NSSF TIER II CONTRACTING OUT| Laren Insurance Agency

What is NSSF Tier II Contracting Out?

NSSF Tier II Contracting Out in Kenya refers to the option given to employers to redirect their Tier II contributions from the National Social Security Fund (NSSF) to a private pension provider. This reform was introduced under the NSSF Act No. 45 of 2013 to enhance pension coverage and give employers greater flexibility in managing their employees' retirement benefits.

While Tier I contributions remain mandatory with NSSF for all employees, Tier II allows employers to choose between staying with NSSF or contracting out to a private pension scheme that offers potentially better returns and more tailored benefits.

Enhanced Returns Potential

Private schemes typically offer

5-12%

average annual returns compared to NSSF's lower rates

Maximize your employees' retirement savings with professional fund management!

Key Provisions of the NSSF Act No. 45 of 2013

The NSSF Act No. 45 of 2013 introduced significant reforms to Kenya's social security system, including the two-tier contribution structure and contracting-out provisions:

Contribution Rate: The pension contribution rate is set at 6% of pensionable earnings for employees and 6% of pensionable earnings for employers
Two Tiers: There are two levels of contributions; namely Tier I & Tier II
Earnings Limits: There are two limits of contributions; namely Lower and Upper Earnings Limits
Tier Structure: Tier I is based on lower earnings limit (Paid to NSSF) and Tier II based on the difference between upper and lower pensionable earnings (Paid to NSSF or Private Approved Scheme)
Gradual Increase: The contribution limits will gradually increase over five years as illustrated below

NSSF Contribution Limits Phase-In Schedule

Year	Lower Earnings Limit	Upper Earnings Limit	Notes
Year 1 (2023)	KES 6,000	KES 18,000	Initial implementation
Year 2 (2024)	KES 7,000	KES 36,000	First increase
Year 3 (2025)	KES 8,000	KES 72,000*	*Actual figures confirmed annually
Year 4 (2026)	KES 9,000	KES 108,000*	*Actual figures confirmed annually
Year 5 (2027)	KES 20,000*	KES 144,000*	*Actual figures confirmed annually

Important Note

The actual figures for Years 3-5 will be confirmed each year by the government through official gazette notices. Employers should stay updated with the latest NSSF announcements to ensure compliance.

NSSF Contribution Breakdown

Understanding how NSSF contributions are calculated under the two-tier system is essential for employers considering contracting out:

Year	Lower Earnings Limit	Upper Earnings Limit	Employee Tier 1 Contribution	Employee Tier 2 Contribution	Total Contribution (Employee & Employer)
Year 1 (2023)	KES 6,000	KES 18,000	KES 360	KES 720	KES 2,160
Year 2 (2024)	KES 7,000	KES 36,000	KES 420	KES 1,740	KES 4,320
Year 3 (2025)	KES 8,000	KES 72,000	KES 480	KES 3,840	KES 8,640
Year 4 (2026)	KES 9,000	KES 108,000	KES 540	KES 5,940	KES 12,960
Year 5 (2027)	KES 20,000	KES 144,000	KES 1,200	KES 7,440	KES 17,280

Contribution Calculation Formula

Tier I Contribution: 6% of Lower Earnings Limit
Tier II Contribution: 6% of (Upper Earnings Limit - Lower Earnings Limit)
Total Employee Contribution: Tier I + Tier II
Total Employer Contribution: Matches employee contribution (6% + 6%)
Total Monthly Contribution: Employee + Employer contributions

Benefits of NSSF Tier II Contracting Out

Contracting out of NSSF Tier II offers significant advantages for both employers and employees:

Better Investment Returns

Private pension schemes typically offer higher returns through professional fund management and diversified investment portfolios.

Tailored Benefits

Customize pension benefits to match your employee demographics, company culture, and compensation structure.

Enhanced Reporting

Access detailed reporting, online member portals, and comprehensive statements for better transparency.

Employee Retention

Attract and retain top talent with superior retirement benefits that demonstrate long-term commitment to employee welfare.

RBA Regulated

All private pension providers are licensed and regulated by the Retirement Benefits Authority for member protection.

Administrative Flexibility

Streamlined administration, online contribution processing, and dedicated account management services.

Tax Efficiency

Employer contributions remain tax-deductible while employees enjoy tax-free growth on their retirement savings.

Financial Security

Enhanced death and disability benefits, early retirement options, and flexible withdrawal terms.

