Transcript Presentation by Shera Noorbhai.

University of Nairobi Pension
Scheme 2007
Member Education Sessions 2014
Retirement Planning and the new NSSF Act
Presentation by:
Shera Noorbhai
June 2014
Agenda
 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
The numbers paint a SCARY picture!
89%
20%
The number
of
people
The NRR of
retiring
today
at
age
55
people retiring
and above
who
are
today aged 55
dependant
on
family
and above
support
Slide 4
Should we accumulate wealth for
retirement?
Hmmm,…
Yes….?
…...... why?
Slide 5
1. Breakdown of traditional social protection
 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
2. Living Longer
Slide 7
3. On retirement for a longer period
Retirement
Work life
>55 yrs
School
40-55 yrs
20-40 yrs
0-20 yrs
Slide 8
Retirement planning
480 salaries
Retirement planning spans
40 years of employment
25
65
To provide for
65
Have you started putting
your retirement plan
together?
Slide 9
90
Around 300 payments
During 25 years
of retirement
4. Inflation
KShs 5,000 bought you...
1970
1980
1990
2010
2020 ?
Slide 10
5. Medical Costs are Sky rocketing
Slide 11
Income Drawdown
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
NSSF Act, 2013
Changes to the Required Contributions
Slide 18
Establishment of Sub-funds
 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
New NSSF Contribution – The Golden Rules
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
Some Definitions
Lower Earnings Limit Average statutory minimum
(LEL)
monthly wage for the top urban
centres, second tier urban centres and
rural areas
National Average
Earnings
(NAE)
Upper Earnings Limit
(UEL)
Average wage earnings as published
by KNBS in Economic Survey for prior
year
4 x NAE
Note LEL and UEL being phased in over five years
Slide 21
Two Levels of Contributions
Tier I
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
Tier II
Contributions
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
Lower Earnings Limit
(LEL) KShs.
Upper Earnings Limit
(UEL) KShs.
1
6,000
50% of National Average
Earnings (18,000)
2
7,000
1 times National Average
Earnings (40,000)
3
8,000
2 times National Average
Earnings (88,000)
4
9,000
3 times National Average
Earnings (144,000)
5 and onwards
As will be defined by the
Act
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)
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
280
880
880
880
880
Contributions under New NSSF
Employee/Employer
Impact of Change
Increase in Employer (ee)
contributions
Slide 24
Illustrations
 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
4
5
LEL
6,000
7,000
8,000
9,000
10,000
* Figures in italics are estimates
Slide 25
NAE
36,000
40,000
44,000
48,000
53,000
UEL
18,000
40,000
88,000
144,000
212,000
Employee earning K Shs 100,000 per month
2014
Monthly Wages
Upper Earnings Limit
Pensionable earnings (PE)
100,000
18,000
2015
110,000
40,000
2016
2017
2018
121,000
133,000
146,000
88,000
144,000
212,000
18,000
40,000
88,000
133,000
146,000
NSSF Contribution (6% of PE)
1,080
2,400
5,280
7,980
8,760
Tier I Earnings (PE up to LEL)
6,000
7,000
8,000
9,000
10,000
12,000
33,000
80,000
124,000
136,000
Tier I Contribution : 6% PE upto LEL
360
420
480
540
600
Tier II Contribution : 6% of (LEL –
UEL)
720
1,980
4,800
7,440
8,160
1,080
2,400
5,280
7,980
8,760
Tier II Earnings (PE above LEL to
UEL)
Contributions under New NSSF
Total Employee
Slide 26
Contracting out by employers
 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
Individual Member Accounts
 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
Basis of Benefits
 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
Principal Benefits
 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
Retirement Age
 60 years for both males and females
 Option to take benefits at or after age 50
Slide 31
Retirement Benefits
 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
Invalidity Benefits
 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

Rate 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
Survivors’ Benefits
 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
 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
Way Forward
 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
Advice and Disclaimer
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 – What is it?
Retirement is a time………

Of change

Of challenge

Of adjustment

To do what we have always wanted to do
To get the maximum out of retirement
we need to plan
Slide 40
Retiring Comfortably - How much do I really need?
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
10%
15%
21%
30
17%
24%
37%
40
29%
48%
86%
50
69%
167%
-
Rates as % of salary
Slide 41
Motivations for Reform
 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