1. Member Education Sessions 2014 Retirement Planning and the new NSSF Act University of Nairobi Pension Scheme 2007 Presentation by: Shera Noorbhai June 2014

2. Slide 2  Importance of saving for retirement  Income Drawdown  NSSF Act, 2013 and the required contributions  Way Forward  Q & A Agenda

3. Slide 3 Why Pension? The Importance of Saving for Retirement

4. Slide 4 The numbers paint a SCARY picture! 89% The number of people retiring today at age 55 and above who are dependant on family support 20% The NRR of people retiring today aged 55 and above

5. Slide 5 Should we accumulate wealth for retirement? …...... why? Hmmm,… Yes….?

6. Slide 6  Traditional forms of social protection Extended families Local communities Social norms and tribal traditions  Impact of Urbanisation Disintegration of extended families Loss of traditional social and cultural norms AIDS/HIV epidemic are stretching the traditional forms of old age protection to breaking point => Poverty and destitution in old age unless planned properly 1. Breakdown of traditional social protection

7. Slide 7 2. Living Longer

8. Slide 8 0-20 yrs 40-55 yrs 20-40 yrs >55 yrs School Work life Retirement 3. On retirement for a longer period

9. Slide 9 Retirement planning 2565 90 Around 300 payments During 25 years of retirement 480 salaries Retirement planning spans 40 years of employment To provide for Have you started putting your retirement plan together?

10. Slide 10 KShs 5,000 bought you... 1970 1980 1990 2010 2020 ? 4. Inflation

11. Slide 11 5. Medical Costs are Sky rocketing

12. Slide 12 Income Drawdown Key features

13. Slide 13 Background - Recap  Prior to June 2008, the options for taking a benefit from a defined contribution scheme were: Take a lump sum from the Provident Fund Purchase an annuity from an insurance company Purchase a pension from the scheme With Scheme retaining long term investment and longevity risks and considered a defined benefit arrangement  Legislation amended in June 2008 to permit income drawdown as an alternative to annuity purchase.  Regulations for implementation of IDD were issued in 2010 and subsequently revised in 2012

14. Slide 14 An income drawdown is an arrangement in which a member opts to access his/her retirement benefits as a regular income through an investment fund from which retirement benefits payments are drawn. Essentially instead of buying an annuity at retirement, the member opts to take his/her accumulated asset (i.e. member account) and invest in an ‘income withdrawal plan’ either within the scheme or through a special plan (IPP or other suitable structure) What is Income Draw Down?

15. Slide 15  Flexibility with regard to  Investment choice  Frequency and timing of payment  Amount of income withdrawals  The income is not guaranteed but entirely dependent on the performance of the underlying investments, the amount of the periodic withdrawal and the member’s lifespan  Under IDD, member responsible for investment and longevity risk as well as all IDD related expenses Features of IDD

16. Slide 16  Minimum drawdown period is 10 years from the date of commencement of the drawdown  Frequency of drawdown: monthly, quarterly, semi annually or annually  Drawdown amounts as a percentage of the member’s outstanding account balance:  Maximum is 15% p.a.  Minimum is 0%  Allowance for fluctuations in drawdown amounts yearly  Must ensure regular financial advice and regular at least annual statements IDD Rules

17. Slide 17  The options available after the minimum withdrawal period of 10 years are: Continue IDD arrangement Use fund balance to purchase an annuity from an insurance company Take fund balance as a cash lumpsum  On death of the member, the options available are: Continue IDD arrangement in respect of nominated beneficiaries Use fund balance to purchase an annuity from an insurance company in respect of nominated beneficiaries Pay fund balance as a cash lumpsum to the nominated beneficiaries IDD Rules

18. Slide 18 NSSF Act, 2013 Changes to the Required Contributions

19. Slide 19  Act establishes two funds:  Pension Fund to cover all employed persons who are above 18 years of age  Provident Fund to cover self employed persons who wish to make voluntary contributions  Current Provident Fund to be closed and ring-fenced Establishment of Sub-funds

