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