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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. - PowerPoint PPT Presentation
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Member Education Sessions 2014Retirement Planning and the new NSSF Act
University of Nairobi Pension Scheme 2007
Presentation by:Shera Noorbhai
June 2014
Slide 2
Importance of saving for retirement Income Drawdown NSSF Act, 2013 and the required contributions Way Forward Q & A
Agenda
Slide 3
Why Pension?
The Importance of Saving for Retirement
Slide 4
The numbers paint a SCARY picture!
89%The number of people retiring today at age 55 and above who are dependant on family support
20%The NRR of
people retiring today aged 55
and above
Slide 5
Should we accumulate wealth for retirement?
…...... why?
Hmmm,… Yes….?
Slide 6
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
1. Breakdown of traditional social protection
Slide 7
2. Living Longer
Slide 8
0-20 yrs
40-55 yrs
20-40 yrs
>55 yrs
School
Work life
Retirement
3. On retirement for a longer period
Slide 9
Retirement planning
25 65
65 90
Around 300 payments During 25 years of retirement
480 salariesRetirement planning spans 40 years of employment
To provide for
Have you started putting your retirement plan
together?
Slide 10
KShs 5,000 bought you...
1970
1980
1990
2010
2020 ?
4. Inflation
Slide 11
5. Medical Costs are Sky rocketing
Slide 12
Income Drawdown
Key features
Slide 13
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 14
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)
What is Income Draw Down?
Slide 15
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
Features of IDD
Slide 16
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
IDD Rules
Slide 17
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
IDD Rules
Slide 18
NSSF Act, 2013Changes to the Required Contributions
Slide 19
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
Establishment of Sub-funds
Slide 20
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
New NSSF Contribution – The Golden Rules
Slide 21
Some Definitions
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 22
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 NSSFTier 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
Two Levels of Contributions
No mandatory contributions on earnings above UEL
Slide 23
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)
Progression of LEL and UEL
Tier I Tier II
Slide 24
Transition yr 1 (2014) Actual LEL of 6,000, UEL of 18,000
Earnings
Monthly Earnings
8,000 18,000 35,000 140,000 250,000
Pensionable earnings (PE) 8,000 18,000 18,000 18,000 18,000
Contributions under New NSSF
Employee/Employer 480 1,080 1,080 1,080 1,080
Impact of Change
Increase in Employer (ee) contributions 280
880 880 880 880
Slide 25
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
Illustrations
Figs K Shs Year LEL NAE UEL
1 6,000 36,000 18,000 2 7,000 40,000 40,000 3 8,000 44,000 88,000 4 9,000 48,000 144,000 5 10,000 53,000 212,000
* Figures in italics are estimates
Slide 26
Employee earning K Shs 100,000 per month
2014 2015 2016 2017 2018Monthly Wages
100,000 110,000 121,000
133,000
146,000
Upper Earnings Limit 18,000
40,000
88,000
144,000
212,000
Pensionable earnings (PE) 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
Tier II Earnings (PE above LEL to UEL) 12,000
33,000
80,000
124,000
136,000
Contributions under New NSSF
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
Total Employee 1,080 2,400 5,280 7,980 8,760
Slide 27
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
Contracting out by employers
Slide 28
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
Individual Member Accounts
Slide 29
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
Basis of Benefits
Slide 30
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
Principal Benefits
Slide 31
60 years for both males and females Option to take benefits at or after age 50
Retirement Age
Slide 32
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
Retirement Benefits
Slide 33
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
Invalidity Benefits
Slide 34
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
Survivors’ Benefits
Slide 35
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
Old Provident Fund
Slide 36
Way Forward
Slide 37
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
Way Forward
Slide 38
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 damageor loss suffered resulting from any action taken by any represented based on this presentation or any discussions relating thereto.
Slide 39Questions
Slide 40
Retirement – What is it?
Of change Of challenge Of adjustment To do what we have always wanted to do
Retirement is a time………
To get the maximum out of retirement we need to plan
Slide 41
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 42
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
Motivations for Reform
Recommended