20. Slide 20 1.Statutory contribution is 6% each of Pensionable Earnings 2. Pensionable Earnings means lower of Monthly Wages and an upper limit called the Upper Earnings Limit 3. Monthly Wages defined as all emoluments excluding fluctuating emoluments (effectively gross consolidated earnings with limited exclusions) 4. Upper Earnings Limit is defined as 4 times National Average Earnings (NAE), which is published annually by KNBS New NSSF Contribution – The Golden Rules

21. Slide 21 Some Definitions Lower Earnings Limit (LEL) Average statutory minimum monthly wage for the top urban centres, second tier urban centres and rural areas National Average Earnings (NAE) Average wage earnings as published by KNBS in Economic Survey for prior year Upper Earnings Limit (UEL) 4 x NAE Note LEL and UEL being phased in over five years

22. Slide 22 Tier I Contributions Contributions at 12% of pensionable earnings (comprising 6% by Employees, 6% by Employer) up to LEL (i.e contributions as % of earnings up to average minimum wage) Must be paid to NSSF Tier II Contributions Contributions at 12% of pensionable earnings (comprising 6% by Employees, 6% by Employer) between LEL and UEL (i.e. contributions as % of earnings between average minimum wage and UEL) Contracting-out of Tier II Contributions permitted for employers who operate, establish or participate in schemes which meet a reference scheme test Two Levels of Contributions No mandatory contributions on earnings above UEL

23. Slide 23 YearLower Earnings Limit (LEL) KShs. Upper Earnings Limit (UEL) KShs. 16,00050% of National Average Earnings (18,000) 27,0001 times National Average Earnings (40,000) 38,0002 times National Average Earnings (88,000) 49,0003 times National Average Earnings (144,000) 5 and onwardsAs will be defined by the Act 4 times National Average Earnings (212,000) Progression of LEL and UEL Tier ITier II

24. Slide 24 Transition yr 1 (2014) Actual LEL of 6,000, UEL of 18,000 Earnings Monthly Earnings 8,00018,00035,000140,000250,000 Pensionable earnings (PE)8,00018,000 Contributions under New NSSF Employee/Employer4801,080 Impact of Change Increase in Employer (ee) contributions 280 880

25. Slide 25  Average Minimum Wage assumed to be K Shs 10,000 in 2018  National Average Earnings taken as K Shs 36,000 and grown approx 10% per annum  Salary grows approx 10% per annum Illustrations

26. Slide 26 Employee earning K Shs 100,000 per month 20142015201620172018 Monthly Wages 100,000 110,000 121,000 133,000 146,000 Upper Earnings Limit 18,000 40,000 88,000 144,000 212,000 Pensionable earnings (PE)18,00040,000 88,000133,000146,000 NSSF Contribution (6% of PE)1,080 2,4005,2807,9808,760 Tier I Earnings (PE up to LEL)6,000 7,0008,0009,00010,000 Tier II Earnings (PE above LEL to UEL) 12,000 33,000 80,000 124,000 136,000 Contributions under New NSSF Tier I Contribution : 6% PE upto LEL 360 420480540600 Tier II Contribution : 6% of (LEL – UEL) 720 1,9804,8007,4408,160 Total Employee 1,080 2,4005,2807,9808,760

27. Slide 27  Employer may opt to pay Tier II Contributions into a contracted out scheme it participates in or opts to establish or participate in  Application for opt out made to and administered by RBA  Tier I Contributions have to be paid to NSSF (i.e.. contracting out only applies for Tier II Contributions)  Contracting out does not impact the contribution amounts, only where contribution is paid and who manages it  Tier I and Tier II contributions are mandatory Contracting out by employers

28. Slide 28  Each member will have individual account in NSSF (‘Member Account’)  Contributions will be credited to individual account  Tier I Contributions credited will be net of cost of minimum death and invalidity benefits  Maximum deduction for min benefits capped at 2% of LEL  Each member account will segregate:  Tier I Contributions split between employee and employer  Tier II Contributions split between employee and employer (if not contracted out)  With investment returns thereon  Members will be entitled to annual benefit statements and on request at any other time Individual Member Accounts

