DEFINITION OF PENSIONS

A) BLACK LAWS DICTIONARY

 Defines Pension as “a stated allowance out of the public treasury granted
by government to an individual or to his representatives, for his valuable
services to the Country, or in compensation for loss or damage sustained
by him in the Public Service.”

B) DUHAIMES LAW DICTIONARY

 Defines Pension as “A private or government fund (or payments there
from), from which intermittent and regular benefits or allowances are paid
to a person upon his or her retirement or disability.”

C) MOLLEUR V MNR, JUSTICE DUMOULIN [1965 CTC 267]

 Of the Exchequer Court of Canada wrote that:
 "Pension allowances or stipends presuppose the retirement or cessation of
the pensioner's services, as no one draws from the same employer both a
salary and superannuation installments."
 He further adopted these words to define a "pension":
 "... an annuity or other periodical payment made, esp., by a government, a
company, or an employer of labour, in consideration of past services or of
the relinquishment of rights, claims, or emoluments....'

PENSIONS AND GRATUITY

 Pension is a term which expresses all long-term benefits offered by the

scheme.
 It defines periodical payments given to a retired member, invalid persons
and survivors of the deceased member to replace the loss of income
resulting from old age, disability or death.
 Pensions are paid for during employment by the employee alone, or
supplemented by the employer.
 Sometimes, pensions are only payable as of a certain age, such as at the
retirement age of 55 or 60 or 65, or upon the attainment of a certain length
of service, such as 30 years of service.
 "Pensions are universally construed as a reward for long-continued service
paid upon retirement from service, and all pensions of public employees
are paid upon their retirement.
  "A pension is a stated allowance or stipend made in consideration of past
services or of surrender of rights or emoluments to one retired from service,
and is not wages as ... wages are defined as remuneration for employment."
 The term pension refers to a fixed sum paid regularly to a person or to
the person's beneficiaries, by their employer as a retirement benefit.
 These pensions are in the form of annuities. A pension may also be
defined as a stated allowance out of the public treasury granted by
government to an individual, or to their representatives, for their
valuable services to the country, or in compensation for loss or damage
sustained by them in the public service.
 It is a regular income paid by a government or a financial organization
to someone who no longer works, usually because of their age or health.
 Furthermore, an employee can receive a pension for other reasons except
for age and health that is a pension could be occupational or personal.
 An occupational pension is one that is given by an employer, in the case
of a private organization.
 A personal pension on the other hand is one where the employee
organizes for it themselves with an insurance company.
 For pensions, employers are required to make contributions towards a
pool of funds that is then invested on the employee’s behalf, allowing the
employee to receive benefits upon retirement.
 Depending on the pension scheme, the employee may also be required
to make contributions.

GRATUITY

 A gratuity is a lump sum amount that an employer pays an employee upon

retirement, completion of a contract of employment, resignation from
employment or in the event of death or being rendered disabled because of an
accident or illness in accordance with the provisions of the contract of
employment.
 See Ben Panhill Sifuna v Kenya Urban Roads Authority [2014] eKLR Cause
Number 734 of 2010 Paragraph 58 where it was stated
i. It serves as reward and recognition for the time served by the Employee,
and also is an important social security mechanism as it is intended to
help a worker after termination.
ii. In essence, a gratuity is a monetary gift from an employer to an employee
for services rendered. The rationale for gratuity is to encourage
 employees to offer longer service to the employer and to ease the
termination of contract of employment by offering the sum of gratuity as
consolation.
 Generally, gratuity is payable upon successful completion of the agreed
contract term.
 Alternatively, an employee could become eligible to gratuity payment after a
specified period of employment. Usually, five years of service with the
employer will suffice.
 This is because the law does not anticipate that one will work for a single
employer all their life. However, in the event of death, the standard is often
lowered and the gratuity is paid to the nominee of the employee.

 See George Onyango Akuti v G4S Security Services Kenya Limited [2013] eKLR
Cause No. 107 of 2013 where it was stated
i. As a general rule, gratuity is not provided for as a minimum condition
of employment. A worker is entitled to a gratuity when it is expressly
stated in the employment contract and thus a claim for gratuity must be
grounded either on provision in the contract of employment or statute.

 Gratuity is given at the discretion of the employer. The gratuity payable depends
on the terms of the contract of service. In essence, gratuity should be a term of the
contact of employment. The amount should be stipulated by the contract as should
the conditions necessary for qualification or entitlement to gratuity such as period
of service.
 See Central Bank of Kenya v Davies Kivieko Muteti [2009] eKLR Civil Appeal
82 of 2005. Where it was observed gratuity by its very nature is discretionary and
cannot be implied.
 Gratuity is given at the discretion of the employer. The gratuity payable
depends on the terms of the contract of service. In essence, gratuity should be a
term of the contact of employment. The amount should be stipulated by the
contract as should the conditions necessary for qualification or entitlement to
gratuity such as period of service.

