UNIT NAME: PENSION AND OTHER BENEFITS SCHEMES

UNIT CODE: ACT 2308

LECTURE ONE: INTRODUCTION TO PENSION

DEFINITION

Pension : A regular payment made by the state/scheme/employer to people of or above the official
retirement age and to some widows/widowers/children/estate and disabled people.

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.

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.

In Conclusion

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.

PENSION FUND

A pension fund is a type of investment fund that is set up to provide retirement benefits to plan
participants. Pension funds can be either private or public, and they are typically managed by professional
investment managers who are responsible for investing the fund's assets in a variety of financial
instruments, such as stocks, bonds, and real estate.

Pension funds can be either defined benefit plans or defined contribution plans.
Defined benefit plan: The retirement benefits are based on a formula that takes into account factors such
as the employee's salary, years of service, and age at retirement. The employer is typically responsible for
funding the plan and managing the assets.

Defined contribution plan: The retirement benefits are based on the contributions made by the employee
and employer, as well as the investment returns earned on those contributions. The employee is typically
responsible for managing the investments and bearing the investment risk.

Pension funds play an important role in retirement planning, particularly as people are living longer and
traditional government pension systems are under pressure. However, they are subject to regulatory
oversight and can also face challenges related to funding, investment performance, and management
fees.

Hybrid plans: Seek to combine features of DB and DC schemes in some way and can take a variety of
forms. For purposes of categorization, hybrid schemes are DB schemes because of the promises they make
to members.

Provident fund

Provident fund means a scheme for the payment of lump sums and other similar benefits to employees
when they leave employment or to the dependents of employees on the death of those employees.

In the case of a pension fund at the point of retiring a proportion of the retirement fund is commuted as
lump sum with the remainder paid out as periodical payments. The commuted amount will be equal to
no more than one quarter of the retirement benefits in a scheme where members do not make any
contributions and not more than one third of the retirement benefits in a scheme where members make
contributions.

Significance of Pension Funds

Pension funds play a significant role in providing retirement security for millions of workers around the
world. Here are some of the key reasons why pension funds are important:

 Retirement Income: Pension funds provide a source of income in retirement, helping to

supplement other sources of income such as Social Security or personal savings.

 Investment Opportunities: Pension funds can invest in a wide range of assets, including stocks,
bonds, and real estate, providing opportunities for growth and diversification.

 Long-Term Focus: Pension funds are typically managed with a long-term focus, which can help to
mitigate the impact of short-term market fluctuations on retirement savings.

 Employer Attraction and Retention: Offering a pension plan can be an effective tool for attracting
and retaining talented employees, particularly in industries where retirement benefits are highly
valued.

 Economic Impact: Pension funds can play a significant role in the economy, as they provide capital
for investment, contribute to financial stability, and support long-term economic growth.
  Government Savings: Pension funds can also help to alleviate the burden on government pension
systems, as individuals are responsible for funding their own retirement through private pension
plans.

In summary, pension funds are an important component of retirement planning, providing income
security, investment opportunities, and economic benefits for individuals and society as a whole.

TERMINOLOGIES

(a) Flexible benefits

This is a form of provision under which the beneficiary has a choice about the types or levels of benefits
to be received. It will usually involve an option to receive salary instead of other forms of benefits or vice
versa.
(b) Pay-as-you-go
A financing arrangement under which benefits are paid out of revenue and no funding is made for future
liabilities.
(c) Closed scheme
A closed scheme is a scheme that does not admit new members. Contributions may or may not continue
and benefits may or may not be provided for future service for existing members.
(d) Hybrid scheme
A scheme that offers both defined benefit and defined contribution sections or benefits that are the better
of a defined benefit and a benefit on a defined contribution basis.
(e) Centralized scheme
An occupational benefit scheme operated on behalf of several employers.
(f) Contingent pension

Contingent benefits are the benefits payable if a scheme member dies during employment (or self-
employment) to which a pension arrangement relates. The definition includes lump sum benefits and
pensions payable to dependents.

(g)Contingent liabilities:

Are the statutory pension benefits that are either being built up, are deferred ,PAYG or are in payment for
your current and former employees who are members of the Fund.

(h)Contingent asset:

Are arrangements that can be put in place to support the level of scheme funding, particularly in the event
of employer insolvency.