Why Opting Out Of NSSF For Any Other Private Pension Service Providers May Pose A Risk To Your Future Financial Security In Kenya

The new 2013 NSSF Act, whose implementation began at the end of February 2023 allows employers to channel the higher contributions (Tier II) to private pension schemes in a move that opened up a new battlefront between NSSF and the private pension providers.

Estimates seen by the Soko Directory Research Team, indicate that tier II contributions will reach Sh12.43 billion in the 2023/24 financial year before rising to Sh23.82 billion by June 2027 when the new NSSF Act is fully implemented. This has opened Pandora’s box kind of conversation.

The National Social Security Fund (NSSF) is a government-run social security scheme in Kenya that provides comprehensive social security protection to all employees in both the formal and informal sectors. The scheme is mandatory for all employees earning a monthly income of KES 6,000 and above, with contributions made by both the employee and the employer.

Most of us, given what has been happening across financial markets, are more adept at trusting a government-backed institution than a private firm. Despite what the ACT says, am keen to lean towards NSSF because I have seen how it has helped my 91-year-old and his pension. In fact, if he had, had the foresight to save more, he would be in a better financial position than he is now. But nonetheless, I am grateful. This has led me to think critically about this and what firms like CPF and other private Pension Provider firms are. This is why;

CPF Financial Services has obtained approval from the Retirement Benefits Authority (RBA) to manage tier II contributions from employers who opt out of NSSF. In this regard, I would like to fault the RBA with all due respect.

However, opting out of NSSF and choosing CPF Financial Services is a risky move for several reasons, and I say this with the utmost respect to the CPF brand, but as a market and financial research analyst, the essence of Corporate Governance tags at my mind greatly and through the lenses of prudent management, as I gaze upon the CPF brand, I can’t help but notice the following issues that the Retirement Benefits Authority should have factored in as they granted CPF the license to manage the funds of those opting out of NSSF. Here are my reasons;

1. CPF’s annual account balance is 10% of that of NSSF. This creates a lot of questions and stability on how such a small fund can manage the outflows from NSSF.
2. The element of compliance about contributions with CPF is wanting and of great concern because, their main contributors are Counties, and they are known to be notorious payers. This leads to high amounts of uncollected contributions that might not be collected at all. This leads to the fund having struggles in getting positive returns because the uncollected contributions might reach KES 2B and this is no small amount.

• The essence of funding. If all the contributors showed up today and demanded that they want their funds, hypothetically speaking, with ceteris paribus, will they manage to pay off the claims? The funding level of NSSF is 105% and that of CPF Financials is 85%. If this situation happens, this means that the Provident fund will fold up. This is a scary scenario for any contributor.

1. NSSF is anchored in law and guaranteed by the Government Of Kenya. This is something that no other private Pension provider can brag about and despite the government challenges, this is still a powerful bragging point. Can CPF Financials brag about this? This is KEY because, in the eventuality of anything wrong, NSSF has a better chance of looking out for its members through the Government’s Guarantee Scheme. CPF Financials is exposed and if its book balance is increased without addressing these concerns then it will be a headache for contributors.
2. The crucial fact of Corporate Governance. This is the elephant in the room. NSSF has in the last decade put in place stringent Corporate Governance structures that will be hard for anyone to mismanage the funds. The GOK cannot just wake up and do as they please as they will have to have a quorum. They must convince FKE (Federation of Kenyan Employers) and COTU. This tripartite engagement has seen better management of the fund and with increasing technology empowering the contributor, the future is good. NSSF has independent Custodians who ensure that the funds are well managed and taken care of better. This is something that you cannot talk about CPF Financials or any other. Hosea Kili runs the fund like his personal shop and this raises a myriad of questions on competence, corporate governance, and ethical aspect of management.

This is a conversation that we must have. If I am opting out of NSSF, then I must go to a better and solid brand. I believe NSSF is the best option majority of us have, especially in terms of access, and infrastructure across the country to address the issues any contributor may have.

NSSF is a statutory body established by an Act of Parliament, while CPF Financial Services is a private company. Therefore, NSSF is more accountable and transparent in its operations, and there are laws and regulations that govern its activities, which are not necessarily applicable to CPF Financial Services. This is not personal and I would love to interview Hosea Kili so he can address the concerns raised above.

NSSF has been in existence for over 50 years and has a proven track record of providing social security protection to millions of Kenyans. CPF Financial Services, on the other hand, is a relatively new player in the market, and its experience and ability to deliver quality services are yet to be tested.

