Rules of Long-Term Saving
1. Never confuse long term savings with short term
savings
2. Pay yourself first every month
3. Harness the power of compound interest
4. Never break into the vault
 Type of Pension
Schemes in Kenya
Legislation Governing Pension Schemes

• The Kenyan Constitution

• Retirement Benefits Act/ Regulations
• Income Tax Act
• Employment Act
• Trust Deed and Rules
• Pensions Act
• NSSF Act
The Role of Retirement Benefits Schemes
➢To provide financial resources after retirement

➢To provide dependents with relief in the event of death

➢Important benefit from employee engagement perspective

➢Promote Savings Culture

➢Tax Benefits for Employee and Employer

The Three Pillar System
• Pillar I – The Statutory Retirement Benefits Schemes:
❑ Provides a retirement planning option for the formal sector;
❑ Characterized by low contributions rates or replacement ratios and
hence inadequate benefits;
❑ Forms the basis on which the country's pension reforms has been
premised.

• Pillar II – Occupational Retirement Benefits Plans:

❑ Compliments the NSSF;
❑ Exhibits low coverage due to its voluntary nature of establishment;
❑ Has great tax incentives to encourage membership and establishment.

• Pillar III – Voluntary Retirement Savings Plans:

❑ Compliments both of the above;
❑ Exhibits voluntary contributions by members;
❑ Individual Personal Pension Plans.
The Kenyan Structure

NSSF
Statutory
Civil Servants
Retirement Armed Forces
Benefits Local Authorities
Schemes

Occupational Pension Scheme Voluntary

Retirement
Individual Pension Scheme Benefits
Schemes
The General Administrative Structure of a Retirement
Benefits Scheme
1. Key Stakeholders – Employee and Employer
2. Governance & Management – Board of Trustees
3. Primary Providers – Administrator, Fund Manager and Custodian
4. Regulatory Authorities – RBA, KRA and UFAA
5. Other Providers – Auditor, Legal Advisors, Property Managers
6. Societies - ARBS
Factors to consider in putting together a Retirement
Benefits Scheme
Scheme
Financing
(Funded and
Unfunded)

Scheme Scheme
Investment Contributions
Design (Contributory/
(Segregated / non-
Guaranteed) Scheme contributory)
Structure /
Design

Scheme Benefit
Structure Scheme plan
(Pension / (DB/DC)
Provident)
Design Plan
Defined Benefit Schemes:
• Promises a defined retirement benefit based on an actuarial formula (Actuarial
Factors, Years of service and Last Pensionable salary)
• Cost of benefit is established through an actuarial valuation;
• Investment risk is therefore borne by the employer;
• Current trend worldwide is conversion of DB Schemes to DC Schemes

Defined Contribution Schemes:

• Provides for a definite contributions towards benefit accumulation;
• Value of benefit is therefore dependent on contributions remitted and
Investment return;
• Investment risk is borne by the members of the Scheme;
• Very favorable to Employers as cost of retirement provision easily known.
Benefit Structure
Provident funds:
• Upon retirement, a member is allowed to access up to 100% of accumulated benefit
as a cash lump sum;
• If the Trust Deed and Rules is drafted appropriately, a member may alsoelect
to purchase a pension or Income Drawdown.

Pension schemes:
• Upon retirement, a member is only allowed to access up to a maximum of1/3
of the accumulated benefit as a cash lump sum;
• The remaining portion is converted into a pension (usually payable for life);
• The member may also opt for an income draw down over a minimum termof 10
years provided that no more than 15% of the total fund may be withdrawn within
any one year;
Benefit Structure
Provident funds:
• Upon retirement, a member is allowed to access up to 100% of accumulated benefit
as a cash lump sum;
• If the Trust Deed and Rules is drafted appropriately, a member may alsoelect
to purchase a pension or Income Drawdown.

