KENYAN EMPLOYERS GUIDE ON PENSION AND BENEFITS
Pension & Retirement Plans in Kenya (Employment Act, 2007)
What is a Pension Scheme?
A pension scheme is an arrangement between employees and employers that tasks the employer with making regular contributions to a fund that takes care of payments made to the employee after they retire.
Advantages of Pension Schemes to Employers and Employees
Retirement benefit plans are beneficial to you as a business owner, your business, and your employees. As an employer, you can help your employees prepare for their golden days by advising them on the right benefits plan and vendor while making sure that the options provided are cost-effective. In addition, the business and its employees gain a significant tax advantage from retirement plans. This guide gives an insight into pension and retirement plans in Kenya and benefits to employees upon termination or resignation.
Types of Pension Schemes
There are two main types of pension schemes; defined contribution plan and defined benefit plan. In a defined contribution plan, an investment account is created for an employee throughout their working years where the balance is available for use upon retirement. A defined benefits plan sets definite monthly payments for life or a lump sum payment on retirement.
Pension and Retirement Plans in Kenya
Section 9 and 10 of the Employment Act, 2007, specifies that an employee shall be employed under a contract of service which shall include pensions and pension schemes in which the employee is involved (section 10 (3) (iii)). This means that the law allows for employees to be included in pension schemes.
Typically, when an employee leaves employment with a defined benefit pension, they have few options. They can now choose to take the money as a lump sum or take the promise of regular payments in the future, also known as an annuity. They may even be able to get a combination of both.
Utilization of Pension Schemes Benefits before retirement
Where an employee of a defined benefit scheme leaves employment before attaining retirement age, he or she will receive no more than 50 percent of the accrued benefits. The remaining 50 percent will be retained in the scheme and will be paid to the member in accordance with the trust deed and rules upon attaining the normal retirement age.
An Employee of a defined contribution scheme shall receive his or her contributions and 50 percent of the employer’s contributions, if he or she retires before attaining retirement age. The remaining 50 percent of the employer’s benefit will be retained in the scheme and will be paid to the employee in accordance with the trust deed and rules upon attaining the normal retirement age.
Benefits to Employees upon Termination or Resignation from Employment
Kenya does not offer unemployment benefits, but there are circumstances in which pensions may be granted in the case of termination of employment. Section 6 (1) (f) of the Pensions Act, grants for payment of pension, gratuity, or other allowance, in the case of termination of employment in the public interest.
According to Section 35 (5) of the employment ACT 2007, an employee whose contract of service has been terminated legally is entitled to service pay for every year worked, the terms of which shall be fixed.
When is service pay exempted in Kenya?
According to Section 35 (5) of the employment ACT 2007, the service pay requirement for each employer shall not apply where an employee is a member of;
- A registered pension or provident fund scheme under the Retirement Benefits Act.
- A gratuity or service pay scheme established under a collective agreement.
- Any other scheme established & operated by an employer whose terms are more favorable than those of the service pay scheme established under this section;
- The National Social Security Fund (NSSF).
For instance, as a member of a registered pension or provident fund scheme under retirement benefits, their pension overrides service pay.
In the same way, as an employee contributing to the National Social Security Fund (NSSF) employees are not entitled to service pay, and those belonging to any other scheme operated by the employer.
Who regulates Pension Funds in Kenya?
The Kenyan government established the Retirement Benefits Authority (RBA) as the regulatory body to oversee the establishment and management of retirement benefits schemes in Kenya. The RBA was established in an effort to centralize the administration of retirement benefits.
The RBA is mandated to;
- Protect the interest of members and sponsors of retirement benefits schemes.
- Advise the Government on matters relating to retirement benefits.
- Develop and promote the retirement benefits sector.
- Implement all Government policies relating to retirement benefits.
- Regulate and supervise the establishment and management of retirement benefits schemes.
Utilization of Retirement Benefits for Mortgage Purposes
Following the gazettement of the Retirement Benefits Regulations 2020, members of retirement benefits schemes can now purchase residential houses using a portion of their pension savings. According to the act, members will be allowed up to 40 percent of their benefits for the purchase of homes provided it does not go beyond seven million shillings. By the time of its implementation, scheme members on retirement or receiving their pension earnings could not benefit from this provision.
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CHRPK Linnet Idagiza
HR and Capacity Development Consultant