Presentation by:
Shera Noorbhai
June 2014
Member Education Sessions 2014
Retirement Planning and the new NSSF Act

 Importance of saving for retirement
 Income Drawdown
 NSSF Act, 2013 and the required contributions
 Way Forward
 Q & A
Slide 2

Why Pension?
The Importance of Saving for Retirement
Slide 3

Slide 4

Slide 5
…...... why?

 Traditional forms of social protection
• Extended families
• Local communities
• Social norms and tribal traditions
 Impact of
• Urbanisation
• Disintegration of extended families
• Loss of traditional social and cultural norms
• AIDS/HIV epidemic are stretching the traditional forms of old age protection to breaking point
=> Poverty and destitution in old age unless planned properly
Slide 6

Slide 7

Slide 8
Retirement
School
Work life
0-20 yrs
20-40 yrs
40-55 yrs
>55 yrs

Slide 9
Retirement planning spans
40 years of employment
25
Have you started putting your retirement plan together?
65
To provide for
65 90
During 25 years of retirement

1970
1980
1990
2010
2020 ?
Slide 10

5. Medical Costs are Sky rocketing
Slide 11

Key features
Slide 12

Background - Recap
 Prior to June 2008, the options for taking a benefit from a defined contribution scheme were:
 Take a lump sum from the Provident Fund
 Purchase an annuity from an insurance company
 Purchase a pension from the scheme
 With Scheme retaining long term investment and longevity risks and considered a defined benefit arrangement
 Legislation amended in June 2008 to permit income drawdown as an alternative to annuity purchase.
 Regulations for implementation of IDD were issued in
2010 and subsequently revised in 2012
Slide 13

What is Income Draw Down?
An income drawdown is an arrangement in which a member opts to access his/her retirement benefits as a regular income through an investment fund from which retirement benefits payments are drawn
.
Essentially instead of buying an annuity at retirement, the member opts to take his/her accumulated asset
(i.e. member account) and invest in an ‘income withdrawal plan ’ either within the scheme or through a special plan (IPP or other suitable structure)
Slide 14

Features of IDD
 Flexibility with regard to
 Investment choice
 Frequency and timing of payment
 Amount of income withdrawals
 The income is not guaranteed but entirely dependent on the performance of the underlying investments, the amount of the periodic withdrawal and the member’s lifespan
 Under IDD, member responsible for investment and longevity risk as well as all IDD related expenses
Slide 15

IDD Rules
 Minimum drawdown period is 10 years from the date of commencement of the drawdown
 Frequency of drawdown: monthly, quarterly, semi annually or annually

Drawdown amounts as a percentage of the member’s outstanding account balance:



Maximum is 15% p.a.
Minimum is 0%
Allowance for fluctuations in drawdown amounts yearly
 Must ensure regular financial advice and regular at least annual statements
Slide 16

IDD Rules
 The options available after the minimum withdrawal period of 10 years are:
 Continue IDD arrangement
 Use fund balance to purchase an annuity from an insurance company
 Take fund balance as a cash lumpsum
 On death of the member, the options available are:
 Continue IDD arrangement in respect of nominated beneficiaries
 Use fund balance to purchase an annuity from an insurance company in respect of nominated beneficiaries
 Pay fund balance as a cash lumpsum to the nominated beneficiaries
Slide 17

Changes to the Required Contributions
Slide 18

 Act establishes two funds:
 Pension Fund to cover all employed persons who are above 18 years of age
 Provident Fund to cover self employed persons who wish to make voluntary contributions

Current Provident Fund to be closed and ring-fenced
Slide 19

1.
Statutory contribution is 6% each of Pensionable
Earnings
2.
Pensionable Earnings means lower of Monthly
Wages and an upper limit called the Upper
Earnings Limit
3.
Monthly Wages defined as all emoluments excluding fluctuating emoluments (effectively gross consolidated earnings with limited exclusions)
4.
Upper Earnings Limit is defined as 4 times
National Average Earnings (NAE), which is published annually by KNBS
Slide 20