Difference Between a Pension and Gratuity

 Pensions and gratuities have various similarities. These include that they are
both social security mechanisms and that they are paid to employees. However,
despite these similarities, gratuity and pension schemes have numerous
differences. These include:
a) Legal Basis for Provision
 The Employment Act requires employers to provide for pension schemes for
their workers within their contracts of service. On the other hand, gratuity is an
ex gratia payment by the employer to the worker for dedicated service provided
for a period of more than five years prior to termination. Employers are
therefore compelled by law to pay their employees whereas it is not mandatory
for employers to pay their employees gratuity.
 However, persons in the public service are entitled to both pensions and
gratuity.

b) Mode of Payment
 Pensions are paid in the form of annuities which are regular payments made for
a lifetime, paid in a fixed sum in the form of monthly installments to the
employee throughout their retirement or to his survivors in the event of death
However, gratuities are paid in the form of a one-off lump sum.

c) Contributions
 In the case of pension schemes, both the employer and the worker make
contributions. However, an employee does not contribute any portion of her
salary towards this amount.

d) Taxation
 Pension benefits are exempted from taxation. When contributing, one enjoys tax
reliefs at the point of deductions from one’s salary. In addition, at the point of
retirement, the pensioner enjoys a tax relief of up to a certain limit after which
the rest of the amount is taxed in a graduated scale.
 On the other hand, gratuity is taxed pursuant to the Income Tax Act which
provides that income upon which tax is chargeable under this Act is income in
respect of gains or profits from employment or services rendered. The Act then
further stipulates that the term gains or benefits include gratuity.
 However, both pensions and gratuities granted in respect of wounds or
disabilities caused in war and suffered by the recipients of those pensions or
gratuities are both tax exempt.
e) Governance
 Pension schemes are governed by various statutes such as the Pensions Act and
the Retirement Benefits Act. Pension schemes must be registered and are
regulated by the Retirement Benefits Authority therefore enhancing their
security. In addition, trustees are appointed to manage the scheme and they are
liable in the event of any mismanagement of funds.
 The gratuity is only governed by the contract of employment and there are no
accountability structures around the gratuity.

f) Investment
 For pensions, contributions are made into a pool of funds that is then invested
in order to generate profit ensuring that the employee is guaranteed future
benefits. The investment of these funds is done in accordance with the
Investment. Guidelines given by the Retirement Benefits Authority. However,
for gratuities, the gratuity money is not invested.

g) Purpose
 Gratuity is nothing but a gift to convey gratitude given by the employer to the
employee for his contribution to the organization or to the country (public
servants) while a pension is viewed as a retirement plan in which a particular
sum is invested by the employer to guarantee a source of income after the
employee retires, or to his dependents in the case of his death.
 Table 1.1 Summary of Differences between Pensions and Gratuity
PENSIONS GRATUITY

Legal Basis Mandatory as per the provisions Discretionary

of the Employment Act

Mode of Regular payments One-off lump sum

Payment

Governing Statute Contract of Employment

Instrument

Contributions Employer and employee Employee does not contribute

contribute

Taxation Tax Exempt Taxed

Investment Pension funds are invested. The gratuity money is not

invested.
PENSIONS AND PENSIONS SCHEMES

 In all developed countries, retired people represent a substantial share of the total
population (11-18%)
 For the vast majority of these people, pension payments constitute the bulk of their
retirement incomes.
 A pension is an income received by a retired person in place of earnings from
employment.
 Pensions are not the only source of income available to retired people. Other
sources include income from property, savings and investments, means-tested
state benefits and, sometimes, the right to consume free of charge – or at a discount
– goods or services which non-pensioners must pay for.
 Many pensioners also have access to a share of the incomes of other people with
whom they live, and many continue to perform some paid work.
 The difference between a pension and other forms of income is that pensions take
the form of an annuity – a stream of regular payments, guaranteed for life.
 The need for pensions arises because people’s capacity to work, and consequently
their ability to derive an income from employment, declines in later life. Although
the point at which this decline begins, and the rate at which it occurs, differs
between individuals, everyone’s capacity to support themselves from
employment eventually ceases altogether, unless death intervenes first. In
traditional societies and less economically developed countries, families provide
the bulk of economic support for the elderly.
 More than half of all old people in the world are cared for by their relatives. The
extended family structures found in traditional societies and developing countries
are, however, much less common in the industrialized world. Economic linkages
between family members are weaker.
 Kinship groups are smaller and more widely dispersed, and relatively few
households comprise more than two generations of the same family.
 Pensions are thus a necessary substitute in developed countries for economic
support within the family.
PENSION SCHEME