Pension schemes:
• Upon retirement, a member is only allowed to access up to a maximum of1/3
of the accumulated benefit as a cash lump sum;
• The remaining portion is converted into a pension (usually payable for life);
• The member may also opt for an income draw down over a minimum termof 10
years provided that no more than 15% of the total fund may be withdrawn within
any one year;
Scheme Investment Design
Segregated Guaranteed
Capital not guaranteed Capital guaranteed

Income not guaranteed Minimal income guaranteed

Trustees involved in Investment decisions Trustees do not have say in investment

decisions

High risk, high return Low risk, moderate return

Administration Structure
Standalone:
• Standalone Fund is a fund established by an employer for its employees.
• Costs tend to be slightly higher
• Trustees totally involved in management.

Umbrella:
• An Umbrella Fund is a fund which multiple and unrelated employers may join
• Set up mainly by financial institutions
• Umbrella Fund will benefit from economies of scale and risk pooling which
potentially translates to significant reductions in overall costs
• The employer will not be able to appoint Trustees to the umbrella
• Management fully done by Umbrella Fund Trustees
Gratuity
Gratuity is a monetary gift from an employer to an employee especially for
services rendered. The Employment Act provides for its definition and also for
instances when it should be given.

Gratuity is a lump sum amount that an employer pays an employee if he or she

retires or resigns from employment. An employee does not contribute any portion
of her salary towards this amount. Gratuity is only paid out at the time of
retirement or resignation, and in the event of death or being rendered disabled
because of an accident or illness.
Gratuity VS Pension
 JOINING AND
CONTRIBUTING
TOWARDS A PENSION
SCHEME
JOINING AND CONTRIBUTING TOWARDS A PENSION SCHEME

Steps to Establishing and Joining the Scheme

1. Employer Resolution to open up Scheme
2. Actuarial Review
3. Trust Deed and Rules
4. Appointment of Trustees
5. Registration of Scheme with Retirement Benefits Authority
6. Commencement of Contributions
7. Appointment of Service Providers
1. Employer Resolution
The sponsor (employer) should resolve to start the retirement benefits scheme.
In the case of a limited company, a board resolution is required. It is important
that the employer originates the idea or at least buys the idea from the
employees because of the financial obligations on the employer.

2. Actuarial Review
The Actuarial Review is the process the general financial potential of the scheme
is looked into. This is where the employer decides the Scheme Plan (DB or DC
or Hybrid), Scheme Benefit Structure (Provident or Pension) and Scheme
Investment Design.
The purpose of the actuarial investigation is to advise on the design and level of
contributions that will achieve and sustain the required level of scheme solvency
and ability to meet its future obligations.
3. Trust Deed and Rules
The Retirement Benefits Act requires that schemes should be established by an
irrevocable trust, and that the scheme documents be professionally prepared.

A scheme will therefore be a ‘trust’ which can be defined as ‘an equitable

obligation, binding a person (a trustee) to deal with property over which he has
control (the trust property) for the benefit of persons (beneficiaries) of whom he
may himself be one’.

It contains rules and operational details of the scheme and everything that a
member needs to know about the scheme.
4. Appointment of Trustees
After the preparation of the trust deed and therefore the establishment of the right nature
and design of the scheme, the sponsor (employer) can then appoint trustees, one-third of
whom must be nominated by the members in a defined benefit scheme.

In a contribution scheme, half of them must be member-nominated.

In the event that the employer does not want to appoint member trustees, he can appoint a
corporate trustee (a body corporate) to run scheme affairs.

Trustees are classes of persons appointed under an irrevocable trust to hold the scheme
fund in trust for the benefit of members. The regulations provide that there should be at
least 3 trustees (unless a corporate trustee is appointed).
4. Appointment of Trustees (Cont…)
On the acceptance of the trust, the trustees have the following duties:
(i) A fundamental duty to administer the scheme in line with the trust deed and rules, which must be
within the provisions of the Retirement Benefits Act.
(ii) To keep proper books of accounts and allow the beneficiary and the sponsor to inspect them.
They must also, on demand, give the beneficiary information and explanations as to the investments
and dealings with the trust property.
(iii) To liaise with service providers who are important players in the running of the scheme.
(iv) To assume the duties of a trustee for as long as the period of the trusteeship. The law does not
distinguish between active and passive trustees, and a trustee is fully liable to the beneficiaries for
any loss that occurs even where the management has been delegated to a third party.
(v) To be bound by the decisions of the trust. Unless stated otherwise in the trust deed, all decisions
of the trustees must be made by all of them. If the rules provide for a majority decision, then that
decision binds the minority.
(vi) To be jointly and severally liable for the decisions of the Trust. An aggrieved party may elect to
sue one, some, or all of the trustees for redress.
5. Registration of the Schemes with the Authority
Registration of schemes is mandatory and free for schemes. It needs to be noted that it is an offence
to operate a scheme without registration. This, on conviction, may attract a maximum fine of Kshs.
500,000, imprisonment for a term of two years, or both.

