The Kenyan Court of Appeal gave a long awaited go ahead to the implementation of the National Social Security Fund Act (No. 45 of 2013) and its regulations on 3rd February 2023. The Act had previously been declared illegal and unconstitutional by the Employment and Labour Relations Court for failure to subject the proposed bill to adequate public participation and failure to seek concurrence of both the Senate and the National Assembly. The Court of Appeal ruled that the Employment and Labour Relations Court had wrongly assumed jurisdiction as the Court can only entertain a suit involving human rights violations only if the matters arose in an employment dispute. The ELRC failed to acknowledge and appreciate that the matter fell within the jurisdiction of the High Court. Additionally, the Court held that the decision declaring the NSSF Act, 2013 unconstitutional for failure to involve Senate in its enactment was not supported by law and as a result the judgement was quashed.

The Court of Appeal decision now paves the way for the implementation of the NSSF Act and its regulations, which will see a significant increase in an employee’s contributions to the National Social Security Fund (NSSF). The Act introduces new provisions on social security such as a new contribution structure which shall increase over time as the formula applied is intended to increase progressively over the next five years; and (b) contracting out of social security contributions to schemes that pass a reference scheme test. For purposes of this article, we will focus on the National Social Security Fund (Contracting Out by Employers) Regulations and the effect of the same on employers, employees and trustees of schemes.

Contracting out

Contracting out is where an employer opts to “contract out” of the NSSF Pension Fund with respect to Tier II Contributions. An employer that participates in or opts to establish or participate in a private pension scheme can opt to pay Tier II Contributions in respect of all or a particular description of its employees to the contracted-out scheme.

The effect of Tier I and Tier II Contributions on an employee’s pension contributions

As mentioned above, the social security contributions in respect of an employee have increased from the previous rate of Kenya Shillings Two Hundred (KShs. 200) per month to a combined amount of 6% of the employee’s salary from the employer and 6% of the employee’s salary from the employee. The contributions are divided into two tiers.

  • Tier I Contributions are contributions in respect of an employee’s salary up to the Lower Earnings Limit. The Lower Earnings Limit for the 1st year is KShs. 6,000 and it shall increase over a 5-year period. Therefore, 6% of this shall amount to a Tier I contribution of KShs. 720 (KShs. 360 as the employee’s contribution and KShs. 360 as the employer’s contribution).
  • Tier II Contributions are contributions in respect of a member’s salary above the Lower Earnings Limit up to the Upper Earnings Limit. The Upper Earnings Limit for the 1st year is KShs. 18,000 and it shall increase over time. Therefore 6% of this amount shall amount to a maximum Tier II contribution of KShs. 1440 (KShs. 720 as the employee’s contribution and KShs. 720 as the employer’s contribution). Tier II Contributions can be paid to a contracted-out scheme as an addition to the current pension contributions made on behalf of an employee. It is necessary for an employer to decide whether the current pension contribution rate will be reduced to accommodate the Tier I & II NSSF Contributions rates or whether the pension contribution rate will be retained and Tier I & II Contributions will be deducted as separate payments.  It is important to be clear on this to the employee as this decision is bound to affect an employee’s net salary and retirement benefits. Confirmation of the same will also guide trustees on the amendment of the trust deed and rules of the scheme the employer participates in

What kind of schemes can employers contract out to?

An employer can only contract out to a contracted-out scheme which shall be an occupational retirement benefits scheme, an umbrella retirement benefits scheme or an individual retirement benefits scheme that has been approved and registered by the Authority for purposes of receiving the Tier II Contributions and Tier II Fund Credit transfers from the National Social Security Fund in respect of an employee. For a scheme to be considered a contracted-out scheme, it must meet the requirements of the reference scheme test conducted by the Retirement Benefits Authority which include registration of the scheme with the Retirement Benefits Authority, registration with the Kenya Revenue Authority as an exempt scheme and compliance with the investment guidelines as provided for under the Retirement Benefits Act by maintaining a prudent investment policy. There are also aspects of the test that are dependent on whether the established scheme is a defined benefit (DB) or a defined contribution (DC) Scheme. For defined benefit schemes, the test shall require a scheme to provide for a pension better than or equivalent to the rate provided for under the NSSF Act.

Once the Authority considers that a scheme meets all the above requirements, it shall issue the scheme with a reference scheme certificate. This certificate shall confirm that the scheme has met the requirements of the refence scheme test and is therefore qualified to receive Tier II Contributions. Trustees of schemes are tasked with ensuring that the scheme meets the requirements of the test.

For retirement benefit schemes existing prior to the filing date of a contracting-out application, this shall necessitate: (a) the passing of a trustee board resolution accepting that the scheme shall receive Tier II Contributions in respect of the schemes members; and (ii) the amendment of the existing trust deed and rules to ensure conformation with the NSSF Act and its regulations. For defined benefit schemes, the scheme actuary must be notified of the proposed alteration to the scheme rules and give confirmation that the scheme shall continue to satisfy the statutory standard and meet the requirements of a DB Scheme under the reference scheme test.

For new retirement benefit schemes that are to be established by an employer for the purpose of contracting-out, the employer and trustees shall prepare a trust deed and rules confirming to the provisions of the NSSF Act and its regulations.

My duty as an employer

Before contracting-out an employer is required to notify: (i) the affected employee; (ii) the trustees and administrator of the relevant scheme it participates in; and (iii) all independent recognised trade unions in relation to the affected employee. The notification shall specify the contracted – out scheme, the categories of affected employees, the effective date of the intended contracting out, the contributions by and benefits payable to the employees and changes made to those as a result of contracting out.

An employer should also confirm with the trustees of the retirement benefit schemes it participates in on behalf of a member whether the scheme has passed the reference scheme test and received a reference scheme certificate from the Authority. This certificate shall be submitted together with the application form and application documents as provided for under Regulation 7 of the National Social Security Fund (Contracting-Out) Regulations. The application must be submitted at least 60 days prior to the intended contracting out. Certain documents are to be provided by the scheme’s service providers therefore it would be prudent to engage with them early.

Once the application has been approved, the employer shall be provided with a contracting-out certificate and can begin remittance of Tier II Contributions to the contracted- out scheme.


One aspect that is emphasised in the NSSF Act and regulations, is that any benefits in respect of contracted-out Tier II Contributions must be treated in a similar manner to pension benefits provided under a scheme. This is ensured by placing a fiduciary duty on trustees, a similar duty that is required of trustees under the Retirement Benefits Act with regard to retirement benefits.

Additionally, on winding up of a retirement benefit scheme, the scheme is required to have sufficient resources to meet the minimum funding requirements with regard to both Tier II Contribution benefits and retirement benefits.

Trustees are also required to comply with the investment guidelines provided under the Act when it comes to investment of funds in relation to Tier II Contributions. This shall protect a member’s Tier II Contributions as it ensures the prudent investment of the same. 

How can we help

As MMAN, we can provide legal assistance with:

  • the updating of a scheme’s existing trust deed and rules to incorporate the changes brought about by the NSSF (Contracting-out) Regulations;
  • drafting of a trust deed and rules for a new scheme to incorporate the changes brought about by the NSSF (Contracting-out) Regulations;
  • guiding trustees and board of directors of the employer through the amended Trust Deed and Rules and advising on the alterations made; and
  • conducting a training for employees or a scheme’s members on the NSSF (Contracting-Out) Regulations and the effect on their social security contributions and benefits and pension contributions and benefits.

By: Allison M.A. Lloyd - Associate

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