Lower Earnings Limit
(LEL)
Average statutory minimum monthly wage for the top urban centres, second tier urban centres and rural areas
National Average
Earnings
(NAE)
Average wage earnings as published by KNBS in Economic Survey for prior year
Upper Earnings Limit
(UEL)
4 x NAE
Note LEL and UEL being phased in over five years
Slide 21

Tier I
Contributions
Tier II
Contributions
Contributions at 12% of pensionable earnings
(comprising 6% by Employees, 6% by Employer) up to LEL (i.e contributions as % of earnings up to average minimum wage)
Must be paid to NSSF
Contributions at 12% of pensionable earnings
(comprising 6% by Employees, 6% by Employer) between LEL and UEL
(i.e. contributions as % of earnings between average minimum wage and UEL)
Contracting-out of Tier II Contributions permitted for employers who operate, establish or participate in schemes which meet a reference scheme test
No mandatory contributions on earnings above UEL
Slide 22

Progression of LEL and UEL
Tier I Tier II
Year
1
2
3
4
Lower Earnings Limit
(LEL) KShs.
6,000
7,000
8,000
9,000
5 and onwards As will be defined by the
Act
Upper Earnings Limit
(UEL) KShs.
50% of National Average
Earnings (18,000)
1 times National Average
Earnings (40,000)
2 times National Average
Earnings (88,000)
3 times National Average
Earnings (144,000)
4 times National Average
Earnings (212,000)
Slide 23

Transition yr 1 (2014) Actual LEL of 6,000, UEL of 18,000
Monthly Earnings
Earnings
Pensionable earnings (PE)
Contributions under New NSSF
8,000 18,000 35,000 140,000 250,000
8,000 18,000 18,000 18,000 18,000
480 1,080 1,080 1,080 1,080 Employee/Employer
Impact of Change
Increase in Employer (ee) contributions
280 880 880 880 880
Slide 24

 Average Minimum Wage assumed to be K Shs
10,000 in 2018
 National Average Earnings taken as K Shs 36,000 and grown approx 10% per annum
 Salary grows approx 10% per annum
Figs K Shs
Year
1
2
3
LEL
6,000
7,000
8,000
4
5
9,000
10,000
* Figures in italics are estimates
NAE
36,000
40,000
44,000
48,000
53,000
UEL
18,000
40,000
88,000
144,000
212,000
Slide 25

Employee earning K Shs 100,000 per month
Monthly Wages
Upper Earnings Limit
Pensionable earnings (PE)
NSSF Contribution (6% of PE)
2014
100,000
18,000
18,000
2015
110,000
40,000
40,000
1,080 2,400
2016
121,000
88,000
88,000
5,280
2017 2018
133,000 146,000
144,000 212,000
133,000 146,000
7,980 8,760
Tier I Earnings (PE up to LEL)
Tier II Earnings (PE above LEL to
UEL)
Contributions under New NSSF
Tier I Contribution : 6% PE upto LEL
Tier II Contribution : 6% of (LEL
–
UEL)
Total Employee
6,000
12,000
7,000
33,000
8,000
80,000
9,000 10,000
124,000 136,000
360
720
1,080
420
1,980
2,400
480
4,800
5,280
540
7,440
7,980
600
8,160
8,760
Slide 26

 Employer may opt to pay Tier II Contributions into a contracted out scheme it participates in or opts to establish or participate in
 Application for opt out made to and administered by
RBA
 Tier I Contributions have to be paid to NSSF (i.e.. contracting out only applies for Tier II Contributions)
 Contracting out does not impact the contribution amounts, only where contribution is paid and who manages it
 Tier I and Tier II contributions are mandatory
Slide 27

 Each member will have individual account in NSSF ( ‘Member
Account’ )
 Contributions will be credited to individual account

Tier I Contributions credited will be net of cost of minimum death and invalidity benefits
 Maximum deduction for min benefits capped at 2% of LEL
 Each member account will segregate:

