NSSF changes a step tow*rds retirement security

From this month, employers will be required to implement the year 2 mandatory pension contributions for their employees to the National Social Security Fund.

In this, the deductions from employees’ salaries will now range between Sh420 and Sh1,740 depending on their gross salary- which will be matched by the employers.

The tiered system of pension contributions has been in place since February 2023 when the National Social Security Fund Act, 2013 Act was implemented, increasing the mandatory pension contributions by employees and employers from a flat rate of Sh200 that had been for years.

Implementation of the act will see deductions raised to specific amounts over the first five years.

As industry experts, we see these steps towards bolstering financial security during retirement as necessary, but we are aware of the concerns raised about affordability by individual Kenyans as well as employers.

This presents a complex landscape to navigate particularly as we work to create an understanding of the opportunities envisioned in the revised contribution rates.

The bottomline is that the NSSF Act translates to higher contributions for all earners boosting their social security net for them during retirement. The revised rates address the longstanding issue of inadequate retirement savings, particularly for low-income earners whose contributions have always fallen short.

Kenya’s pension penetration remains below 25 per cent and the informal sector is largely excluded. Additionally, our savings rate is one of the lowest in the East African Region at 17 per cent and the income replacement ratio upon retirement is below 40 per cent compared to the recommended 75 per cent.

With this, old age poverty in the country is imminent; a concern that has called for interventions both in the private and public sectors. It is with this background that we have now seen the NSSF Act 2013 implemented.

Expanding pension coverage is crucial to ensure that a larger portion of the population is adequately prepared for retirement. Kenya’s pension industry also needs to strive to extend coverage to workers in the informal sector, who currently lack access to formal pension schemes.

However, the concerns of many Kenyans as relates to affordability cannot be ignored particularly for low and middle-income earners who are already hard-pressed by the high cost of living.

With Kenyans currently pushed to the wall, the implementation of this Act is not likely to go down well with many – whether or not they understand why it is necessary for their financial future.

Further decrease in disposable income negatively impacts households and increases financial stress which comes with multiple social implications.

On the other hand, businesses, faced with higher labor costs could resort to reducing employment opportunities and investments further straining the economy.

These concerns necessitate careful monitoring and targeted interventions to mitigate the negative impacts, such as tax breaks for low-income earners as well as small and medium-sized businesses that supply over 80 per cent of jobs to the economy.

Financial literacy targeted at both employees and employers particularly as it relates to retirement planning is paramount. Employers can play a proactive role in promoting financial education programmes and empowering employees to make informed choices about their retirement savings.

From the public sector perspective, there is a need to address the long-standing concerns around transparency and accountability of the fund to boost compliance.

This can be done through actively engaging stakeholders, including employees, and employers, to address concerns and build trust.

Additionally, streamlining the registration and contribution processes including creating an enabling working environment with private pension players who are licensed to manage Tier 2 contributions is necessary.

These steps will go a long way in ensuring wider participation and maximizing the benefits of the revised rates.

—The writer is the CEO of Enwealth Financial Services Ltd