University of Nairobi Pension Scheme 2007

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

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

3. Why Pension? The Importance of Saving for Retirement

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

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

6. 1. Breakdown of traditional social protection • 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

7. 2. Living Longer

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

9. Retirement planning 480 salariesRetirement planning spans 40 years of employment To provide for 25 65 65 90 Around 300 payments During 25 years of retirement

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

11. 5. Medical Costs are Sky rocketing

12. Income Drawdown Key features

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. What is Income Draw Down? 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)

15. Features of IDD • 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

16. IDD Rules • 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

17. IDD Rules • 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

18. NSSF Act, 2013 Changes to the Required Contributions

19. Establishment of Sub-funds • 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

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

21. Some Definitions Note LEL and UEL being phased in over five years

22. Two Levels of Contributions No mandatory contributions on earnings above UEL

23. Progression of LEL and UEL Tier I Tier II

24. Transition yr 1 (2014) Actual LEL of 6,000, UEL of 18,000

25. Illustrations • 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

26. Employee earning K Shs 100,000 per month

27. Contracting out by employers • 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

28. Individual Member Accounts • 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

29. Basis of Benefits • 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

30. Principal Benefits • 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

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

32. Retirement Benefits • 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

33. Invalidity Benefits • 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 • Rate 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

34. Survivors’ Benefits • 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

35. Old Provident Fund • 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

36. Way Forward

37. Way Forward • 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

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. Questions

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

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

42. Motivations for Reform • 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