Pension in KNH

By Chebet Kwemoi & Priscah Angwenyi

“Do not save what is left after spending, but spend what is left after saving”. This is a famous quote by Warren Buffett. In this regard, we need to know how to save for our future.

Newsline got the opportunity to interview Ms. Lilian Gitau, KNH’s Pensions Manager, who gave us great insights on the subject.

What is a Pension?

This is a question that lingers in people’s minds, especially in the corporate world. Pension is defined as a fund into which a sum of money is added during an employee’s employment years and from which payments are drawn to support the person’s retirement from work in the form of periodic payments. This should not be confused with a Retirement Plan.

A retirement plan is an arrangement to provide individuals with an income during retirement when they are no longer earning a steady income from employment.

There are two main types of retirement plans:

1. Employer-Sponsored plans are formed by employers for the benefit of their employees to provide income at the point of retirement and benefits to dependents in the unfortunate event of the death of an employee.

2. Individual Pension Plans for employed individuals who are not in an employer-sponsored scheme, as well as self-employed individuals.

“It is key to note that it is not compulsory for employers to form pension schemes and most employers in Kenya have not set up retirement schemes meaning that their employees have to plan for their retirement savings,” said Ms. Gitau.

Kenyatta National Hospital operates two pensions scheme under Irrevocable Trusts for its employees namely the Kenyatta National Hospital Staff Superannuation Scheme (Defined Benefit (DB) Scheme) and the Kenyatta National Hospital Staff Retirement Benefits Scheme (Defined Contribution (DC) Scheme).

“The KNH Staff Superannuation Scheme was established on 1st January 1991 and was closed to new entrants on 30th June 2011 following a government directive that all DB schemes be converted and be operated as DC schemes. Therefore, the Kenyatta National Hospital Staff Retirement Benefits Scheme was set up for employees 45 years and below and those employed after 1st July 2011,” continued Ms. Gitau.

Benefits of pension;

i. Provision of income at retirement. When employees retire, they experience a reduction in income and pension makes up for part of this loss of income.

ii. Safeguarding the interests of beneficiaries. In the unfortunate event of your death, a pension protects dependents in the form of lump sums or monthly pensions.

iii. Disciplined Savings. Savings put away in a pension scheme are not readily available for withdrawal, unlike money in a bank account.

iv. Enjoy Taxation Benefit. Employees enjoy tax relief on pension contributions of up to Kshs. 20,000 per month. For instance, an individual earning Kshs. 30,000 making a monthly contribution of Ksh. 2,250 will be taxed on Kshs. 27,750. The return earned on the investment of these contributions is also tax-exempt.

v. Compound Interest. Pension benefits are only accessible when one exits employment by way of resignation, dismissal, retrenchment, retirement, ill-health retirement, migration, or upon death. Hence, it means benefits earn compounded income year-on-year as no benefits are withdrawn during an employee’s working life.

When should one start saving?

“The best time to plant a tree was 20 years ago. The second-best time is today.” Chinese Proverb.

An individual should start saving early in their career, if possible, from the first day of employment.

One of the main advantages of starting to save early is the power of one percent stemming from the ‘magic’ of compound interest. Compound interest, in simple terms, is where your interest earns interest. In other words, after the first year, your savings will have grown with interest. In the second year, the first year’s interest is part of your savings, and hence will also earn interest in the second year – hey Presto! Compound interest.

To show you the impact of compound interest, let’s use a simple numerical example. Let’s assume at age 30 you start saving a fixed amount of KShs. 2,000 every month for 30 years, the table below shows your savings balances after 30 years of applying different net investment returns:

On a different angle, if you start saving at the age of 40 the same fixed amount of KShs. 2,000 every month for the next 20 years, the below table shows your savings balance after 20 years of applying different net investment returns: greatly impacts the replacement ratio.

Gross Replacement Ratio (GRR) measures the adequacy of a retirement benefits arrangement. It is the gross income after retirement divided by the gross income just

It is key to note from the table above just how much of your balance is made up of interest. Remember, in all three examples above, your capital is only KShs. 720,000.

This shows that when you delay your savings plan you will not be able to save as much, and you will need to increase your monthly savings amount to attain the same target. When you start saving early, a little can go a long way to retire comfortably at the age of 60. The power of compounding, the amount of savings, and a long investment before retirement and experts recommend a GRR of 60% - 70%. For instance, say your last salary at the date of retirement is KShs. 100,000.00 your ideal GRR would be an amount between KShs. 60,000.00 and KShs. 70,000.00. This will ensure one can maintain their pre-retirement lifestyle.

Ms. Lilian Gitau Pension Manager KNH

PHOTO | COURTESY

>>> Part two continues in edition 3