Why Opting Out Of NSSF For Any Other Private Pension Service Providers May Pose A Risk To Your Future Financial Security In Kenya
KEY POINTS
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.
KEY TAKEAWAYS
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.
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;
- 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.
- 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.
- 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.
- 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 co