 A pension scheme is a mechanism for providing retired people with annuities, and
for allowing those of working age to build up entitlements to an annuity when
they retire.
 Pension schemes can be provided publicly, by national governments, or privately,
by employers, insurance companies and other commercial organizations.
 Without pension schemes, the only way workers could make provision for their
old age would be by deferring consumption of part of their income until they
retired – i.e. by saving for retirement.
 Faced with uncertain life expectancies, however, workers would have difficulty
knowing how much to save.
 Those with a strong aversion to risk would tend to over-save, in an attempt to
avoid the possibility of exhausting their savings before they died.
 Others would not save enough. Pension schemes overcome these pitfalls by
providing retirement annuities in return for contributions made during working
years.
 They are, therefore, a more efficient way of shifting consumption from the early to
the latter part of the human life course.

ANNUITITY

 Annuities are contracts which are sold to individuals by life insurance companies
to provide a guaranteed income from the date of purchase (or coming into effect
for deferred annuities) until death.
 They thus provide insurance against the non-diversifiable risk of outliving ones
assets.
 This is minimized by “law of large numbers” given a pool of annuitants. In
addition, investment risk is eliminated by traditional level annuities, and inflation
risk can be removed by indexed annuities (if suitably priced indexed bonds are
available).
 The trade-off is losses in terms of missed opportunities to invest freely.
 Annuities, if fairly priced, allow maximization of income over the pensioner’s
lifetime compared with other ways of releasing assets, since alternatives would
always require excess assets at death).
 They also provide a smooth income which is consistent with what is typically
assumed to be a desired pattern of consumption. They may thus be the optimal
way to invest, unless there is a bequest motive.
RISK

 Correspondingly, for the provider, risk in annuities is related to two main aspects
1. The degree to which returns from the financial instruments chosen to back
the claim match the income stream precisely, and
2. The accuracy of the mortality assumption.
 If either of these is inaccurate in favor of the annuitant, the company can make
unexpected losses.
 Ultimately, such losses may threaten solvency and hence the income stream to the
pensioner.
 Equally, if the insurance company becomes insolvent for other reasons arising
from liabilities (e.g. losses on life or general contracts) or assets (e.g. credit risk on
corporate bonds), the annuity payment stream may again be threatened.

TYPES OF PENSION SCHEMES

 Pension schemes usually fall into one of two broad types:

1. Defined benefit (DB) schemes and
2. Defined contribution (DC) schemes.

DEFINED BENEFIT SCHEMES

 DB schemes allow workers to accrue entitlements to retirement benefits, the value

of which are determined by the rules of the scheme.
 DB schemes provide either flat-rate or earnings-related benefits.
 Britain’s basic state pension (BSP) is an example of a flat-rate DB scheme for
example -In April 2003, single pensioners with full BSP entitlement received
pension payments of £77.45 per week, irrespective of their prior earnings from
employment. Married or cohabiting pensioner couples received £123.80 per week.
 The US equivalent of Britain’s BSP – known as Old Age Survivors and Disability
Insurance (OASDI) – is an earnings-related scheme. The value of the pension
benefits it provides depends upon pensioners’ earnings before retirement. Pension
entitlements are calculated as a fraction of workers’ pre-retirement earnings for
each year of scheme participation. Thus, the greater a person’s earnings from
employment, the higher the pension benefits he or she will receive in retirement.
 Whereas the value of pension payments from DB schemes is predetermined
according to benefit rules, contributions are variable.
  The administrators of DB schemes are free to raise or lower contribution levels in
line with their scheme’s financing requirements.
 DB schemes can thus be thought of as providing fixed benefits based upon variable
contributions.

DEFINED CONTRIBUTION SCHEMES

 By contrast, DC schemes provide variable pensions based on fixed contributions.

 The rules of DC schemes specify the amounts that must be contributed, not how
much will be paid out in pension benefits.
 Contributions may be flat-rate – e.g. 200 per month – or set at a fixed proportion
of workers’ earnings.
 DC schemes are frequently referred to as money purchase schemes, since the value
of the pensions they provide depends upon how much pension income a worker’s
total contributions will buy when he or she retires.

FINANCING OF PENSION SCHEMES

 Pension schemes are financed on either a

i. funded or
ii. a pay-as-you-go (PAYG) basis.
 Contributions to funded schemes accumulate in a fund which is invested in a
range of financial assets – company shares, government and commercial bonds,
property, etc.
 The pensions these schemes provide are paid for from members’ accumulated
contributions and investment returns.
 Contributions to PAYG schemes do not accumulate in a fund.
 Instead, the pensions these schemes provide are financed directly from
contributions.
 Because there is no fund, PAYG schemes are often referred to as unfunded
schemes.
 Whereas DB schemes can be financed on either a funded or PAYG basis, DC
schemes are always funded.

