A LOOK AT THE NEW NSSF RATES (NSSF ACT 2013)

By Jacob Steven Otieno and Sandra Ngaire

After a lengthy legal battle that began in 2014, the Court of Appeal finally made a decision on February 3rd regarding the legality and constitutionality of the enactment of the National Social Security Fund (NSSF) Act 2013. The NSSF Act 2013 was introduced on December 24th, 2013 but was not fully implemented due to the suspension of several provisions, including Section 20, which concerns contributions to NSSF. The court of Appeal set aside the judgment of the Employment and Labor relations court in its entirely arguing the court lacked jurisdiction to handle the matter.?Therefore, this means that the NSSF Act 2013 is now constitutional, and is to be enforced. This new Act repeals in total the previous NSSF Act of 1965.

The Act introduces a new contribution structure which is based on a graduated scale referred to as Tiers. Contribution is at 12% of the monthly employee’s pensionable earnings, 6 % being deducted from the employee and 6 % contributed by the employer.

Tier I contributions are calculated as follows:

• ?6 % of pensionable earnings up to a maximum called the Lower Earning Limit(L.E.L).This limit is currently capped at Ksh. 6000 per month.
• Maximum Contribution is therefore Ksh. 360 being (6% of 6000). The employer will then match this contribution, thus making the total contribution to be Ksh. 720.
• This contribution will always be remitted to NSSF

Tier II contributions are calculated as follows:

• 6% of pensionable contributions up to 50% upper earnings Limit(UEL). This Limit is currently capped at Ksh 18,000 per month.
• Maximum contribution is therefore Ksh 720 being (6% of U.E.L-LEL:18,000-6,000).The employer matches this contribution thus making the total contribution to be Ksh.1440.

In the provisions of Act, the NSSF rate is set to increase progressively for the next five years. For the first year, Tier II contributions are based on 50 percent of the national average earning, set at Sh36,000. This will be progressively increased to 100 percent for the second year, 200 percent for the third year, 300 percent for the fourth year, and 400 percent for the fifth and subsequent years.

Under the Act, employers who are contributing to a registered retirement benefits scheme can opt to pay their Tier 2 contributions to their own scheme instead of NSSF (contracting out) subject to meeting regulatory requirements.

Our Take

While the implementation of the Act is a development for the pension industry, and is poised to offer a significant increase in national savings, businesses will need to bear extra expenses to comply with its requirements. This may result in financial difficulties and cash flow challenges for many employers, particularly in the current challenging economic climate. Employees will also experience reduced take home amounts in their payslips.