NSSF provides a comprehensive range of benefits, including old-age pensions, invalidity pensions, survivors’ benefits, and emigration benefits. CPF Financial Services, on the other hand, has not disclosed the nature and extent of the benefits it will provide, and therefore, there is a risk that the benefits may be inadequate or not meet the needs of the members.

NSSF has a large membership base, which spreads the risk among a diverse group of individuals. This reduces the risk of loss for individual members. In contrast, CPF Financial Services is likely to have a smaller membership base, which increases the risk of loss for individual members.

NSSF is backed by the government, which provides a safety net in case of any losses. In contrast, CPF Financial Services is a private company, and there is no safety net in case of any losses.

NSSF has a guaranteed return on contributions, which is currently set at 7.5% per annum. CPF Financial Services has not disclosed the return on contributions, and therefore, there is a risk that the return may be lower than that of NSSF.

NSSF has a strong governance structure, with a board of trustees, a management team, and an independent auditor. CPF Financial Services, on the other hand, is a private company, and its governance structure is not as robust.

NSSF has a well-established investment portfolio, which includes investments in government securities, equities, and real estate. CPF Financial Services, on the other hand, is yet to establish its investment portfolio, and there is a risk that the investments may not perform as expected.

NSSF has a large network of branches and service centers, which makes it easier for members to access their benefits and services. CPF Financial Services, on the other hand, is likely to have a smaller network, which may make it more difficult for members to access their benefits and services.

NSSF is subject to regular audits and inspections by government agencies, which ensures that it is accountable and transparent in its operations. CPF Financial Services, on the other hand, may not be subject to the same level of scrutiny.

NSSF has a well-established customer care department, which provides timely and efficient service to members. CPF Financial Services, on the other hand, is yet to establish its customer care department, and there is a risk that the service may not meet the expectations of the members.

NSSF has a well-established brand, which is recognized and trusted by the public. CPF Financial Services, on the other hand, is a new player in the market, and its brand may not be as well-known or trusted.

NSSF has a long-term investment horizon, which enables it to invest in projects with long-term returns, such as infrastructure development. CPF Financial Services, on the other hand, may have a shorter investment horizon, which limits its ability to invest in such projects.

NSSF provides social security protection to all employees, including those in the informal sector, who may not have access to formal social security schemes. CPF Financial Services, on the other hand, may not be able to provide such protection to the informal sector.

NSSF has a well-established disability assessment and management system, which ensures that members who become disabled receive appropriate benefits and services. CPF Financial Services, on the other hand, is yet to establish such a system, which may lead to delays or inadequate benefits for disabled members.

NSSF has a well-established legal framework, which provides a clear process for resolving disputes between the scheme and its members. CPF Financial Services, on the other hand, may not have such a legal framework, which may lead to disputes that are difficult to resolve.

NSSF has a well-established contribution collection system, which ensures that contributions are collected on time and in full. CPF Financial Services, on the other hand, may not have such a system, which may lead to delays or non-payment of contributions by employers.

NSSF has a well-established member education and awareness program, which ensures that members understand their rights and benefits under the scheme. CPF Financial Services, on the other hand, is yet to establish such a program, which may lead to members being unaware of their rights and benefits.

NSSF has a well-established communication strategy, which ensures that members are kept informed of any changes or developments in the scheme. CPF Financial Services, on the other hand, is yet to establish such a strategy, which may lead to members being unaware of any changes or developments in the scheme.

NSSF has a well-established system for handling complaints and grievances, which ensures that members’ complaints are addressed in a timely and efficient manner. CPF Financial Services, on the other hand, is yet to establish such a system, which may lead to members’ complaints being ignored or not addressed.

In conclusion, opting out of NSSF and choosing CPF Financial Services is a risky move. NSSF is a government-run social security scheme that provides comprehensive social security protection to all employees in both the formal and informal sectors. NSSF has a proven track record of providing social security protection to millions of Kenyans and has a well-established governance structure, investment portfolio, customer care department, and legal framework.

CPF Financial Services, on the other hand, is a private company that is yet to establish its investment portfolio, customer care department, legal framework, and other essential structures. There is a risk that the benefits provided by CPF Financial Services may be inadequate or not meet the needs of the members. Additionally, there is no safety net in case of any losses, and the risk of loss is higher for individual members due to the smaller membership base.

Therefore, it is advisable for employers to continue contributing to NSSF and for employees to take advantage of the benefits provided by the scheme. By doing so, employees can be assured of comprehensive social security protection, a guaranteed return on contributions, and a well-established system for handling complaints and grievances.

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