DISTINCTION BETWEEN FUNDED AND PAY-AS-YOU-GO SCHEMES

 A key distinction between funding and PAYG is that those who contribute to
funded schemes pay for their own pensions, whereas contributors to PAYG
schemes pay someone else’s pension.
  Because PAYG schemes finance retirement benefits from the contributions of
active members – those currently in employment – they can begin paying pensions
as soon as they are established.
 A disadvantage of funded schemes is that many years must elapse from the time
they are set up before sufficient funds have accumulated to provide retiring
workers with pension benefits.

CATEGORIES OF PENSION SCHEMES

 Differences in national pension systems are often compared and analyzed with
reference to various ‘pillars’, or ‘tiers’, of pension provision.
 Pension schemes can be categorized in three ways
i. First Pillar or Bottom Tier
ii. Second Pillar or Middle Tier
iii. Third Pillar or Top Tier

a) The Different Provider of the pension

i. Thus, the first pillar – the bottom tier – comprises state-run public
pension schemes,
ii. the second pillar – the middle tier – is made up of employer-provided
occupational pensions, and
iii. the third pillar – the top tier – consists of pension arrangements which
individuals make for themselves through commercial pension
providers.

b) Different Type of Benefits

 Alternatively, each pillar/tier can be defined in terms of different types of pension
benefit. In this case,
i. the first pillar would provide flat-rate pensions,
ii. the second earnings-related pensions,
iii. with the third providing pension benefits which vary according to the
amount of retirement saving individuals undertake.

c) Function
 On a functional basis
i. The first pillar is defined as consisting of basic income schemes aimed at
preventing poverty in old age through the provision of flat-rate retirement
benefits.
 ii. The second pillar is made up of income maintenance schemes, which aim
to prevent a sudden fall in income at retirement by providing earnings-
related benefits.
iii. The third pillar consists of schemes designed to supplement the retirement
incomes provided by the first and second pillars.

d) Method of Financing
 Where the different pillars/tiers are defined according to the method of financing,
i. The first pillar consists of schemes which are financed out of general
taxation. These usually provide means-tested retirement benefits.
ii. Pillars two and three comprise, respectively, PAYG-financed government
schemes and funded private occupational and individual schemes.

MEMBERSHIP

 Membership of more than one pension scheme is common in Kenya, Britain, the
United States and many other countries.
 In addition to their participation in the government-run scheme, Kenya, British
and American workers are frequently members of schemes provided by their
employers.
 Many workers also contribute to schemes run by commercial pension providers,
either in addition to or in place of those offered by their employers.
 Consequently, large numbers of people either have, or will have, a total pension
income that derives from several sources.
 In some countries, though – Greece and Italy, for example – membership of more
than one pension scheme is unusual. The overwhelming majority of workers in
these countries rely solely on the government scheme for their retirement
pensions.

PARTICIPATION

 Participation in pension schemes is not always a matter of choice.

 Where governments provide a public scheme, membership is usually compulsory.
 Although participation in private schemes is often voluntary, as in the Kenya, UK
and US, in some countries – Australia and Chile, for example – it is compulsory.
 Even in countries where people have the right but not the obligation to join a
private scheme, governments frequently offer financial incentives for them to do
so.
  Typical incentives are tax relief on contributions to private schemes and the right
to opt out of part or all of the public scheme.

RISK

 Contributing to a pension scheme is not risk free.

 Members of pension schemes face two kinds of risk.
1. First, there is the risk that the amount of retirement income they ultimately
receive will be substantially less than they had hoped for or expected.
2. Second, there is the possibility that achieving their desired level of
retirement income will turn out to be more costly than was originally
anticipated.
 These risks arise because of the long-term and illiquid nature of pension saving.
 Because pension contributions are made over several decades, there is plenty of
time for a scheme’s actual performance to deviate from what was originally
promised or expected. Moreover, if contributors become dissatisfied with the
performance of their schemes, moving their pension savings to another scheme
may be impossible or

DIFFERENT TYPES OF PENSIONS

 Given the importance of retirement benefit schemes, it is vital to know how they
work. Kenya has different types of retirement schemes that one can enroll in.
 Besides the statutory scheme, the National Social Security Fund (NSSF), retirement
schemes can be classified as either individual or occupational schemes.
 The basic difference between these two categories is the initiator of the scheme.
a) INDIVIDUAL
 An Individual pension plan is usually set up by an individual to make
contributions on his/her own behalf towards saving for retirement.