NSSF vs Private Pension Comparison

Feature	NSSF Tier II	Private Pension Scheme
Investment Returns	Government-set rates	Market-based, typically higher
Investment Options	Single fund	Multiple fund choices
Member Services	Basic statements	Online portals, detailed reporting
Benefit Flexibility	Standard benefits	Customizable options
Death Benefits	Prescribed amounts	Enhanced coverage options
Administration	Centralized government system	Dedicated account management

Requirements for Contracting Out

To legally contract out of NSSF Tier II, employers must meet specific requirements set by the Retirement Benefits Authority:

1

RBA Registration

Register a private pension plan with the Retirement Benefits Authority that meets all regulatory requirements.

2

Approval Application

Submit a formal application to RBA for contracting-out approval with all required documentation.

3

Benefit Standards

Ensure the private scheme offers benefits equal to or better than NSSF Tier II minimum standards.

4

Employee Communication

Provide proper notification to employees and obtain necessary consents for the transition.

Important Compliance Note

Employers must maintain Tier I contributions with NSSF for all employees. Only Tier II contributions can be redirected to private schemes. Failure to maintain Tier I compliance can result in penalties and legal consequences.

Start Your Contracting Out Process

Is Contracting Out Right for Your Company?

Contracting out of NSSF Tier II is particularly beneficial for certain types of organizations:

Established Companies

Businesses with stable workforce and long-term employee retention goals

Higher employee satisfaction
Better retirement outcomes
Enhanced corporate image
Competitive hiring advantage

Professional Services Firms

Organizations with highly skilled workforce valuing comprehensive benefits

Attract top talent
Retain key personnel
Align with professional standards
Partnership structures

Growing Businesses

Companies planning for scalability and future expansion

Scalable benefits structure
Future-proof retirement planning
Progressive HR policies
Succession planning support

Why Choose Laren Insurance for NSSF Contracting Out?

Expert Guidance: Our specialists understand NSSF regulations, RBA requirements, and the contracting-out process
Provider Selection: We help you compare multiple RBA-approved pension providers to find the best fit
Compliance Assurance: Ensure your contracting-out arrangement meets all legal and regulatory requirements
Implementation Support: End-to-end assistance with scheme setup, employee enrollment, and NSSF coordination
Employee Education: Comprehensive communication materials and sessions to explain the transition
Ongoing Administration: Support with contribution processing, compliance reporting, and member services
Local Expertise: Deep understanding of the Kenyan pension landscape and regulatory environment
Strategic Partnership: Long-term relationship focused on optimizing your retirement benefits strategy

Frequently Asked Questions

Can we contract out of both Tier I and Tier II contributions?

No, contracting out is only available for Tier II contributions. Tier I contributions must remain with NSSF for all employees as this provides the basic social security coverage mandated by law. The Tier II portion is the supplementary pension component where employers have the option to use private pension providers.

What happens if our private scheme underperforms compared to NSSF?

Private pension schemes are required to meet minimum benefit standards set by RBA. While past performance isn't guaranteed, private schemes typically offer professional fund management and diversified portfolios that have historically outperformed NSSF returns. Most schemes offer different investment options with varying risk profiles, allowing employers to choose an approach that matches their risk tolerance.

How long does the contracting-out process take?

The contracting-out process typically takes 4-8 weeks from initial consultation to RBA approval. This includes scheme selection, documentation preparation, RBA application submission, and employee communication. The exact timeline depends on the complexity of your organization and the responsiveness of the RBA approval process.

Can employees opt out of the private scheme if they prefer NSSF?

No, the contracting-out decision is made at the employer level for all eligible employees. However, employees maintain their Tier I benefits with NSSF, and the private scheme must provide benefits that are at least equal to what they would have received under NSSF Tier II. Employees are protected by RBA regulations ensuring their benefits meet minimum standards.

What are the costs associated with contracting out?

Private pension schemes typically charge annual management fees ranging from 1-2% of assets under management. These fees cover administration, fund management, and regulatory compliance. Some schemes may have additional setup or transaction fees. The exact cost structure varies by provider and should be clearly disclosed during the selection process.

Can we switch back to NSSF if we're not satisfied with the private scheme?

Yes, it is possible to switch back to NSSF Tier II, but the process involves applying to RBA for approval and may require transferring the accumulated funds from the private scheme back to NSSF. This process can be complex and may have tax implications, so it's important to carefully evaluate private scheme options before making the initial decision to contract out.