29. Slide 29  Benefits based on size of member account  Ensures link between contributions and benefits  Retains largely defined contribution structure for benefits  Immediate vesting of contributions  Frequency of interest allocation – at least annually  Allocation of interest by Trustees based on advice of actuary or other qualified person Basis of Benefits

30. Slide 30  Old Age  Invalidity  Survivors’  In the form of regular pension  Funeral grant  Emigration benefit  Board may from time to time recommend to Cabinet Secretary additional benefits Principal Benefits

31. Slide 31  60 years for both males and females  Option to take benefits at or after age 50 Retirement Age

32. Slide 32  Eligibility  Qualifies for retirement age  Benefits  Pension/annuity for life that can be secured by member account  Annuity must include a minimum guarantee period of 10 years  Annuity may be combined with Tier II credits whether from NSSF or opt-out scheme  Pensions secured through securing annuities or income drawdown  Commutation permitted to a max of 1/3 of Tier II credits, unless trivial amount  Benefits can be deferred beyond retirement age Retirement Benefits

33. Slide 33  Eligibility  36 months of contribution payments immediately preceding date of invalidity  Must be certified to be permanently invalid by qualified and recognized medical board  Benefits  R ate of invalidity pension shall be determined and payable in the same manner as for retirement pension  Except that the Tier I Credit in respect of the member shall be increased by an amount equal to the last Tier I monthly contribution by and in respect of the member multiplied by half the number of months of potential employment between the member’s date of invalidity and attainment of pensionable age subject to a maximum of 90 months potential employment counting Invalidity Benefits

34. Slide 34  Eligibility  Death in employment  36 months of contribution payments  Benefits  Payable to dependants of deceased persons  Based on nomination of beneficiaries, but subject to Board decision  Total pension to survivors to be equal to alternative invalidity pension Survivors’ Benefits

35. Slide 35  Old provident fund closed and fully ring fenced  Will be accounted for separately  Benefits earned under existing NSSF will be retained on same terms, with exception of funeral grant Old Provident Fund

36. Slide 36 Way Forward

37. Slide 37  Decision taken by UON Council to:  Integrate contributions  Deduct NSSF contributions from the Scheme Contributions  Contract-Out  Seek approval from RBA for Tier II contributions to go to Scheme instead of NSSF  UON Council has appointed Management to do the necessary to implement decision Way Forward

38. Slide 38 Advice and Disclaimer Any guidance, opinions or proposals expressed by the presenter is for information purposes only and are not intended to be advice as contemplated. Alexander Forbes shall not be liable for any damage or loss suffered resulting from any action taken by any represented based on this presentation or any discussions relating thereto.

39. Slide 39 Questions

40. Slide 40 Retirement – What is it?  Of change  Of challenge  Of adjustment  To do what we have always wanted to do Retirement is a time……… To get the maximum out of retirement we need to plan

41. Slide 41 Retiring Comfortably - How much do I really need? A good rule of thumb is a minimum of “8/9/10”; 8 times annual salary if retiring at 60; 9 times annual salary at 55 and 10 times annual salary at 50 What regular contributions do I need to make? The following table shows how much you should put aside to get to “8/9/10” taking into account when you start contributing Minimum “8/9/10” Start AgeAge 60; min 8Age 55 ;min 9Age 50; min 10 2010%15%21% 3017%24%37% 4029%48%86% 5069%167%- Rates as % of salary

42. Slide 42  Breakdown of traditional forms of social security & old age protection becoming a policy concern with projected increase in dependency ratios  Improve coverage  Improve adequacy of benefits  Improve type of benefits and form in which provided  Overcome inertia and behavioural obstacles to saving  Linkage between social security, employment and development  Increase savings rate  Promote voluntary contributions and participation by informal sector  Making mandatory contribution rates comparable with “peer” countries Motivations for Reform