b) OCCUPATIONAL
 While an occupational scheme is set up by an employer who makes
contributions on behalf of their employees for the provision of retirement
benefits.
 In most instances, the employee also makes contributions (together with the
employer) in an occupational scheme.
 It is not mandatory for an employer to provide a retirement scheme to its
employees.
  However, if an employer does establish a retirement scheme, they are
obligated to comply with the retirement benefits legislation and the
established rules of the retirement scheme.
 There are further two types of occupational schemes
i) Stand Alone
 A stand-alone occupational scheme consists of a sole
employer who initiates the scheme — only eligible employees
of the employer would be able to participate in the scheme.
 They are more popular with medium to large sized
organizations who can sustain the operational costs of
running a scheme.

ii) Multi-employer Umbrella Scheme

 A multi-employer umbrella scheme is a variation of the
typical stand-alone occupational scheme.
 Umbrella occupational schemes allow multiple, unrelated
employers to participate in a single pension scheme. They are
popular among all types of organizations, including medium
to large organizations due to their cost-effective and “hands
free” nature.
 When an employer joins an umbrella scheme, they are joining
a pre-existing scheme that has already been registered and is
operational.
 In addition, the time and resource requirements for the
employer are greatly reduced through an umbrella scheme,
which effectively works like a professionally outsourced
pension solution.
 This has proven very attractive to employers around the
globe.

D) Retirement schemes can be further classified depending on:

i. their registration as either a Provident Fund or a Pension Scheme;
ii. the investment plan of the scheme (guaranteed and segregated funds); and
iii. the design of the scheme (Defined Benefit and Defined Contribution
schemes).
 i. Provident Funds vs. Pension Schemes
E) The fundamental difference between Provident Funds and Pension Schemes is in
terms of accessing your benefits at retirement.

ii. Guaranteed Funds vs. Segregated Funds

F) The Trustees of a retirement scheme have to develop an investment plan and
strategy in order to generate a return on the members’ contributions (while
managing risks at an acceptable level).

a) Guaranteed Funds
G) Guaranteed funds are offered by insurance companies where the members’
contributions are invested as a pool of funds.
H) The guaranteed fund is comparable to an insurance policy the contributions are
more like a premium, with the insurance company guaranteeing a pay-out of a
return of contributions and a minimum (guaranteed) level of interest.

b) Segregated Funds
I) In segregated funds, members’ contributions are invested directly by the Trustees
via an appointed Fund Manager.
J) The Trustees establish an appropriate investment strategy which is then
implemented by the Fund Manager.
K) The scheme directly holds the investments and the returns are fully accrued to the
scheme for the benefit of members.

Defined Benefit vs Defined Contribution Schemes

 The structure of the retirement scheme is determined at the initial design stage
when the scheme is being established.
 Historically, the most common type of retirement arrangement was a Defined
Benefit scheme.
 In the more recent past, there has been a pronounced shift by employers around
the globe who have moved away from Defined Benefit schemes.
 Today, Defined Contribution schemes are the more popular structure for
delivering retirement benefits.
LICENSING AND SETTING UP A PENSION SCHEME

 To be a pension/provident fund/actuary in Kenya, you need a license from

Retirement Benefits Authority. Requirements for this are as explained below.

Licensing Requirements

 Provisions of Section 22, 22A, 23 and 25 of the Retirement Benefits Act

 Specific Regulations
 Retirement Benefits (Managers & Custodians) Regulations, 2000
 Retirement Benefits (Administrators) Regulations, 2007

Key issues for consideration

1. Specific criteria for suitability of applicant as provided under Section 22A of the
Retirement Benefits Act
i. The financial status of the applicant (requirements for capitalization
provided under the specific regulations)
ii. Solvency of the applicant
iii. Educational or other qualifications or experience of the applicant having
regard to nature of functions for which, if application is granted, the person
shall perform
iv. Ability of the applicant to carry on the regulated activity competently,
honestly and fairly.
v. Top Management and Board of Directors of the applicant should also have
the necessary educational, professional or other qualifications and
experience having regard to the nature of the functions to be performed
vi. Status of any other license or approval granted to the person by any
financial sector regulator
vii. Reputation, character, financial integrity and reliability of applicant
2. Operational systems in place to offer respective services including internal control
procedures and risk management systems.
Application for Registration

 The following will be required to enable the Authority consider an application for
registration
i. Application in the prescribed form
ii. The prescribed application for registration fee, currently Kshs.50,000.00 payable to
the Authority and submitted with application
iii. Applicant’s latest Financial Statements, duly certified
iv. Certificate of incorporation of Applicant
v. Memorandum and Articles of Association of the Applicant – objective to carry out
specified service should be in the Memorandum
vi. Curriculum vitae for Key Technical Staff
vii. Copies of current registration license if licensed by other Regulators
viii. Applicants should have a minimum paid up share capital including unimpaired
reserves – current Kshs.10 million for the Manager and Administrator; 250 million
for the Custodian
ix. The Authority will thereafter carry out a due diligence onsite inspection to assess
the applicant’s capability to carry on respective services

