Federation of Kenya Employers warns new pension reforms too costly

By Nicholas Waitathu

Employers will be forced incur additional cost as they embark on paying new contributions to their employees once the National Social Security Fund Bill, 2012 is enacted into law.

Experts and employers warn that once enacted, the law will lead to change of the budgets of Companies to reflect the new scenario.

Benson Okundi chairman Institute of Certified Public Accountants of Kenya (ICPAK) says employers will have to incur extra costs as they start paying the new enhanced rates of pension for their workers.

“The employers should brace for additional cost in their companies as the enhanced rates will demand they realign their annual budgets to reflect the new scenario. The additional cost will have serious effects into the management of companies,” he said. This implies that the companies will have to reorganise their development plans as the wage bill will increase.

In order to fit in the new scenario, Okundi stated the companies are likely to shelve any plans to increase workers’ salaries and to some extent reduce the workforce. This might in the long affect production level of organisations. He cautioned against enactment of the bill before governance issues at the NSSF are addressed. 

Pension scheme

The Bill seeks to convert the current NSSF from a Provident Fund to a Pension Scheme while strengthening the corporate governance of the NSSF.

Further, the bill seeks to position NSSF as a public mandatory social security scheme covering all employees in the formal sector and a voluntary scheme for the self-employed and workers in the informal sector who wish to make voluntary contributions to the Fund.

Currently, the rates of contribution to the NSSF are subject to a maximum monetary ceiling of Sh400 per month translating to a contribution of less than 1.2 per cent of national average earnings.

But the rates of contribution in the pension fund will be at 12 per cent of pensionable earnings where an employer and employee will contribute 6 percent respectively.

Federation of Kenya Employers (FKE) Executive Director Jackline Mugo acknowledged that the enhanced rates will eventually impact on the employers’ budget especially those, which do not operate private pension schemes.

“Even though in the long run the enhanced rates will benefit the contributor because of increased retirement pension, employers will have to contend with high wage bill which in the long run will affect production,” she said in a phone interview. 

sound management

The country’s pension contributions and provision of the same, she said, is wanting owing to inefficiency of the institution carrying out the same.

 “As we crave to have the contributions increased there is need to ensure the institution charged with the responsible has sound management,” she stated.

But, Mugo hastened to add that even as the government endeavours to enhance social security provision there is need to institute checks and balances to assist in protecting the pension fund from political interference and allow the board to work independently.

She said the social security strategy as outlined in the Vision 2030 needs to be pursued as the country’s population continues to increase and consumer purchasing power declining. 

“One has to go home with a reasonable retirement pension package so that he/she can be able to undertake post retirement activities, like business undertaking,” she added. 

The Bill proposes an increase in the level of mandatory contributions  to achieve the objective of ensuring adequacy of benefits to be phased in over a period of five years.