Workers and their employers in the formal sector will from next month cough up at least Sh2,000 extra when the government starts deducting a ten-fold increase in the National Social Security Fund (NSSF) contributions.

The money is meant to cater for the retirement payouts for workers in the private sector. Their counterparts in the public sector have their pension paid for by taxpayers. For every shilling that a worker pays as his pension contribution, the employer will be expected to match it similarly, meaning that the cost of creating jobs will go up for employers. It will also mean that workers will take home less every month.

Kenya has 2.9 million formal sector employees. Half of these earn less than Sh50,000. If the law is implemented, workers earning between Sh15,200 and Sh50,000 will remit Sh3,000 of their pay to NSSF. Employers will remit a similar amount for every employee in that bracket.

Under the new contributions plan, the government spread the payment across five years and in the first phase, the minimum rate was capped at Sh2,000 for the minimum wage earners, an increase from the previous minimum deduction of only Sh200. Top earners taking home more than Sh100,000 previously contributed a maximum rate of Sh1,700.

Yesterday, the Court of Appeal judges Hannah Okwengu, Mohamed Warsame and John Mativo gave a verdict allowing the government to implement the controversial NSSF Act of 2013, which sought to increase monthly contributions to cater for their retirement benefits.

“The decision declaring the NSSF Act, 2013 unconstitutional for failure to involve the Senate in its enactment was not supported by the law. On this ground, we hold that the judgment cannot be allowed to stand,” the three Justices said in their ruling.

This, however, signals an additional financial obligation that both employees and employers will be facing to remit the contribution rates for the old age comfort and sustenance of private sector workers.

The ruling comes when the labour market is still struggling with high operation costs amid inflationary pressures arising from the disruption of global supply chains by the Covid-19 pandemic that hit the globe for two years and the ongoing conflict between Russia and Ukraine, which has raised the cost of commodities.

Unless yesterday’s ruling is appealed and overturned by the Supreme Court, those above the minimum monthly wage bracket – currently estimated at Sh15,200 – will be expected to remit six per cent of their earnings to secure their sunset years. Their employers will be expected to contribute a similar amount, bringing the cumulative deduction by the two sides to 12 per cent of the basic salary. The deductions will be fully executed over a five-year period.

This means that for someone earning a constant basic salary of Sh50,000, there will be a deduction of Sh3,000 for NSSF by the fifth year of rolling out this new contribution plan. Employers will pay a similar amount.

Other associations

The law mandating these deductions had been challenged in the Court of Appeal by the Kenya Tea Growers Association, Agricultural Employers’ Association and 13 other associations, who had argued that the proposed deductions were illegal.

Court of Appeal repealed ruling of the Labour and Employment Relations Court, arguing that the lower court lacked the mandate to pronounce itself on the matter.

Justices also faulted the argument that Senate had not been involved. According to them, the law does not affect devolution and, as such, does not require the concurrence of the Senate. Their ruling effectively gave the government the go-ahead to implement the NSSF Act, 2013.

The ruling comes just weeks after the Kenya Kwanza administration, led by President William Ruto, signaled that it would push for higher retirement savings to increase the national savings ration to at least 25 per cent. Currently, the ratio stands at about 12 per cent, one of the lowest in the world. The government argued that increasing savings would create a pool of funds that can be borrowed to fund infrastructure development and reduce the country’s reliance on debt.

Higher payments

Ruto’s government is also betting on increasing workers’ contribution to National Hospital Insurance Fund (NHIF) and NSSF to mobilise capital for the implementation of the Universal Health Coverage (UHC) plan and improve the social protection fund.

However, higher payments to NSSF will mean that in addition to taxes, Kenyans will have to pay more for other public services, such as health, considering that contributions to NHIF are also likely to be increased once the fund changes its name as has been proposed by the Cabinet Secretary for Health, Susan Nakhumicha.

Workers are currently overburdened by the existing high taxes, mainly pay-as-you-earn (PAYE) at a time when salary increments have been frozen amid high inflation, now standing at about 9.7 per cent, above the government recommended threshold of 7.5 per cent. Salary increments were last effected in 2018.

NSSF maintains that the country’s dependency ratio is too high and that the increased savings deductions will create higher revenue to help people retire with dignity.  Data from the Kenya National Bureau of Statistics shows that there are 2.9 million Kenyans in the formal employment sector, with almost half of them earning below Sh50,000. The government’s plan to implement the NSSF Act 2013 was cut short in September 2022, by Labour Court judges who declared it unconstitutional following a contention by various lobby groups.

Before the matter moved to the court, the Federation of Kenya Employers (FKE) had proposed that the six per cent enhancement of NSSF be implemented progressively over five years to enable employers and employees to adjust and accommodate the new rates.

“We hope that the court gives its decision soon facilitating consultative engagements to address the issues employers and workers raised to reach win-win resolutions,” FKE Chief Executive Jackline Mugo had said in a past statement.

Last November, President Ruto said his administration had reached an agreement with FKE and the Central Organisation of Trade Unions to have the new rates implemented after gazettement by the National Treasury.  

Court of Appeal ruling has dovetailed into the President’s pronouncement.

Experts and sector players are concerned that the an increase in the social protection contributions like NHIF and NSSF could compel employers to either consider layoffs or have separate arrangements to have consumers pay for the additional operating costs, which could in turn raise the cost of goods and services.

“Expect contract reviews. Many employers will not be able to meet that bill (new rates). They are burdened by a lot of increases in taxes, levies and high cost of living,” said Consumers Federation of Kenya chairperson Stephen Mutoro.