IMPORTANT CLAUSES IN SETTING UP A PENSIONS DEED

1. Declaration of Trust
a) The trustees are to hold the fund upon trust to provide benefits for members
and other beneficiaries becoming eligible in accordance with the rules.
b) Indicate what shall constitute the fund:
i. Investments, cash and other assets held by the trustees or transferred
by the trustees of any fund;
ii. All contributions by members;
iii. All amounts paid by the employer to the trustees;
iv. Any donations, legacies or other exceptional receipt; why is this
important?
v. The interest, dividends and income of the Fund.
2. Eligibility and Membership
a) The issue of admitting part timers should be dealt with as their exclusion
may amount to indirect discrimination.
b) ECJ in Bilka Kaufhaus v Weber von Hartz (1986) ECR 1607: where the rules
of the pension scheme exclude part timers and the exclusion affects more
 employees of one sex than of the other, then that will amount to indirect
discrimination in violation of Article 119 of the Treaty of Rome.
c) The rules must be explicit about whether the membership is optional or
automatic.
d) Compulsory membership is frowned upon

Sample clauses on eligibility and membership

“Employees who are eligible for membership are all full-time permanent employees
who are over the age of 21. Membership of the scheme shall be optional. The employer
with the consent of the trustees may admit to membership any employee who is not
otherwise eligible”

3. Calculation of service
a) Consider what to do (the procedure) in cases of transfer (e.g., member who joins
and wants his contributions from another previous scheme transferred into the
current scheme/ current member wants to opt out and have his contributions
transferred to another scheme)
b) Absence from work due to illness or any other capacity, death how are the benefits
to be calculated? Deduct the days absent from salary? Remember the vesting
schedule.
c) Absence as a result of secondment, to take up work of national importance, to take
up a course/study. Is the period of absence to be considered in calculation of
service?
d) What about maternity and family leave? Is it to be treated as pensionable service?

4. Contributions
a) It is important to be clear about the definition of salary to be used for the purposes
of members contributions. Is it basic salary or salary defined in some other way?
b) When are members contributions to cease? On attaining normal retirement?
c) “Contributions commence with the first payment of Salary after becoming a
member and stop at normal retirement date, or leaving pensionable service”.
d) Will voluntary contributions entitle a member to further or additional benefits?
e) How much is a member to contribute?
f) What of the employer? How much, what rate? Discretion? Suspension?
 5. Benefits
a) Dependent on the scheme.
b) But all the benefits should be spelt out. Including last respect benefits.

6. Preservation of benefits on leaving pensionable service

a) What options shall be given to an early leaver? E.g., right to take a transfer value
to be taken to the approved scheme of her choice?
b) What if the member has been making additional voluntary payments? Is he
entitled to a refund?

7. Pension increase/Review

There ought to be a clause on the regular review of pensions.

“The employer and the trustees shall make in each year a regular review of pensions
on payment and any pension in payment may from time to time be further increased
by such amount and at such times as the trustees, with the consent of the employer,
and having regard to the availability of funds, may decide. Such increase may not
exceed the limit specified in Appendix 1”

8. Forfeiture, commutation and alienation

a) Have a clause that permits the employer and the trustees to have charges and set
off to the extent and in the circumstances permissible by law.
b) Forfeiture of unclaimed benefits.

“Any sum which has become due to or in respect of a member may be forfeited if it has
not been claimed for at least 6 years from the date upon which it became due”

9. Undertakings and taxation

a) Have a clause that permits the trustees to be the direct contact persons to deal
with the RBA and give undertakings.
b) Have a clause that allows the trustees to deduct tax from members’ benefits
c) Tax treatment of benefits especially when you have foreign nationals and Double
Taxation Treaties.
10. Administration & Amendments
a) Who has the power to remove and appoint trustees? Employer? What does
the RBA say?
b) Are funds to be invested?
c) Any discretionary powers?
d) Delegating powers of trustees?
e) Indemnity?
f) Liability? See – Armitage v Nurse (1997) CA. Millett LJ; “In my judgment
Clause 15 exempts the trustee from liability for loss or damage to the trust
property no matter how indolent, imprudent, lacking in diligence,
negligent or wilful he may have been, so long as he has not acted
dishonestly”.
11. Termination
a) Employer given option to terminate on notice. 1 month is standard for
contracting out especially where trade unions are not involved.
b) Can be through withdrawal of the employer or expiry of the perpetuity
period.