The Authority issues a certificate and keeps a register of all the registered schemes. Application
forms for registration are available at RBA offices. These forms can also be downloaded from the
RBA website at www.rba.go.ke

The following attachments must accompany the form for registration of a new scheme:
(i) Trust deed and rules;
(ii) Fund management agreement;
(iii)Custody agreement;
(iv)Actuarial certification (defied benefit schemes only); and
(v) Administration agreement. The Authority shall consider the application and notify the applicant in
writing whether or not the scheme is eligible for registration. If a scheme satisfies all the
requirements for registration, the Authority will forward to the scheme a certificate of registration.
6. Commencement of Contributions
After registration of the Scheme with the Authorities (RBA & KRA) and appointment of service
providers. The employer will remit employer and employee contributions. Additional Voluntary
Contributions also considered.

7. Appointment of Service Providers

The Retirement Benefits Act specifies various key parties who are required in the establishment and
operation of a retirement benefits scheme. The principal parties are members, sponsors and trustees.
However, there are also other important but secondary parties in this regard. These include
administrator, managers and custodians. Finally, other professionals will often be required to prepare
statutory reports and documents for schemes such as auditor, actuaries, legal advisors etc.
i. The Fund Manager
The manager advises the trustees on available investment vehicles and expected risk and returns for each.
The manager makes tactical asset allocation decisions based on the strategic asset allocation contained in
the investment policy and RBA guidelines.
The manager also undertakes research at company, sector and country levels, manages the portfolio so as
to ensure liquidity and thus ability to meet the scheme’s needs, and provides accurate and timely periodic
reports to the trustees and the Authority on scheme holdings and transactions.
5. Registration of the Schemes with the Authority
Registration of schemes is mandatory and free for schemes. It needs to be noted that it is an offence
to operate a scheme without registration. This, on conviction, may attract a maximum fine of Kshs.
500,000, imprisonment for a term of two years, or both.

The Authority issues a certificate and keeps a register of all the registered schemes. Application
forms for registration are available at RBA offices. These forms can also be downloaded from the
RBA website at www.rba.go.ke

The following attachments must accompany the form for registration of a new scheme:
(i) Trust deed and rules;
(ii) Fund management agreement;
(iii)Custody agreement;
(iv)Actuarial certification (defied benefit schemes only); and
(v) Administration agreement. The Authority shall consider the application and notify the applicant in
writing whether or not the scheme is eligible for registration. If a scheme satisfies all the
requirements for registration, the Authority will forward to the scheme a certificate of registration.
i. The Fund Manager (Cont…)
The general obligations of the manager include:
a) Submitting quarterly investment reports;
b) Sitting in attendance in board of trustees’ meetings convened to discuss an agenda involving investment
of scheme funds;
c) Issuing instructions on behalf of trustees to custodians to effect payments;
d) Keeping or causing to be kept records and statements of investment transactions; and,
e) Whistle-blowing, including, with regard to contributions remittance outstanding for more than 30 days.
ii. The Custodian
The custodian must be a corporate body registered by the Authority - almost always a bank - and is
mandated to:
(i) Hold all the assets of the scheme including cash, securities, title documents and deeds;
(ii) Settle all transactions in accordance with the instructions received from the manager;
(iii) Receive and record all dividend, interest and other income due to the scheme and credit them to the
scheme; and,
(iv) Provide accurate and timely periodic reports to the trustees and the Authority on holdings and
transactions.
iii. The Administrator
The administrator must be a corporate body or a natural person registered by the Authority, and is mandated
to:
i. Carry out daily administration of the affairs of the scheme in accordance with the provision of the Act,
scheme trust deed and rules, and keep scheme records;
ii. Co-ordinate meetings, submission of regulatory documents, facilitation of entry into and exit from the
scheme, prepare scheme budgets, training of trustees, members, and sponsors; and,
iii. Provide data to service providers, give statements and computation of benefits, and conduct whistle-
blowing as necessary.
iv. Other Service Providers
Schemes may from time to time make use of other relevant professionals whose services are not regulated
by the Authority. These include lawyers, actuaries and auditors.
• The actuaries play an advisory role as to the set-up of the scheme fund and conduct periodic reviews on
funding adequacy of the scheme in relation to its benefits liabilities.
• The legal advisor's roles is setting up and review of the trust deed and the rules of the scheme.
• The auditors periodically review the financial records of the scheme.
 TAXATION AND
REGULATION OF
PENSION SCHEME
TAXATION AND REGULATION OF PENSION SCHEME
Saving in a registered retirement benefits scheme is one sure way of keeping your
savings safe from the tax man. Schemes registered by the Kenya Revenue Authority.

