Banking on social security: Is it a choice?


In the age of coronavirus pandemic, the Government, non-governmental organizations and private employers should raise the bar to ensure that workers are able to save enough for retirement. Sadly, how do you deal with a situation that has left the two parties, employee and employer, facing hell?  

Anything that happens during this era, or doesn’t happen, is a story for another day – jobs or no jobs, companies going down, and broken families. Saving money is not a priority at the moment. Perhaps a different approach, and one that gives you control is what could work right now. Many corporates and individuals are navigating through a pandemic that has stretched for over 100 days, and nobody knows when things will bounce back to normalcy.

Negative performance of most companies was expected, and aviation industry is a real life example. The first six months of 2020 have put airlines between a rock and a hard place. This is backed by data from International Air Transport Association which shows that GDP supported by aviation in Africa might fall by up $35b, which is $7 billion more thatn the figure that the body had previously predicted. 

A majority of players in the aviation industry have grounded their airlines. Some have been forced to reduce operations and Kenya Airways is one of them. The national career in an online investor briefing that took place end of August said that it has been quite a tough year thanks to depressed demand for air travel. It is resizing across its networks, a move that will obviously affect fleet and employees big time. 

“In the next six months it will be tough time for the airline… It’s really tough and I would urge investors to give us 100% support. But going forward, we’ve analysed the situation in detail… We know that we can continue to be the pride of Africa if we make and follow through on the right strategic calls without undue interference as we prioritise the financial viability and long-term survival of the airline. Nobody wants to lay off people. It’s painful but it needs to be done,” says Michael Joseph, chairman of Kenya Airways board. 

The Chairman sounds like a man with a lot of understanding. Reality is that the coronavirus pandemic has troubled not only businesses but also homes so much that building strong social security schemes might be the best solution. The pandemic has created an invisible mess, and companies that will fail to innovate will suffer. Look at the working from home economics, for example. The trend is forcing companies and individuals to not only cut down on rent but also shift resources to where there are huge demands. It is a whole different ball game. 

Indeed, things are quickly going to change. Experts have analysed the pandemic and concluded that it will take time to do things normally. Already, most companies, though trying to operate within the law, are struggling. Fund managers too are not spared. A look at the National Social Security Fund (NSSF), a national institution offering retirement solutions show that it is not easy to meet targets as far as revenue collection is concerned. 

There was a net surplus of Sh25.76b in the year to June 2018, up 7.8% from Sh23.89b in the 2017 financial period as per last audited figures of the NSSF. The figure is expected to dip as many employers have reduced their operations significantly as it is becoming tough to sustain a workforce amidst the current circumstances. 

Generally, regular contributors are also affected in such a scenario. When a contributor fails to send payments, the NSSF is absolutely denied revenue. As anybody in pension business will tell you, individuals and businesses contribute a certain amount resulting to a financial freedom for individuals and businesses at retirement. The questions are: How will the NSSF protect workers? Are we breeding a new generation that will retire with little or no savings? How will pension money be remitted when the workers lack buying power simply because some are on pay cuts, or unpaid leave? 

Over the years, the more enlightened segment of the workforce has come to insist on more personal control and transparency in dealing with employers, hence wanting to manage their own retirement planning.  

There are many reasons employers especially those in the private sector will be forced to set up pension plans in the near future. Many of them have been ignoring that route simply because of lack of the needed technical and legal support. But the current goings on might be an eye opener. 

For employees, a pension plan is of high interest because it is a savings for their retirement. Very few employees will develop personal savings for their retirement and therefore a pension plan provides an avenue for a forced saving. On the other hand, due to tax exemptions that come with a registered pension plan, employees are able to get tax relief on their contributions to the pension plan and hence have high take-home pay than when they would have no pension plan.

Having corporate organisations with pension plans will be a plus in the fight against poverty. Pension plans will go a long way in reducing dependency at old age and hence reducing poverty at that level of the society. The savings that pension plans mobilise is good for the economy, because they are long-term savings. But the whole process has many challenges. That is why the government has a high interest and thus ensuring that an enabling environment is provided for these schemes to thrive. 

“Due to poor management of these plans in the past by employers/Trustees the employees have reservations of the promises made by the employer on their pension arrangements. For this reason, most employees have little respect for pension plans. Most pension plans have poor if any pension plan communication policies and due to limited knowledge most employees look at pension plans as a way for an employer to deny them their deferred salaries when the contract is terminated on a sour note,” says Fred Waswa, group CEO of Octagon Financial Services. 

As always, the savings that an employee makes in the pension plan earn a tax-free income on the investments. These taxes are subject to certain limits stipulated in law. This increases the returns on the savings and hence faster growth of the plan to ensure enough savings at retirement age. 

The Coronavirus pandemic has seemingly tested the government interest in ensuring that the whole workforce is taken care of when it comes to pension plan arrangements. Thus, what goes into setting up a scheme has been questioned. 

Establishing a scheme

It is interesting that it is not mandatory for companies to provide retirement savings avenues for their employees. But the good thing is that the maddening coronavirus has, sort of, equally exposed the underbelly of employers and workers. As an example, most employees are becoming more conscious of their future income when they get employed and the question of benefits does not leave out retirement schemes. 

Companies, particularly the Small and Medium Enterprises (SMEs) still face challenges in establishing their own schemes. Establishing a scheme is a tedious process that needs time and resources. Most of the SMEs are less on human capital and would try to maximize the use of whatever they have to run business. This means that it may become strenuous to allocate resources to non-core business like scheme set up and management processes.

Once a scheme is set up the minimum number of trustees required is four. Because of the small staff counts that SMEs have, it is unreasonable to have a large percentage of employees as trustees. The regulation for trustees to serve a maximum of six years makes the whole process complicated thanks to the fact that the organization is likely to run out of employees to be trustees.

The Retirement Benefits Authority (RBA) requires that for a scheme to be established it must be set up under a trust deed. This is to ensure the scheme operates as a legal entity separate from the founder. This is a legal document that usually is prepared with the help of legal experts, which require financing of such a process. The SMEs may not afford such start-up costs of retirement schemes.

It is also a requirement that for a scheme to be registered by the RBA, it must have appointed a fund manager who will provide professional fund management services, a custodian bank to provide settlement and custody services for scheme assets and administrator to provide record keeping and general administration of the scheme. These are services essential to ensure safety of members’ assets. However, each of these service providers will charge minimum fees for small start-up schemes. Most SMEs may not sustain such initial costs.

The trustees of a scheme require training to ensure they are able to provide “trusteeship” which is also a cost that small schemes may not sustain. It is at the back of this that umbrella schemes come in handy for the private sector, as the employer does not have to set up a scheme. 

Knowing the advantage that comes with joining a scheme, an employee will simply join an existing scheme registered and regulated by RBA and the employer will deduct and submit contributions to the umbrella scheme. 

In most developed nations, the retirement benefits industry is driven by umbrella schemes whereby multiple and unrelated employers participate in a single pension scheme, a move that tends to be cost effective and also avoid exposing employees to fiduciary risks when they are made trustees. 

Sign Up