By Marina Joseph – Art in Tanzania internship
Corporate Social Responsibility
In a lifetime, one expects to retire from whatever profession one has chosen for sustenance. To be able to retire, one must plan and save to enjoy the benefits of retirement. Pension funds are investment pools that pay for workers’ retirements. Either employees, employers pay for funds, 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 voluntarily contribute part of his income to an investment plan to help fund retirement. Retirement plans are a valuable benefit that impacts employees’ present and future lives. An organisation that offers a retirement plan presents benefits to both the employer and the employee.
Benefits of Pension Schemes to Employer:
• Attraction of Employees
An organization has an effective retirement plan. It attracts the best talent from the workforce. A potential employee is more likely to choose an employer with better retirement benefits than one without. This is because the pension plan is a massive part of an employee’s total compensation. It also makes it easier to retain competent employees.
• Maintain Productivity
A good retirement plan promises a better financial status for the employee upon retirement. It motivates employees to know 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 company’s goodwill. This demonstrates the value an organisation places on its employees’ services and its willingness to ensure their financial security in retirement. Employees with a good retirement package will proudly speak of their former employers, thereby creating a positive public image for the organisation.
Benefits of Pension Schemes to Employees:
• 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 increase returns.
• Opportunity to diversify across asset classes
Pension funds allow investors to choose which asset classes they would like to have maximum exposure to, thereby maximising 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 regarding how they want to make the payments. Investors can choose to invest a lump sum amount and receive immediate annuity payments, or opt for a deferred annuity plan, which allows their corpus to earn more interest until payouts begin.
• Can provide benefits of a life insurance cover
Some pension plans offer life cover, in which a lump sum amount is paid to the family member or nominee upon the insured’s death. 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
The pension policy can be adjusted to allow 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 that can provide a steady stream of income after retirement, ensuring a substantial corpus is accumulated by the time one retires.
Background on Pension Systems in East Africa:
Diverse retirement benefits systems exist within the East African Community (EAC) member states. These include cash transfer programs, mandatory national 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 and 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 conventional social protection practices. New policies 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 differed 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 initially designed to cover European employees.
The scheme was gradually extended to Africans working for colonial governments, but it excluded women employed on short-term government contracts. (World Bank Group, 2019)
In 1999, Tanzania enacted the Public Service Retirement Benefits Act No. 2 to establish the contributory Public Service Pension Fund. The Act repealed the Pension Ordinance of 1954, which was a non-contributory pension scheme. 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 Minister of Finance has not yet implemented the Act. The pension scheme for civil servants in Kenya has remained unchanged. 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. 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 that extended coverage to formal private sector workers were nearly absent during the colonial days. After independence, mandatory contributory retirement benefit schemes were established.
These required private sector formal workers and employers to contribute to compulsory national social security schemes. In some countries, these mandatory schemes were referred to as contribution provident funds, while in others, they were described as benefit pension schemes. Colonial legacies or national development policies adopted after independence informed the various policy approaches. In the case of Tanzania, in keeping with its affinity for Eastern socialism, institutions were nationalized, and social security choices 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, more capitalist than other countries, established the national social security scheme in 1965. (World Bank Group, 2019)
Kenya currently has the most significant 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 | |
REFERENCE:
The World Bank Group. (2019). Pension Systems in East Africa: A Deep Dive.