12. Winding Up
a) Clause to deal with bulk transfers following liquidation or sale of an employer or
sale of business.
b) Bulk transfers to pass to trustees (Insolvency Act – insolvency practitioner).
c) Those members to whom benefits have not yet accrued to be treated in accordance
with the clause on preservation of benefits on leaving pensionable service.
d) Set out how the trustees will deal with surpluses. Unclaimed financial assets/
public trustee?

13. Dispute Resolution

a) Maximize internal mechanisms before going to court or tribunals.
b) See R vs Senate of Kiambu exparte Njenga Karume.
SPECIFIC RULES OF INTEPRETATIONS
Re Courage Case LRT Case (1993) National Grid Case Lloyds Bank PTC Davis Case (1990)
(1987) (1997) Case (1996)
Rule 1: No special rules – Rule 3: Practical and Rule 4: Look out for clarity Rule 7: Confine your Rule 8: It is legitimate to
give a reasonable and purposive approach and unambiguity, look interpretation to the text consider the earlier
practical effect to the PS rather than detached and out for the technical of the PS as it stands and scheme when construing
Therefore interpretation literal. words. This is because the “not attempt to find an interim trust deed,
cannot be strict and purposive and practical inspirational guidance in however, it will not be of
liberal. approach does not doing so by interpreting much help.
necessarily provide an the earlier deeds or rules
easy route to an answer. which they have
superseded”
Rule 2: Test the PS by Rule 5: Look at the
reference to the situation language of the scheme
at the time of the and construe it fairly.
proposed alteration and Remember pension
not by original rules. schemes are often
complicated and obscure.
Rule 6: Inquiry into the Rule 6: Inquiry into the Rule 6: Inquiry into the
history. history. history.
NOTE: THIS CLASS READING HAS BEEN ADAPTED FROM “ANALYTICAL REVIEW OF THE PENSION SYSTEM IN KENYA SUNDEEP K RAICHURA”-See
https://www.oecd.org/daf/fin/private-pensions/41564693.pdf

The New Regulatory Framework in Kenya (PRE-RBA VS POST RBA)

Motivation for new Legislation and Regulatory Framework

 The pre-RBA era in Kenya saw a retirement benefits sector was characterized by the following
i. with little effective regulation and supervision.
ii. The interests of retirement scheme members and their beneficiaries were not sufficiently protected.
iii. There was concern about the design and financial viability of certain schemes in the country unless appropriate remedial action
was taken.
iv. There was poor administration and investment of scheme funds with particular concerns on concentrations of investment,
particularly in property.
v. In the majority of cases, this was inadvertent and unintentional, but without adequate controls and supervision, there was always
a risk of mismanagement and outright misappropriation.
vi. Further disclosure and accountability were lacking. The NSSF had also been riddled with governance issues and concerns over its
investments and payment of benefits.
vii. Not surprisingly, confidence in the sector was low.

 The primary motivation for reform and enactment of the retirement benefits legislation in Kenya in 1997 was thus to strengthen the
governance, management and effectiveness of the NSSF and of the occupational pensions sector.
 The enactment of the Retirement Benefits Act (‘RBA’) (1997) and the establishment of the Retirement Benefits Authority (‘the Authority’)
in 2000 marked the beginning of a regulated, organized and more responsible retirement benefits sector in Kenya.

Fundamental Tenets of New Legislation

 Through the regulatory framework and policies, new legislation since then has been founded on the following two (2) tenets:
a) Improvement of protection of member’s benefits
b) Improved governance of schemes.
 A closer look at the tenets
a) Improvement of protection of member’s benefits
 The new legislation provided for registration of existing and new retirement benefits scheme in the country with a transition period for
compliance for schemes existing on the date of implementation of the new framework.
 The law placed greater emphasis on protection of members’ benefits through the imposition of design and viability checks, minimum
funding requirements for defined benefit schemes and restrictions on adverse amendments to members’ benefits.
 Key amongst the measures to safeguard members’ benefits was the separation of roles between scheme sponsors, trustees and
professional advisors.
 In particular, in-house investment and custody of scheme funds which was the norm before 1997 was no longer allowed under the Act
with all schemes required to appoint external professional investment managers and custodians registered by the RBA.
 Investment guidelines were set out in the new Regulations which prescribed maximum limits on the amounts that may be invested in
various asset categories including property and offshore investments and these were aimed at reducing concentration of risks and
achieving more diversification of assets.
 Since the promulgation of the initial regulations in 2000, there have been additional regulations to improve the protection of member’s
benefits. Some of these measures include:
i. Reduction in the period for full vesting of benefits initially from five years to three years and now down to one year;
ii. Compulsory preservation of a portion of benefits on leaving service before retirement although the introduction of compulsory
preservation has been resisted by members of schemes and employers;
iii. Explicit clarification on treatment of death benefits under trust-based schemes;
iv. Requirement for legally enforceable contribution schedules, penalties and interest on late contribution payments and
criminalization of non-remittance of employee contributions deducted from pay;
v. Prescribed time period within which benefit payments to be processed and provision for interest on late payments,
vi. Protection of members’ benefits on winding ups and liquidation of schemes or scheme sponsors.

b) Improved governance of schemes.

