How planned law might turn National Social Security Fund into a looters’ paradise

By MACHARIA KAMAU and KENNETH KWAMA

KENYA: When Labour Cabinet Secretary Kazungu Kambi cancelled the controversial Sh5 billion National Social Security Fund (NSSF) project in Tassia last week, it was seen as a rare intervention to stop the plunder of the fund’s resources.

To workers’ body - the Central Organisation of Trade Unions (COTU), conditions of criminality and undermanned procurement process that facilitated awarding of the tender by the wealthy Fund had combined to create a perfect storm of juicy prospects for looters who have been keen to take up every available opportunity to steal pensioners’ money.

Retirement Benefits Authority Chief Executive Dr Edward Odundo has raised a red flag over the Fund’s corporate governance even before the new law comes into force.

““Issues of corporate governance are still of concern to RBA as the law did not address them,” explained Odundo when contacted.

But celebrations by COTU and others opposed to the project like the Federation of Kenya Employers (FKE) maybe short-lived following the implementation of the new NSSF Act this month. The law is set to expand the fund’s collections by more than1,000 per cent in the next five years and will make it easier for those who espouse looter’s ethos to pillage their way through the newly created wealth by weakening oversight.

Under the new regime, COTU and the FKE, which had permanent seats within the Fund’s board-and somehow strengthened oversight, will relinquish their positions. Appointment of the NSSF Managing Trustee will also escape scrutiny since the Labour Cabinet Secretary without the involvement of the board will make the appointment.

Two years ago, the Fund was collecting Sh600 million monthly from workers, but this grew to Sh1.2 billion after it outsourced the collection function to Kenya Revenue Authority (KRA).

NSSF projects the monthly collections would climb to a staggering Sh15 billion in the sixth year of the implementation of the new Act. This would amount to Sh180 billion annually in member contributions, far much more than any listed firm on the Nairobi Securities Exchange makes in annual earnings.

In the proposed law, an employer will be required to contribute six per cent of the employee’s earnings to the fund. This is in addition to an employee also contributing six per cent of their earnings, bringing the total to 12 per cent. For instance, a worker earning Sh100,000 per month will be contribute Sh6,000, with the employer paying a similar amount. This is in contrast to a flat rate of Sh200 by employee and a similar amount by employer.

A lot of questions surround NSSF’s new enlarged deduction, not the least of which is who will manage the expected huge jump in asset that could potentially reach as much as Sh180 billion annual cash inflows and how the Fund would manage to keep away briefcase investors at bay, a problem has continued to dog the Fund managers.

Among the potential options is hiring third-party managers to run the Fund’s assets or outsource money management to one of the country’s top asset management firms with capabilities to manage such huge funds.

Revenue growth

The expected growth in revenue is no doubt sizable. While sources wouldn’t specify how much in assets could ultimately be in the Fund, they said it could receive as high Sh180 billion annually making NSSF one of the richest funds in the continent.

With the new levels of liquidity and the legendary scandals that NSSF has had in the past, there are concerns that the new pool of wealth may be mismanaged.

The fact that the NSSF, which has mainly stuck to land and development of property for investments, has never identified other viable investment avenues to make the situation even riskier.

“If the management has in the past faced difficulties to invest the Sh1.2 billion it collects every month, how will they know what to do with Sh15 billion monthly inflows? NSSF is headed for trouble unless some remedial action is taken soon,” reckons a former Managing Trustee who requested not to be named.

According to the former NSSF boss, initially there were plans to use some of the hefty collections as bonds to fund infrastructural projects such as the building of roads and railway systems, but interference by the executive and instability at the top-guaranteed by frequent change of Managing Trustees has put paid to some of these ambitious plans.

“Instead of going to the Chinese to borrow over Sh300 billion for the Mombasa-Malava Railway, the government would easily get the same from a well-structured NSSF and keep the billions it is set to pay as interest circulating within the Kenyan economy,” he says.

The frugality of holding the top job and the social security fund is underlined by the fact that in the last eight months, it has had four different heads-Alex Kazongo, Tom Odongo, Hope Mwashumbe and current acting Managing Trustee, Richard Lang’at. This translates to an average of two months in office for each.

The Fund concedes to its inglorious past, even going on to note in its communication materials that its history has sadly ‘been marred by scandals and ill-conceived investment policies’.

Just as it has attracted phonies in the past, analysts warn that a more liquid NSSF is likely to attract even more fraudulent characters and if governance structures are not fixed, the new realities may make past scandals look like child play.

Board’s position

But managers at the Fund are optimistic that the NSSF Act 2013 whose implementation began January 10, will strengthen governance at the institution.

“What we have today comes from a bad history. The previous Act had weaknesses that allowed what happened to happen,” explained Richard Nyakundi, a communications official at NSSF.

“The law will make sure that NSSF is properly governed and contributors get value for their money. Poor governance is a big issue and the only way to cure it is to put in place stringent governance parameters,” said Nyakundi.

“The new law will also limit political influence, for example it makes it difficult for the Cabinet Secretary to fire the managing trustee but he would have to adhere to the laid down law. In addition, NSSF will now be under the regulator Retirement Benefits Authority.”

Operating as a pension scheme and under RBA rules as opposed to a provident funder will see some re-organisation of NSSF, with changes in its investment portfolio that is heavy on stocks and property. The RBA requires all pension schemes to reduce their investments in property to 30 per cent.

Audit findings

It is a national scandal that criminals, fortune-seekers and shady characters now see NSSF as a looters’ paradise, where one gets in and loots their way to riches, when millions of the workers who have pooled the money wallow in poverty.

Apart from the Tassia II saga playing out in the mainstream media, the Fund has also been gripped with other gruesome if not unexplained cases of wanton plunder. Last year, Parliament’s Public Investments Committee (PIC) heard that some Sh3.5 billion in the cashbooks of the fund was not reflected in the bank account statements.

A report by the National Audit office last year found out that of the Sh30 billion portfolio held by NSSF in the form of equities, some Sh778 million worth of investment had no share certificates.

This was in addition to the Sh1.2 billion that it has yet to recover from collapsed stockbrokerage firm — Discount Securities Limited. Discount had bought shares on behalf of NSSF before it went under.

In the NSSF 2009/10 financial statement, details are still missing on a dispute concerning Sh53 million in uncollected rent for the fund’s properties —Bruce House, View Park Towers and Hazina.

NSSF has over time been duped into acquiring gazetted land, including in areas like Muthaiga, Karura Forest and Ngong Forest. Other parcels located in similar protected areas are in Nyali, Athi River and Karen. The total worth of all the parcels, sitting on the NSSF books but which it cannot touch is worth Sh2 billion.

The Fund has also made irregular payments to contractors. These include an advance payment of Sh324 million to Mugoya Construction and Engineering Company. This is despite the fact that Mugoya had not completed construction work on phase one and two of the Nyayo Estate Embakasi housing projects.

Mugoya’s contract was eventually terminated in 2004 forcing the firm to sue for damages worth Sh7 billion for breach of contract. NSSF made a counterclaim of Sh9 billion. The issue is still in the courts but NSSF has in the past said it has considered writing off the Sh324 million.

And in 2013, the Fund’s management was at pains to explain a seeming irregular payment of Sh233 million to China Jiangxi in relation to the design of the Hazina Trade Towers when the building was restructured from the present eight to 36 floors.

Other planned projects, which will be taken in partnership with the private sector, include 30,000 housing units Hazina Village Mavoko, a 60 storey skyscraper on its Kenyatta Avenue 3.5 acres plot and building of residential houses on its plots located on State House road.