There are various options that outline the provisions for end of service benefits schemes. If your are in employment, it is advisable you keep in mind what your contract states in regards to what end of service benefits are payable to you upon: resignation, retirement, end of contract or even after contract cancellation. This article aims to shed light on the available options as may be provided for by your employer or the retirement benefits regulator.
The two main provisions for end of service benefits schemes
Pension Funds
Pension funds are designed to provide end of service benefits to employees. A sum of money is added to the fund during an employee’s employment years. Payments are drawn to support an employee’s retirement from work in the form of periodic payments.
Pension Funds have two set up types:
- Defined Benefit
- Defined Contributions
Gratuity
This is a sum of money paid by an employer to an employee for services rendered in the company, normally at the end of a contract. An employee does not contribute any portion of his/her salary towards this amount. However, it is given at the discretion of the employer. The terms and conditions are governed by one’s contract, conduct and by the employer’s policies.
How schemes are set up
| Defined Benefit (DB) Schemes | Defined Contribution (DC) Schemes |
| It is a type of a plan in which an employer/sponsor promises a specified lump-sum of a pension payment | It is a plan set up by a Founder/sponsor (Employer) who defines what both the Employer and Employee contribute to the scheme |
| The final payment is predetermined by a formula based on an employee’s salary history, duration of service or age. (the final calculation parameters are known in advance) | The contributions by both the sponsor and employees are set as a certain percentage of the employee’s salary. Thus, the final payment depends on contribution history and fund performance |
| The final pay-out is not determined by any investment performance trends, the sponsor administers the portfolio and bears all the risks involved (sponsor solvency is key) | The final pay-out depends on fund growth (investment performance) which is determined by the investment choices made by the trustee of the scheme. |
| Not easily portable (not easy to transfer) | Easily portable (transferrable) |
Do you know your end of service design?
Types of Schemes
How funds are invested
Segregated Funds
- The Trustees of a scheme develop an investment plan and strategy in order to generate a return on the members’ contributions.
- The rate of return is determined by the choices of the trustees and the appointed fund manager.
- Ideal for schemes with large membership or high fund value
The Funds are invested directly by the Trustees through an appointed Fund Manager – employs a diversified asset mix.
Guaranteed Funds
- Offered by Life Insurance companies where a minimum annual rate of return is guaranteed.
- The guaranteed rate means that your capital amount is preserved from erosion.
- Ideal for schemes with small membership or small to moderate fund value
Over the years, these schemes have proved competitive. Thus, it is always advisable to look into how well diversified and competitive the provider is.
Classification of Schemes
Individual pension plan
Commonly referred to as an IPP or IPF. These types are common among insurance firms and fund administrators. An individual opens one to make voluntary contributions on their behalf towards a retirement fund.
This type is scheme is ideal for the consolidation of retirement benefits in the event one switches jobs.
Occupational scheme
An Occupational scheme is an end of service benefits arrangement where many unrelated employers (entities) participate in an already registered single retirement benefits scheme – usually run by Insurance companies. They are very cost-effective for employers since management is almost ‘hands-free.’
Employee monthly contributions and employee’s monthly deduction plus the return on investment account for the total fund value.
Umbrella Scheme
It comprises many unrelated employers (entities) who participate in an already registered single retirement benefits scheme – usually run by Insurance companies. They are very cost-effective for employers since management is almost ‘hands-free.’
Benefits of End of Service Benefits Schemes
To the Employer
- Staff retention – enables the employer to keep hold of efficient and experienced employees.
- Better workplace environment – employee loyalty leads to a motivated workforce hence increased productivity. The employer also becomes attractive to would-be job seekers.
- Tax savings – contributions are tax-deductible. It lowers the employer’s tax bill.
To the Employee
- Secure or better retirement – Employees can work without fear of a lack of income upon early or scheduled retirement.
- Savings avenue – the schemes come with an option of additional voluntary contributions. An employee can use this to amass a capital base.
- Tax-deductible and relief – plans come with a tax-deductible of up to KES20,000 per month. In addition, with every completed year in a scheme, the taxman awards you relief of KES60,000 subject to a maximum of 10 years .
Scheme withdrawal options
- Normal Retirement – upon attainment of statutory retirement age
- Ill-Health Retirement – caused by serious illness and permanent ill-health. Medical evidence from a qualified Medical Practitioner is required
- Early Retirement – After attaining 50 years of age subject to employer’s consent if in an occupational scheme
- Termination or Resignation – the employee is entitled to 50% of their contributions plus interest
- Late retirement – an employee elects to defer withdrawal if the employer consents to continue service and contribute. After actual retirement, they will be paid the accumulated fund value
- Death – In case of death while in service the benefits are paid to the employee’s nominated beneficiaries. However, the trustees have the discretion to uncover the existence of factual beneficiaries.
- Immigration – upon permanent change of country of residence.