The Income Tax Act provides the following allows a tax relief up to a maximum of Kshs.
240,000 per annum or Kshs. 20,000/- per month for amounts contributed to a registered
scheme.

At withdrawal or retirement, you are also entitled to receive tax free lump sum payment from
the fund of Kshs. 60,000/- for every year of membership in the scheme up to a maximum of
Kshs. 600,000/-. The tax on the excess amount is then calculated as per the tax brackets
applicable for various age groups and preferential conditions.

In addition to this members earning pension/annuity/income drawdowns from a pension

scheme are entitled to receive tax free lumpsum of Kshs. 25,000/- per month (Kshs.
300,000/- per annum)
TAXATION AND REGULATION OF PENSION SCHEME
The tax benefits that members do enjoy being in a pension scheme are as follows
1. Tax- Free Contributions – contributions by both employee and employer to registered schemes are
tax deductible subject to the below limits;
– In respect of the employees’ contributions, it is lower of 30% of pensionable income or the
first 240,000/= per annum
– In respect of the employers’ contributions, it is 30% of the aggregate of pensionable income
of the members or 240,000/= per annum, times the number of members whichever is less
reduced by the employees’ deductible contributions.
– Tax Free Investment Growth – The investments income earned by the registered funds is also
tax exempted in its entirely
2. Tax Free Benefits – up to 600,000/= lump sum, is tax exempted or 60,000/= for every year of
pensionable service, for annuity up to 300,000/= pension per annum or 25,000/= per month is also
tax exempt.
ILLUSTRATION ON TAX FREE CONTRIBUTION
Member A Member B Member C

Basic salary 100,000.00 100,000.00 100,000.00

Allowances 50,000.00 50,000.00 50,000.00
Gross pay 150,000.00 150,000.00 150,000.00

Personal Relief 2,400.00 2,400.00 2,400.00

Pension Contributions - 10% 10,000.00 10,000.00 -
Additional Voluntary Contribution - 10% 10,000.00 - -
Statutory - NSSF Contributions 200.00 200.00 200.00

Non taxable 22,400.00 12,600.00 2,600.00

Taxable income 127,600.00 137,400.00 147,400.00
Tax payable 33,063.35 36,003.35 39,003.35

Net salary 94,536.65 101,396.65 108,396.65

WITHHOLDING TAX BENEFITS BANDS

The tax bands for person accessing their benefits before 50 years of age:
 For those who terminate their membership in the scheme before the expiry of
fifteen years, the tax-free amount is Kshs. 60,000 for every year of
membership up to a maximum of Kshs 600,000.
 The amount above the tax free is taxed at the following graduating bands:

Amount in Kshs. Withholding Tax

First 288,000 10%
Next 200,000 15%
Next 200,000 20%
Next 200,000 25%
Above 888,000 30%
ILLUSTRATION OF TAX COMPUTATION
Details Frequency/Amount
Years of Service 5
Total Benefit 3,000,000.00
EE 100% and ER 50% 2,000,000.00
Deferred Benefits 1,000,000.00
Tax Free 300,000.00
Applicable Tax Free 200,000.00
Deferred Tax Free 100,000.00
Taxable amount 1,800,000.00

