OPINION: NSSF Phase Four - Why February’s payslip shock may actually be good news

As of the end of this month, many workers will notice that their payslip is slightly thinner than before. This follows the implementation of the fourth phase of the NSSF Act, 2013, which has increased statutory pension contributions for formally employed Kenyans.

Under the Act’s Third Schedule for Year Three, new contribution limits now apply. The Tier I Lower Earning Limit has risen from Ksh. 8,000 to Ksh. 9,000, increasing the minimum monthly contribution from Ksh. 480 to Ksh. 540. At the same time, the Tier II Upper Earning Limit has moved from Ksh. 72,000 to Ksh. 108,000, raising the maximum contribution from Ksh. 3,840 to Ksh. 5,940.

The law, in an attempt to move pension savings away from the old flat-rate contribution of Ksh. 200 towards a more realistic system based on six per cent of an employee’s earnings, with employers contributing a similar amount.

Under the previous arrangement, it would take nearly 2,500 months, or more than 200 years, for a worker to save just Ksh. 1 million. This helps explain why many Kenyans reach retirement with little or no financial security.

With the Income Replacement Ratio in Kenya remaining low at just below 40%, most retirees are unable to maintain their pre-retirement standard of living. As a result, many older citizens experience increased poverty in old age and are forced to rely heavily on family members and the working population for financial support, leading to a high dependency ratio and placing additional strain on households and the broader economy.

With the rising cost of living and other commitments such as loans and statutory deductions, even a small reduction in take-home pay is painful. For many workers, the payslip already feels stretched to its limit, and what it needs is relief, not further thinning.

Numerous studies and reports, however, have consistently shown that a significant number of retirees in Kenya fall into poverty soon after leaving formal employment. A pension system should provide adequate, affordable and sustainable income in old age. For decades, this basic objective has not been met, leaving families to absorb the burden of ageing parents and grandparents who can no longer provide for themselves.

Retirement should not mark the beginning of anxiety, dependence and quiet suffering. It should be a stage of dignity, where individuals can live without the daily pressure of work and without becoming a burden to their families. Seen in this light, the increased deductions, uncomfortable as they are today, are intended to prevent far greater hardship later in life.

There has been common observation that in developing countries people tend to grow old before they grow rich, while developed nations grew rich before they grew old. The result is often poverty in old age, family strain, declining health and, in extreme cases, early death driven by stress and neglect. This should not be accepted as normal. Regardless of a country’s economic status, those who have worked all their lives deserve security and dignity in retirement.

The NSSF Act also introduces an important element of flexibility. While Tier I contributions are mandatory and must be paid to NSSF, Tier II contributions may be directed to a registered private retirement scheme, subject to approval by the Retirement Benefits Authority. This places responsibility on employers to ensure that the retirement schemes they select are efficient, transparent and capable of supporting employees well beyond their working years.

Beyond individual wellbeing, the broader economic implications of the fourth phase of the Act are significant. Total retirement savings in Kenya stood at about Ksh. 2.5 trillion as of June 2025, a figure expected to rise sharply as higher contributions take effect. These funds do not only secure the futures of retirees; they also provide long-term capital for national development.

In the past, pension funds were largely conservative, dominated by government securities and near-cash instruments, partly due to liquidity needs and regulatory constraints. Today, retirement savings are gradually being diversified into areas such as national infrastructure, private equity and real estate. This shift has the potential to strengthen long-term returns while supporting economic growth through investment in roads, energy and water projects.

The payslip may feel lighter today, but the real cost would be allowing millions of Kenyans to retire into poverty tomorrow. The challenge now lies in managing these funds transparently and efficiently while investing prudently and attracting competitive returns that helps grow the pot for retirees, so that the promise of a dignified retirement becomes a lived reality rather than another deferred hope.

The writer is the Chief Executive Officer of Octagon Africa Group.