February 20, 2023
Kenya's Court of Appeal declares National Social Security Fund Act of 2013 proposing increase to monthly contributions constitutional
The National Social Security Fund (NSSF) Act No. 45 of 2013 was assented into law on 24 December 2013 with the effective date of 10 January 2014. However, the implementation of the Act was suspended by a court order in 2014.
The Act was declared unconstitutional by the Employment and Labor Relations Court (ELRC) on 19 September 2022.
Dissatisfied with the decision of the ELRC, the Appellants moved to the Court of Appeal with issues for determination as outlined below.
The Court of Appeal held that the ELRC bench wrongly assumed jurisdiction. It stated that ELRC jurisdiction is limited to matters that arise from employment disputes or where the employer-employee relationship subsists. Since this was a matter challenging the constitutionality of a statute it rightfully falls under the jurisdiction of the High Court under the provisions of Article 165(3) of the Constitution.
On the issue of which house has competence to legislate the matter, the appellate court held that matters of social security fell within the ambit of the National Government as stated in the Fourth Schedule of the Constitution and did not require concurrence of the Senate. Therefore, it declared that the Act was constitutionally enacted.
The Act sought to revise the monthly contributions by both employees and employers from a fixed amount of KES200 to a 6% deduction operated in the Tier 1 and Tier II system. The Tier I contributions are contributions in respect to pensionable earnings up to the Lower Earnings Limit (LEL) of KES6,000. The Tier II contributions are contributions in respect to pensionable earnings up to the Upper Earnings Limit (UEL) of KES18,000. The rate for each tier is 6% from the employee and 6% from the employer subject to an upper contribution limit of KES2,160 for employees earning above KES18,000.
The contributions relating to the earnings below the LEL (a maximum of KES720 for both employer and employee) will be credited to what will be known as a Tier I account while the balance of the contribution for earnings between the LEL and the UEL (up to a maximum of KES1,440 for both employer and employee) will be credited to what will be known as a Tier II account. Employers have an option to opt out of Tier II contributions to NSSF and remit them to a contracted-out scheme.
The law, which is effective immediately, seeks to increase savings towards retirements.
Employers should assess how the increase in contributions will impact their business activities. Moreover, they should ensure compliance with this development to mitigate possible penalties.
Guidance is expected from the NSSF on the contracting out process for employers who opt to contribute Tier II contributions to a contracted-out scheme.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Kenya), Nairobi
Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York