Tax Bands Benefit Withholding Tax Rates Withholding tax amounts

First 288,000 288,000.00 10% 28,800.00
Next 200,000 200,000.00 15% 30,000.00
Next 200,000 200,000.00 20% 40,000.00
Next 200,000 200,000.00 25% 50,000.00
Above 888,000 912,000.00 30% 273,600.00
Total 1,800,000.00 422,400.00

Net Benefit Payable 1,377,600.00

PREFERENTIAL TAX BENEFITS BANDS
 The current preferential tax treatment for members who leave a retirement
benefit scheme after 15 years of service or those who retire after the age of
50 years or those who retire at any time on grounds of ill health is such that
the first Kshs. 60,000.00 for every year of membership up to a maximum of
Kshs 600,000 of lump sum payment is tax free.
 The amount above the tax free is taxed at the following graduating bands:

Amount in Kshs. Withholding Tax

First 400,000 10%
Next 400,000 15%
Next 400,000 20%
Next 400,000 25%
Above 1,600,000 30%
ILLUSTRATION OF TAX COMPUTATION ON LUMPSUM
Details Frequency/Amount
Years of Service 12
Total Benefit 3,000,000.00
Annuity/ Drawdown Benefit 2/3rd 2,000,000.00
Lumpsum Benefit 1/3rd 1,000,000.00
Tax Free 600,000.00
Taxable amount 400,000.00

Tax Bands Benefit Withholding Tax Rates Withholding tax amounts

First 400,000 400,000.00 10% 40,000.00
Next 400,000 - 15% -
Next 400,000 - 20% -
Next 400,000 - 25% -
Above 1,600,000 - 30% -
Total 400,000.00 40,000.00

Net Benefit Payable 960,000.00

ILLUSTRATION OF TAX COMPUTATION ON PENSION
• Annual tax-free allowance for pension up to K Shs 25,000 per month (or Kshs.
300,000 per annum).
• For pensioners above the age of 65 no tax is payable on pensions in payment
Amount in K Shs Withholding Tax
First 33,333.33 10%
Next 33,333.33 15%
Next 33,333.33 20%
Next 33,333.33 25%
Balance 30%
Calculation of Pension Tax
Taxation of Monthly Pension Amount (KShs)
Monthly Pension 40,000.00
Tax Free Amount 25,000.00
Taxable Amount 15,000.00
Tax @10% 1,500.00
Tax Payable 1,500.00
Net of Tax 38,500.00
ILLUSTRATION ON TAX FREE CONTRIBUTION
Member A Member B Member C

Basic salary 100,000.00 100,000.00 100,000.00

Allowances 50,000.00 50,000.00 50,000.00
Gross pay 150,000.00 150,000.00 150,000.00

Personal Relief 2,400.00 2,400.00 2,400.00

Pension Contributions - 10% 10,000.00 10,000.00 -
Additional Voluntary Contribution - 10% 10,000.00 - -
Statutory - NSSF Contributions 200.00 200.00 200.00

Non taxable 22,400.00 12,600.00 2,600.00

Taxable income 127,600.00 137,400.00 147,400.00
Tax payable 33,063.35 36,003.35 39,003.35

Net salary 94,536.65 101,396.65 108,396.65

RETIREMENT
BENEFITS
RETIREMENT BENEFITS
Members are likely to exit from their retirement benefits scheme:
1. On leaving the Employer’s Service (resignation,
retrenchment or dismissal)
2. At retirement (ill health, early or normal retirement)
3. In the event of death
RETIREMENT BENEFITS

1) Ill health benefit

2) Withdrawal benefits (termination, resignation, dismissal, etc.)
o Before attainment of age 50yrs
o After attainment of age 50yrs
3) Immigration
4) Early retirement
5) Normal Retirement
6) Late Retirement
7) Death in Service
8) Death in Deferment
9) Death in service
 PRIVATE PENSION
ARRANGEMENTS
(TYPES AND DESIGN)
What is
a
Trust?
CONCEPT OF TRUST
❑Schemes established through an irrevocable Trust
❑A Trust Deed and Rules is developed to legally bind all the parties involved
❑Trustees are appointed to hold the trust assets in trust on-behalf of scheme
beneficiaries
❑Registration with RBA and KRA for Tax Exemption
❑Trustees serve a maximum renewable term of three years
❑Board certification – Trustee Development Program Kenya
❑Trustees required to meet at least semi-annually with the service providers
❑Compliance with Governance Guild-lines 2018
WHY SHOULD A RETIREMENT SCHEME ESTABLISH A TRUST