 The Act preserved the Anglo-Saxon model of trust-based schemes in Kenya, but made explicit some of the requirements of trust law
through regulation and made trustees the linchpin of the new legislation.
 Legislation guided the composition and election/nomination of trustees to include member participation of at least one-third of a board
of trustees (later increased to at least 50% for defined contribution schemes).
 Schemes were required to conduct annual audits and periodic actuarial reviews and new disclosure requirements, including a requirement
for annual benefit statements and annual general meetings for scheme members have also been introduced.
  In particular, the Regulations provide for submission of various documentations and reports to the RBA including trust deeds, amending
deeds for prior approval, annual audits, actuarial valuations, investment policy statements, service provider agreements, quarterly
investment and custody reports from service providers, quarterly contribution records, etc.
 Inspection of these documents and the timeliness of submissions enables the RBA to track a scheme’s compliance levels with legislation
and exposure to risk.
 The Authority also has the powers to and has carried out scheme inspections in certain instances where there are indicators of poor
scheme governance.
 The penalties and fines associated with non-compliance are stated in the Act and serve as a deterrent to would be offenders.
 The provision of a ‘whistle blowing’ mechanism by both the members and professional advisors leads to timely information that allows
the Authority to take the necessary steps in good time.
 Scheme administration which was recognized as a key risk area has recently debuted into the priorities list with the amendment of the
Act to provide for registration of administrators and the formalization of regulations for administration of schemes in 2007 to improve the
operation and management of schemes.
 Again, as for the first tenet above, there has been a progressive increase in the level of responsibility placed on trustees and service
providers and the level of accountability demanded of them.

Role and effectiveness of the regulatory authority - the RBA

 The Retirement Benefits Authority was established in 2000 to regulate and supervise establishment and management of retirement
benefits schemes, and thereby protect the interest of members and sponsors of retirement benefits schemes.
 The Authority’s mandate extended to promoting the development of the retirement benefits industry, advising the Minister for Finance
on the national policy to be followed with regard to the retirement benefits industry and most importantly to implement all government
policies relating to the retirement benefits industry.
 In addition to its supervisory role, the RBA has also been at the forefront in:
i. Seeking additional tax incentives for saving through retirement benefits schemes;
ii. Promoting the growth of umbrella (multi-employer) and individual retirement schemes;
iii. Encouraging development of the annuities market and alternatives to annuity purchase;
iv. Education campaigns to sensitize more Kenyans on the need to plan and save for retirement;
v. Carrying out surveys of retirement benefits schemes and members;
vi. Engaging stakeholders in discussions of exposure drafts of proposed regulations, etc.
Towards Risk Based Supervision:

 The main focus of the compliance-based supervision utilized from inception of the Authority until today has been compliance with the
regulatory framework and the retirement benefit legislation.
 However, analysis of this system has led to identification of gaps in the effectiveness of current supervisory practice.
 The RBA has indicated a shift to a risk-based approach to supervision under which the RBA will direct resources and regulatory focus to
the areas that pose the greatest risk to achieving statutory objectives.
 Adapted from the Australian model, progress has been made to implementing RBS approach, including:
i. Adoption of new risk-based model
ii. Training of technical staff
iii. Development of compliance visit manuals
iv. Progress in carrying our initial risk assessment audit of all registered schemes through on and offsite audits
v. Sensitization of service providers.

 The risk mitigants that have already been identified by the Authority for prioritization in RBS include the quality of the board of trustees,
operational systems, information systems and financial controls, risk management systems and internal audit and compliance levels.
 The challenges surrounding the implementation of RBS have impacted on the full implementation of the new model.
 RBS is still fairly new and untested in the retirement benefits sector and thus, there is very little supporting documentation to assist in the
implementation of RBS.
 In addition to this, there is no standard framework or minimum requirements that must be satisfied by RBS and stakeholders are unclear
concerning their level of involvement and their role in RBS; leading to unmatched expectations and demands.
 The effectiveness of the RBA to date evaluated through the IOPS (International Organization of Pensions Supervisors) Principles of Pension
Supervision can be rated as satisfactory.
 Overall, the RBA has been sufficiently equipped to fulfill its roles and has shown itself to be a proactive and responsive regulator and this
is reflected in the outcomes to date.
 Clearly, the success or failure of the RBA is judged on its primary responsibility of ensuring effective regulation of the sector.
 It is important that its sector development responsibilities do not detract the RBA from remaining focused on its primary regulatory
objective.