As we get older, we lose the energy and ability to work. It is therefore imperative to think about income sources during retirement. How about the National Social Security Fund (NSSF)? While this may be one income source, it may not be enough. In addition to saving for retirement via the NSSF, you can use a pension scheme. In this article, we explore pension schemes and pension scheme types.
What is a Pension Scheme?
A pension scheme fund, or plan can be defined as a long-term saving plan that helps you save money for future purposes. Saving up money during your working days for when you are old is also a convenient way to define it.
Types of Pension Schemes in Kenya
In the Kenyan Vision 2030, one of the social and economic pillars is the ‘Retirement Benefits Sector’, which is further divided into three:
- The zero pillar
- The first pillar
- The second pillar
Let us further explore each of these ‘sub pillars’.
The Zero Pillar
This one primarily focuses on the senior citizens (who are aged over 65). It gives them a basic income and the distribution is managed by the Ministry of Labor and Social Protection.
The First Pillar
This category is mandatory for all workers and comprises the NSSF (National Social Security Fund).
The Second Pillar
This category comprises 4 pension plan types:
- Civil Service Pension Schemes.
- Occupational Pension Schemes.
- Individual Pension Schemes.
- Umbrella Retirement Pension Schemes.
Our focus, in this article, will be on the sub-categories in the second pillar.
Civil Service Pension Scheme
This type is established by a Parliamentary act. Its aim is to provide retirement benefits for civil servants. It is a non-contributory scheme and is funded by the government’s revenue collections.
As you may have rightly guessed, this is not sustainable in the long term, as retirees increase, year after year. To further streamline pension contributions, the Public Service Superannuation Scheme Act was enacted in 2012. Its goal was to formulate a contributory pension scheme aimed at ensuring that public servants get retirement benefits. It was effected on the 1st of January, 2021.
Occupational Pension Schemes
These are schemes where all the members belong to a particular organization, institution, or company. The employees contribute to the scheme and automatically leave the scheme if they leave the employer. They can no longer contribute.
In Defined Contribution Occupational Pension Schemes, both employers and employees make fixed contributions, which could be a percentage of pensionable earnings or a specified amount. Employees are free to contribute more than the defined fixed rate. This contribution is known as the additional voluntary contribution. This is the most common occupational pension scheme type in Kenya.
Individual Retirement Pension Scheme
These are run by independent financial institutions, usually insurance firms. Their membership is open to anyone willing to contribute towards retirement.
Umbrella Retirement Pension Schemes
Unlike Occupational schemes where all members belong to the same employer, in Umbrella schemes, contributions are pooled from several employers and employees. This is a cost-effective move, as an individual contribution, as well as that of their employer, is significantly reduced.
The above are the pension scheme types you will encounter within the Kenyan borders. While NSSF is mandatory, you can combine it with any other pension type. It is however imperative to find out what each type entails to see whether it is a good fit.