➢Security

➢Tax relief

➢Equity
CREATION OF A TRUST
❑Property is held by one or more persons known as “Trustees”,
for the benefit of others, who are known as “Beneficiaries” for
the purposes specified by the “Trust” instrument

❑Trust Deed between the sponsoring Employer and Trustees

❑Deed
❑Supplemental or amending deeds
❑Rules – Structure of Scheme

❑Persons or classes of persons given benefit by the Trust

document
CREATION OF A TRUST
❑Property is held by one or more persons known as “Trustees”,
for the benefit of others, who are known as “Beneficiaries” for
the purposes specified by the “Trust” instrument

❑Trust Deed between the sponsoring Employer and Trustees

❑Deed
❑Supplemental or amending deeds
❑Rules – Structure of Scheme

❑Persons or classes of persons given benefit by the Trust

document
WHO IS A TRUSTEE
A trustee is a person or firm that holds and administers property or assets
for the benefit of a third party. A trustee may be appointed for a wide variety
of purposes, such as in the case of bankruptcy, for a charity, for a trust fund,
or for certain types of retirement plans or pensions.

A good Trustee needs:

- Common sense
- Integrity/Prudence
- Knowledge of his duties, discretions and powers
WHO IS A TRUSTEE
A trustee is a person or firm that holds and administers property or assets
for the benefit of a third party. A trustee may be appointed for a wide variety
of purposes, such as in the case of bankruptcy, for a charity, for a trust fund,
or for certain types of retirement plans or pensions.

A good Trustee needs:

- Common sense
- Integrity/Prudence
- Knowledge of his duties, discretions and powers
LAW RELATING TO TRUSTEE

The law relating to trusts is made up of:

- Retirement Benefits Act 1997 and Retirement Benefits
Regulations 2000 (as amended)
- Income Tax Act Cap 470 and Income Tax (Retirement
Benefits) Rules
- Trustee Act
- NSSF Act
- Case law
TYPES OF TRUSTEES
Trustees may be

❑a number of individuals appointed by the employer, some of whom may also

be elected by the members

❑independent individuals or a professional trustee company, unrelated to the

employer

❑a corporate trustee established by the employer

❑a custodian trustee

❑Or any combination of the above

TYPES OF TRUSTEES
Trustees may be

❑a number of individuals appointed by the employer, some of whom may also

be elected by the members

❑independent individuals or a professional trustee company, unrelated to the

employer

❑a corporate trustee established by the employer

❑a custodian trustee

❑Or any combination of the above

WHAT WILL A WARRANT A TRUSTEE TO BE DISQUALIFIED?
❑ Those sentenced to imprisonment for 6 or more months

❑ Bankrupt individuals

❑ Those previously involved in the management or

administration of a scheme which was deregistered for any
failure on the part of the management or the administration
thereof

❑ Those disqualified under any other written law or whose

appointment would be detrimental to the scheme.
TRUSTEE BOARD REPRESENTATION

Defined Benefit

❑Minimum 3 trustees, unless corporate trustee

❑At least one-third of trustees to be nominated/ elected by

members

Defined Contribution

❑Minimum 4 trustees, unless corporate trustee

❑At least half of trustees to be nominated / elected

by members
APPOINT OF TRUSTEES (RBA)
➢ Minimum of two trustee meetings Per Annum
➢ No more than six months between meetings
➢ Three-year term of office renewable once
➢ Need clear nomination/election process
➢ Chairperson elected by Trustees from amongst their number
➢ Trust Secretary selected by the Trustees (may be Trustee or Not)
➢ Relationship between Trustees and Employer
➢ Independence of Trustee’s role
➢ Potential conflicts of interests
➢ Protection of trustees against victimization and discrimination
➢ Compliance Legal Notice 99 and 101 of 2016 (TDPK)
➢ Compliance Good Governance Guidelines 2018
DUTIES, POWERS, RESPONSIBILITIES

What’s the Difference?