Tier I Contributions split between employee and employer
 Tier II Contributions split between employee and employer (if not contracted out)
 With investment returns thereon
 Members will be entitled to annual benefit statements and on request at any other time
Slide 28

 Benefits based on size of member account
 Ensures link between contributions and benefits
 Retains largely defined contribution structure for benefits
 Immediate vesting of contributions
 Frequency of interest allocation – at least annually
 Allocation of interest by Trustees based on advice of actuary or other qualified person
Slide 29

 Old Age
 Invalidity
 Survivors’
 In the form of regular pension
 Funeral grant
 Emigration benefit
 Board may from time to time recommend to Cabinet
Secretary additional benefits
Slide 30

 60 years for both males and females
 Option to take benefits at or after age 50
Slide 31

 Eligibility
 Qualifies for retirement age
 Benefits
 Pension/annuity for life that can be secured by member account
 Annuity must include a minimum guarantee period of 10 years
 Annuity may be combined with Tier II credits whether from
NSSF or opt-out scheme
 Pensions secured through securing annuities or income drawdown
 Commutation permitted to a max of 1/3 of Tier II credits, unless trivial amount
 Benefits can be deferred beyond retirement age
Slide 32

 Eligibility
 36 months of contribution payments immediately preceding date of invalidity
 Must be certified to be permanently invalid by qualified and recognized medical board
 Benefits
 R ate of invalidity pension shall be determined and payable in the same manner as for retirement pension
 Except that the Tier I Credit in respect of the member shall be increased by an amount equal to the last Tier I monthly contribution by and in respect of the member multiplied by half the number of months of potential employment between the member’s date of invalidity and attainment of pensionable age subject to a maximum of 90 months potential employment counting
Slide 33

 Eligibility
 Death in employment
 36 months of contribution payments
 Benefits
 Payable to dependants of deceased persons
 Based on nomination of beneficiaries, but subject to
Board decision
 Total pension to survivors to be equal to alternative invalidity pension
Slide 34

 Old provident fund closed and fully ring fenced
 Will be accounted for separately
 Benefits earned under existing NSSF will be retained on same terms, with exception of funeral grant
Slide 35

Way Forward
Slide 36

 Decision taken by UON Council to:
 Integrate contributions
 Deduct NSSF contributions from the Scheme
Contributions
 Contract-Out
 Seek approval from RBA for Tier II contributions to go to
Scheme instead of NSSF
 UON Council has appointed Management to do the necessary to implement decision
Slide 37

Any guidance, opinions or proposals expressed by the presenter is for information purposes only and are not intended to be advice as contemplated.
Alexander Forbes shall not be liable for any damage or loss suffered resulting from any action taken by any represented based on this presentation or any discussions relating thereto.
Slide 38

Questions
Slide 39

Retirement is a time………




Of change
Of challenge
Of adjustment
To do what we have always wanted to do
Slide 40
To get the maximum out of retirement we need to plan

A good rule of thumb is a minimum of “8/9/10”; 8 times annual salary if retiring at 60; 9 times annual salary at 55 and
10 times annual salary at 50
What regular contributions do I need to make?
The following table shows how much you should put aside to get to “8/9/10” taking into account when you start contributing
Minimum “8/9/10”
Start Age Age 60; min 8 Age 55 ;min 9 Age 50; min 10
20
30
40
50
10%
17%
29%
69%
Rates as % of salary
15%
24%
48%
167%
21%
37%
86%
-
Slide 41

 Breakdown of traditional forms of social security & old age protection becoming a policy concern with projected increase in dependency ratios
 Improve coverage
 Improve adequacy of benefits
 Improve type of benefits and form in which provided
 Overcome inertia and behavioural obstacles to saving
 Linkage between social security, employment and development
 Increase savings rate
 Promote voluntary contributions and participation by informal sector
 Making mandatory contribution rates comparable with “peer” countries
Slide 42