MOI UNIVERSITY

ANNEX CAMPUS

SCHOOL OF BUSSINESS AND ECONOMICS

COURSE CODE: BBM 305

COURSE TITLE: PENSION ACCOUNTING

REG NO NAME
BBM/1697/22 ALEXANDER MURIITHI

TASK: ASSIGNMENT
Question 1

Explain briefly the motivation behind NSSF changing from 200 shillings by both
the employer and employee to 6% contribution on basic salary

The social securities significantly contributes to national savings which directly

reflect the level of saving in the country.

This change ensures that higher income earners contribute more proportionately
toward the social security benefits. The higher the income, the higher the
contribution. This ensures fairness to all employees.

Fixed monetary amounts tend to lose their value over time due to inflation. Thus, a
fixed percentage of the basic salary will keep pace with inflation..

Social security systems in different countries use a percentage-based contribution

model. By adopting this similar approach, the NSSF may be aligning itself with
international practices and standards in social security administration.

The change will create a culture of saving among different individuals. The savings
will be of great benefit upon retirement.

Question 2

Write a brief history of pension and explain why DC schemes have gained
popularity over the DB scheme

Pension can be dated back to ancient times. In the classical world, Romans offered
legionnaires (centurions) military pensions,in the form of a land grant and military
treasury.

The modern concept of pension was introduced during the industrial revolution
when companies began offering pension to retiring employees as a form of deferred
compensation in order to attract and maintain skilled workers.

Reasons why the DC schemes have gained popularity over DB schemes:

i. In a DC scheme, an employee does not loose his or her benefits incase he

decides to switch jobs unlike DB schemes where pension benefits may be lost
when an employee decides to switch jobs.

ii. DC schemes are flexible in such a way that employees can reduce their
contribution more easily especially during hard economic times.
iii. Companies have increasingly shifted towards DC schemes to reduce their long
term financial obligation and shift their investment risk to employees.

iv. In a define contribution schemes, employees have control over their retirement
savings allowing them to choose how their contributions are invested. This is an
empowering option compared to defined benefit plan where benefits are
determined by the employer.

Question 3

Discuss the advantages and disadvantages of defined benefit scheme and defined
contribution schemes

1. Defined benefit scheme

This is a scheme where benefits are defined by scheme rules and accrue
independently of the contributions made. The rules are defined in advance and
benefits are normally related to the final salary and number of years of service.

Advantages

a) A DB scheme provides a guarantee of income upon retirement which help in

financial planning and security.
b) In a DB scheme, the employer bears the investment risk and ensuring there are
enough funds to meet the promised benefits. This relieves the employees the
burden of managing their own investments.
c) DB schemes provide benefits for life, thus retirees are financially supported
throughout their retirement years.
d) DB schemes help to attract and retain skilled employees. Knowing that they have
access to retirement benefit can increase employee loyalty and commitment to the
organization.

Disadvantages

a) In a DB scheme, employers bear the risk and are responsible for ensuring there
are enough funds to meet promised benefits. Poor investment performance leads
to increased costs for employers in economic downturns.
b) Lack of flexibility on retirement benefits may be a disadvantage to employees
who prefer control over their retirement savings.
c) As population and life expectancy increase, DB schemes face challenges since a
larger retired population drawing benefits compared to the active workforce
contributing to the plan.
d) An employee who switches jobs looses the accrued benefits in the case of a DB
scheme.
2. Defined contribution schemes

This is a scheme in which the employer and the employee contribute either a fixed
percentage of earnings or as a shilling amount towards the retirement benefit of the
employee.

Advantages

a) Portability of employees contributions when they change jobs .

b) There is transparency since employees can see the contributions made to their
account and how those contributions are invested.
c) There is a potencial of high returns since they are based on performance of the
underlying investment compared to DB schemes where benefits are
predetermined.

Disadvantages

a) Investment risk is borne by the employee as the account balance is depedent on

the performance of the investment.
b) The payment of the benefit is not guaranteed as it depends on the contributions
made and the perfomance of the investment.

Question 4

Using the RBA act of 1997, discuss the players in the management of pension
scheme in kenya

The RBA is the regulatory body responsible for supervising and regulating the
establishment and management of retirement benefit schemes in Kenya
It ensures compliance with the RBA act and other relevant laws

Trustees
These are individuals or a corporate body entities appointed to manage the affairs of
a pension scheme.
They have the fiduciary responsibilities to act in the best interest of the scheme
members and ensure compliance with the RBA act and the trust deeds governing the
scheme.

Employees
Employers plays a crucial role in pension scheme by contributing to the scheme on
behalf of their employees and ensure that the contribution are remitted in a timely
manner
Employers also have a responsibility to provide accurate information to the scheme.
Pension scheme administrator
Entities licensed by the RBA to administer pension scheme on behalf of employers
and trustees. They keep records, member’s communication and processing of
benefits.
Contributing members: make contribution to pension scheme through deductions from
their salaries.