➢ Duty : A task which a person is bound to perform for
moral or personal reason
➢ Power : The authority to do something
➢ Responsibility : A thing for which a person is accountable
➢ Discretion : The power to make a choice
DUTIES OF A TRUSTEE
It is the duty of a Trustee…
• To act in accordance with Trust Deed and Rules
• To act in the best interests of their beneficiaries
• To act with reasonable care
• To act impartially amongst various classes of beneficiaries
• To act gratuitously
• To act jointly
• To ignore their own interests when these conflict with their duties as Trustees
• To familiarize themselves with the terms of their Trust
• To manage the scheme effectively and efficiently
DUTIES OF A TRUSTEE
It is the duty of a Trustee…
• To disclose anything which may lead you to exercise discretionary
powers unfairly
• To pay the right amount of benefits to the correct recipient
• To collect all money due to the scheme
• To invest the Trust Assets
• To prepare accounts
• To obtain expert advice in areas where they are not themselves
expert
• Be aware of relevant legislation and comply with it
DUTIES OF A TRUSTEE –RETIREMENT BENEFITS ACT 1997
• Ensure proper management of Scheme in accordance with
Act/Regulations/Scheme Rules/directions of CEO of RBA

• Ensure management of scheme is carried out in the best interests of

members and sponsors

• Report to CEO of RBA any unusual occurrences that may be detrimental

to the scheme

• Report to CEO of RBA if any contributions into a scheme fund remain due
for a period of more than 30days

• Appoint advisers

• Separate banking
DUTIES OF A TRUSTEE –RETIREMENT BENEFITS REGULATIONS
• Administering scheme

• Keeping proper records

• Liaising with the RBA

• Updating sponsor(s) at least quarterly

• Appointing advisors

• Ensuring correct contributions collected and remitted

• Regular communication to members

• Issuing annual benefit statements

• Ensure scheme documents professionally prepared

• Trustees can delegate these functions, but not the responsibility

POWERS OF A TRUSTEES
• To act by majority
• To augment benefits
• To invest the Trust Assets (covered in investment session)
• To insure benefits, where necessary
• To borrow monies
• To amend the Trust Deed and Rules
• To appoint advisors
Source of Powers
• Statute – Supersede
• Case Law - Supersede
• Trust Deed - Current
• Shared with Employer
DISCRETION
• Exercise discretion in a fiduciary manner

• Areas of discretion:-
• Appointment of advisors
• Investment matters
• Ill-health early retirement
• Augmenting benefits
• Waiving of eligibility conditions
• Death in service benefits

Trustees cannot delegate their responsibility

BREACH OF TRUST
• Misconduct
• Maladministration
• Breach of duty failure to carry out duty of trusteeship
• Action taken by trustees outside the powers contained in the
trust instrument
• Investment of trust monies in unauthorized investments
• Taking profit from trust not authorized by trust instrument or
court
• Manipulating investments to benefit one beneficiary at expense
of others
• Negligently allowing trust property in hands of one trustee
• Paying out trust property to wrong person
• Purchasing trust property without authority
• Failing to exercise proper discretion in trust decisions
RISK LIMITATIONS FACTORS FOR TRUSTEES
• Take professional advice
• Always act in accordance with Trust documents
• Exercise “duty of care”
• Documentation
• Be reasonable
• Recognize conflict of interest and deal with it
RETIREMENT BENEFITS ACT IMPLICATIONS FOR TRUSTEES
➢ Supervision
➢ Disclosure
➢ Form of Trusteeship
➢ Documentation
➢ “Whistle blowing”
➢ The penalties
➢ Eligibility
➢ Scheme rules may not confine eligibility on the basis of gender, race or religion
➢ Membership may not be subject to any discretionary power
➢ Trustees must accept transfers in or out of the scheme
➢ Full vesting of employer benefits
➢ Non assignability of benefits
RETIREMENT BENEFITS ACT IMPLICATIONS FOR TRUSTEES
➢ Leaving service benefits – immediate payout
➢ Payments to nominated beneficiary on death
➢ Discretionary benefits
➢ Commutation formula (1/4 for non-contributory, 1/3 for contributory, commutation terms
➢ Schemes to keep proper books and accounts
➢ Appointment of auditor and notification to RBA
➢ Prepare and audit annual accounts
➢ Financial statements to be prepared in prescribed format with required disclosures (e.g.
un-remitted contributions, fee paid to or on behalf of trustees, related party transactions)
➢ Audited accounts with certificate by Chairman of Board of Trustees to be submitted to RBA
within four months of scheme financial year end
➢ Inform members of availability of audited accounts for inspection
➢ Send summary of audited accounts to members with benefit statements
CONCLUSION
• If a trustee accepts the office of trustee, must discharge its duties
as long as trusteeship subsists

