The National Social Security Fund (NSSF) Act, 2013, as amended in 2021, introduced a new contribution structure that significantly changes how employers and employees contribute to the fund. The amendments aim to enhance retirement benefits for Kenyan workers by aligning contributions with prevailing economic conditions and increasing the fund’s sustainability. This article explores the key changes under the amended Act, the impact on employers and employees, and compliance requirements.
History and Background of the Amendments
The NSSF Act, 2013 was enacted to replace the older NSSF Act (Cap 258), to improve retirement benefits for Kenyan workers. It was signed into law in December 2013 and was set to take effect in January 2014. However, its implementation was delayed due to legal challenges.
Shortly after the Act was passed, the Kenya Tea Growers Association (KTGA) and other employer groups filed a petition at the Employment and Labour Relations Court (ELRC), challenging the constitutionality of the mandatory contributions under the new law. The court issued an injunction in 2014, halting its enforcement. In its Judgment, the ELRC found that the NSSF ACT 2013 was unconstitutional.
Aggrieved, the NSSF Board of Trustees filed an appeal at the Court of Appeal, while the appellants filed a notice of cross-appeal and a notice affirming the ELRC’s decision. The respondent urged that: the ELRC wrongfully assumed jurisdiction over a matter falling within the High Court’s domain; the petition did not disclose any employer-employee relationship to trigger the jurisdiction of the ELRC, and that the allegations of unconstitutionality of the NSSF Act 2013 or its impugned sections did not arise from an employment and labor relations dispute. The Court of Appeal, in its judgment, held that the ELRC fell into error when it failed to appreciate that the issue before it fell within the jurisdiction of the High Court. The Court of Appeal held that for the ELRC to assume jurisdiction, constitutional issues must have arisen from an employer-employee dispute. The Court of Appeal allowed the appeal and set aside the judgment and all consequential orders of the ELRC. Aggrieved, the appellants filed the instant appeal at the Supreme Court. At the Supreme Court, the Court observed that the ELRC had jurisdiction to determine the constitutional validity of the NSSF Act 2013 and accordingly remitted the case to the Court of Appeal to determine the substantive merits of the ELRC Judgment on an urgent basis.
Background of the Amendments
The amendments to the NSSF Act were introduced to ensure that Kenyan workers can retire with greater financial security. The previous contribution structure, which had remained unchanged for years, was deemed inadequate in providing sufficient retirement benefits. With the amendment, the government seeks to increase contributions and expand coverage to more workers gradually.
New Contribution Structure
The amended NSSF Act introduces a tiered contribution system, replacing the previous flat-rate contributions. The new structure is as follows:
1. Categorization of Earnings into Tiers: The contributions are now categorized into two tiers based on the employee’s monthly income:
- Tier I Contributions: This applies to earnings up to the lower earnings limit (currently set at Ksh 7,000 per month and increasing to Ksh 1,000 in the next 2 years until reviewed).
- Tier II Contributions: This applies to earnings above the lower earnings limit up to the prescribed upper earnings limit, which has been adjusted progressively. The Upper Earnings Limit shall, for each financial year, be the level of earnings equal to four times the National Average Earnings.
2. Contribution Rates
The contributions are split between the employer and the employee, with each party contributing 6% of the employee’s monthly pensionable earnings, as follows:
- For 2024: The upper limit for pensionable income is capped at Ksh 36,000, meaning the maximum deduction is Ksh 2,160 from the employee and an equal amount from the employer, totalling Ksh 4,320.
- From February 2025 (Year 3 of the Act): The pensionable income upper limit will increase to Ksh 72,000, meaning the maximum deduction will be 6% of Ksh 72,000 (Ksh 4,320) plus a matching employer contribution, totalling Ksh 8,640. However, contributions for salaries below Ksh 72,000 will be pro-rated accordingly.
Flexibility in Contributions
A key amendment in the Act allows employees and employers some level of choice in how contributions are allocated:
- Of the total Ksh 8,640 contribution, only Ksh 960 (Ksh 480 from the employee and Ksh 480 from the employer) must go to NSSF under Tier I Pension.
- The remaining Ksh 7,680 (Ksh 3,840 from the employee and a matching Ksh 3,840 from the employer) can be directed to a private pension scheme that meets the Retirement Benefits Authority (RBA) standards, provided both the employer and employee opt out of Tier II contributions to NSSF.
The NSSF Act provides for the mandatory contribution of pensions. This pension is divided into Tier I and Tier II, each paid into a different fund, but both are maintained under NSSF. Tier 1 is paid into the Tier I fund and is the pension payable on the Lower Earnings Limit (this keeps changing and is increased over time). Tier I must be made to the NSSF Board every month. Tier II is any pension payable above the Lower Earning Limit.
The NSSF Act allows employers who wish to manage a pension scheme to do so privately, but only for Tier II contributions. Thus, while Tier I contributions must always be paid to the NSSF Board, Tier II contributions need not be paid to the NSSF Board PROVIDED that what would be Tier II contribution is remitted to the privately arranged scheme (this scheme must be registered with the Retirements Benefits Authority). The employer and employee are free to determine the contribution to the private scheme, provided that the total pension amount in Tier I and Tier II must meet the minimum contribution requirements.
For the amounts payable, please note that section 20 of the NSSF Act requires an employer to pay the NSSF Fund at 12% of the employee’s salary contributed by both the employer and employee as follows:
- the employer’s contribution at six per cent of the employee’s monthly pensionable earnings; and
- the employee’s contribution at six percent of the employee’s pensionable earnings deducted from the employee’s earnings.
Thus, the employer is liable for 6% while the employee is liable for 6% of their salary.
Impact on Employers and Employees
- Increased Deductions for Employees – Under the new structure, employees contribute a higher amount than before. While this means a reduced take-home salary, it ultimately enhances their pension benefits upon retirement.
- Higher Employer Contributions – Employers must match employees’ contributions, leading to an increase in payroll expenses. However, this contributes to employees’ long-term financial security, fostering goodwill and compliance with labor laws.
- Expanded Coverage – The amendment brings more workers into the NSSF system, including those earning above the previous limit. This ensures that a broader workforce benefits from structured retirement savings.
- Impact on Employees with Existing Pension Schemes – If an employee is already contributing to a qualifying pension scheme, then their additional NSSF contribution increase is minimal—only Ksh 120, increasing their total mandatory contribution to Ksh 960 (inclusive of the employer’s matching contribution). Their existing pension contributions will count towards their Tier II obligations if they and their employer choose to opt out of additional NSSF Tier II contributions.
Penalties for Non-Compliance
Failure to comply with the new NSSF contribution requirements attracts penalties, including:
- A fine of up to Ksh 50,000 for each offence.
- A penalty equal to 5% of the unpaid amount for every month the contribution remains unpaid.
- Potential legal action by NSSF against non-compliant employers.
Way Forward for Employers and Employees
Both employers and employees must adapt to the changes by ensuring timely compliance. Employers should update payroll systems to reflect the new contributions, while employees should be aware of the deductions and the benefits they will receive upon retirement.
For businesses, engaging with payroll service providers or legal experts can help streamline compliance with the amended NSSF Act.
Conclusion
The amended NSSF Act 2021 marks a significant shift in Kenya’s retirement benefits system, ensuring that workers save more for their future. While the increased contributions pose short-term financial adjustments, they ultimately enhance social security for employees upon retirement. Employers and employees alike must stay informed and comply with the new requirements to avoid penalties and ensure long-term financial stability.
For personalized legal assistance on NSSF compliance and employment law matters, feel free to contact us at Njaga & Co Advocates.