By Marina Joseph – Art in Tanzania internship
In a lifetime one expects to retire from whatever profession they have chosen for sustenance. To be able to retire one must plan and save to enjoy the retirement benefits. Pension funds are investment pools that pay for workers’ retirements. Funds are paid for by either employee, employers, or both. When paid by employers’ funds, the funds are invested on the employee’s behalf, and the earnings generated on investment are considered income to the employee upon retirement. A worker can also choose to voluntarily contribute part of his income to an investment plan to help fund retirement. Retirement plans are a valuable benefit that impacts the present and future lives of employees. An organization that provides a retirement plan presents advantages to the employer and employee.
Benefits of Pension Schemes to Employer:
• Attraction of Employees
An organization has an effective retirement plan. It attracts the best talent from the pool of workforce. A potential employee is more likely to choose an employer with better retirement benefits than the one with not. This is because the pension plan is a huge part of the total compensation for an employee. It also makes it easier to retain competent employees.
• Maintain Productivity
A good retirement plan is to promise a better financial status for the employee upon retirement. It motivates employees to know that they are working in anticipation of a better retirement package.
• Public Image
Having a retirement plan puts any organization in a positive image. However, an organization with an effective and successful retirement plan greatly adds to the goodwill of the company. This shows the value an organization places on the service of the employees and a willingness to ensure their financial security when they are old. Employees who have a good retirement package will proudly speak of their former employers and hence create a good public image for the organization.
Benefits of Pension Schemes to Employee:
• Tax Saving
An employer usually takes pension contributions before deducting tax. Therefore, tax is paid on the remainder of the salary. Saving taxes with each contribution paid into the plan will contribute to higher returns over time.
• Opportunity to diversify across asset classes
Pension funds give investors an option to choose what kind of asset classes they would like maximum exposure to maximize their earnings.
• Employer Contribution
When an employer decides to make contributions to the pension plan, the plan becomes even more profitable for employees as the accumulated funds will grow faster.
• Multiple options of payment and Guaranteed Income at the end
Flexibility is offered to investors when it comes to how they want to make the payments. Investors can choose to invest a lump sum amount and receive immediate annuity payments, or they can choose a deferred annuity plan which will let their corpus earn more interest until the payouts begin.
• Can provide benefits of a life insurance cover
Some pension plans offer a life cover as well in which a lump sum amount is paid to the family member/nominee at the death of the insured. If there is no surviving spouse, a benefit can be paid to a designated beneficiary or to the member’s heirs.
• Emergency Access to Funds
Adjustments in the pension policy can be made to allow for access to funds in case of an emergency. These emergencies are pre-defined.
• Long-term Investing
As this long-term investing, investments will reap the benefits of long-term investing. Pension plans create an annuity which can provide a steady flow of cash post your retirement after ensuring a good amount of corpus is accumulated by the time one retires.
Background on Pension Systems in East Africa:
Diverse retirement benefits systems exist within the member states of the East African Community (EAC). These include a mixture of cash transfer programs, national mandatory schemes, work-based retirement schemes and individual retirement savings plans. The regulatory framework for retirement benefits in EAC member states mirrors the policies adopted by each state, as well as the historical influence of their colonial past. With the introduction of the modern state, traditional social support systems were gradually dismantled, and market-based social protection policies were introduced with the gradual collapse of traditional social protection practices. New policies were established which rewarded civil servants who remained loyal to the colonial government. The bulk of the employees who benefited from the policies of their colonial powers were themselves white employees. Their benefits were guaranteed by statute even after independence. The effect of providing coverage to loyal civil servants was that the rest of the citizenry remained uncovered, including the casual and agricultural workers employed in white-owned plantations. In the Francophone countries of Rwanda and Burundi, the colonial powers established contributory defined benefits schemes for civil servants. Soon after independence, these were converted to contributory defined benefit social insurance schemes for all formal workers. The situation was different in Kenya, Tanzania, and Uganda, where the British left a legacy of non-contributory defined benefit pension schemes for civil servants working in the colonial government. These were originally designed to cover European employees. The scheme was gradually extended to Africans working for colonial governments, but it excluded women who were employed on short-term government contracts. (World Bank Group, 2019)
In 1999, Tanzania enacted the Public Service Retirement Benefits Act No. 2 to provide for the establishment of the contributory Public Service Pension Fund. The Act repealed the Pension Ordinance of 1954, which was non-contributory. In 2012, Kenya’s efforts to reform the civil service non-contributory pension scheme (which commenced in early 2000) culminated with The Public Service Superannuation Scheme Act, which is intended to make the scheme contributory. Unfortunately, the Act has not yet been implemented by the Minister of Finance. The pension scheme for civil servants in Kenya has remained the same scheme, that is, it continues to utilize the system established by its colonial powers in 1946. In Uganda, the non-contributory public pension scheme began in 1946 with the enactment of the Pensions Act. To date, efforts to reform the system to a contributory scheme have been slow and tedious. (World Bank Group, 2019)
Aside from these traditional civil service schemes, policies and regulatory frameworks extending coverage to the formal private sector workers were nearly absent during colonial days. After independence, mandatory contributory retirement benefit schemes were established. These required private sector formal workers and employers to contribute to national mandatory social security schemes. In some countries, these mandatory schemes were defined contribution provident funds, whereas in other countries, they were defined benefit pension schemes. The various policy approaches were informed by colonial legacies or national development policies adopted after independence. In the case of Tanzania, in keeping with its affinity for eastern socialism, institutions were nationalized, and social security choice demanded solidarity rather than the individualistic approach of the west. This explains the existence of mandatory defined benefit schemes which currently operate in Tanzania. The Francophone countries, Burundi and Rwanda, reformed the contributory public schemes established during colonial days to include private sector workers. Kenya and Uganda adopted the neoliberal economic principles of the west, which to a large extent prioritize individual responsibility over collectivism or solidarity vis-à-vis retirement savings. These national socioeconomic development choices led to the development of defined contribution provident funds in Kenya and Uganda, where there is no intergenerational transfer or redistribution within the scheme. Kenya, which is more capitalist than other countries, established the national social security scheme in 1965. (World Bank Group, 2019)
Kenya currently has the largest number of private occupational and individual retirement benefit schemes among the EAC countries. The legal framework for retirement benefits in the EAC is Eurocentric, that is, it favors the formal sector rather than the informal sector. (World Bank Group, 2019)
|COUNTRY||NATIONAL PENSION SCHEME||CIVIL SERVICE SCHEME|
|TANZANIA||National Social Security Fund – NSSF (main) Pay-As-You-Go (PAYG) Defined Benefit (DB)||Public Service Sector Security Fund – PSSSF PAYG DB|
|KENYA||National Social Security Fund – NSSF DC Provident Fund||Public Service Superannuation Fund – PSSF DB – Transitioning to DC|
|UGANDA||National Social Security Fund – NSSF DC Provident Fund||Public Service Pension Scheme – PSPS Non-Contributory DB|
|BURUNDI||Institut National de la Securite (National Institute of Social Security) – INSS Pay-As-You-Go (PAYG) Defined Benefit (DB)||Office Nationale des Pensions et Risques Professionals (National Office of Pensions and Occupational Risks) – ONPR PAYG DB|
|RWANDA||Rwanda Social Security Board – RSSB PAYG DB|| |
The World Bank Group. (2019). Pension Systems in East Africa: A Deep Dive.