• Law does not distinguish between active and passive trustees

• If fail to sustain a common law or statutory duty and thereby cause

loss to another, may be sued for loss in their own capacity

• Trustees are jointly and severally liable and any aggrieved party
may elect to sue one, some or all of them for redress
 Cash Flow Model

ROLE OF
SERVICE
PROVIDERS
Role of the Administrator
Key Roles
• Contributions crediting to the members’ accounts
• Income allocation and issuance of member statements
• Computation and payment of members benefits
• Management of member relations for members
• Member communications and Education
• Keeping and updating of records i.e. Forms
• Planning and management of scheme meetings
• Scheme compliance management
• Prepare and submit reports to trustees and Regulator

General Duties
• Ensure that legally binding documents are professionally prepared and executed.
• Ensure that actuarial valuation and audit reports are prepared as required by law.
• Ensure compliance with legislation and advice to trustees of any legislative changes.
• Review from time to time general provisions of scheme.
• Advise to members on options available to them in light of the existing laws.
Role of the Administrator
Accounting Roles
• Scheme cash flow management in liaison with the fund manager
• Maintaining the scheme books of accounts.
• Reconciliations with bank accounts and service provider’s reports.
▪ Facilitate audit to meet the regulatory deadlines i.e. RBA, KRA.
▪ Prepare and submit quarterly detailed reports to the trustees.
▪ Prepare & submit schemes financial statements to the auditors
• Scheme compliance management
Role of the Fund Manager
▪ Advise Trustees on the available Investment options
▪ Analysis and Identifying securities to construct the best portfolio
▪ Constantly reviewing the portfolio and making suitable asset allocation
changes.
▪ Invest scheme assets in line with IPS and RBA
▪ Report to Trustees on the performance of the scheme funds.
▪ Submit appropriate quarterly returns to RBA.
▪ Ensuring the Scheme deliver’s sustainable real returns over the long-
term
Role of the Custodian
▪ Holds investments securely on behalf of the scheme and is able to
account independently for any financial transactions.
▪ Income collection: dividends and coupons due on securities
▪ Tax recovery – recovery tax which can be reclaimed
▪ Cash management – management of the cash account
▪ Settlement of securities – administration of the actual exchange of cash
for securities when a security is traded
▪ Foreign exchange – settling foreign exchange deals
▪ Pooled funds eliminates the need for a separate custodianship
arrangement.
Discussion
Arrangements
Group and Individual Personal Schemes
Occupation Schemes
Multi –employer Schemes

1. Definition
2. Design Plan
3. Benefit Structure
4. Features
 Case Study 1
• Grace is a Trustee of the XYZ Staff Pension Scheme and has been receiving a pension from the
scheme for the last five years. Ben is the youngest trustee (30 years) who joined the Board last year
following his promotion to finance manager of the firm.
• The returns for the scheme at 7.5% over the past three years, have been lower than market average
and inflation. Ben has done some research and is recommending the assets be invested in ‘All is
Well’ Unit Trusts where his personal investments have attained over 50% investment growth over the
past two years.
• This proposal raised very heated debate and the Chairman deferred discussion to the next trustee
meeting. Grace was particularly passionate about opposing the proposal.

Questions
• Why in your opinion would Grace be opposing the suggestion? How much of this would be
influenced by personal consideration?
• Is Ben’s recommendation suitable for the Scheme? What other information would the trustees
need before considering this proposal?
• As the Board, what would you resolve on this matter? Why?
Question/Feedback