By Chrispine Oduma
The enactment of the NSSF Act, 2013 fundamentally reshaped Kenya’s retirement benefits landscape by introducing mandatory Tier I and Tier II contributions, with employers required to remit both employee and employer portions.
From February 2023, this reform moved from theory into practice. However, due to historical governance and performance concerns surrounding the National Social Security Fund (NSSF), the retirement benefits industry successfully lobbied for the option of contracting out Tier II contributions to approved occupational or umbrella schemes, subject to approval by the Retirement Benefits Authority (RBA).
This compromise was designed to preserve competition, protect member interests, and recognize the maturity of private retirement schemes. Many employers have since obtained RBA authority to redirect Tier II contributions away from NSSF into private schemes. The system has thus evolved into a dual-track structure: mandatory participation in NSSF, with optional redirection of Tier II into alternative schemes.
The recent announcement by National Social Security Fund of a 17% net return for 2025 has therefore triggered anxiety across the sector. Such a return is unprecedented in the Kenyan pension environment and raises both strategic and policy questions about sustainability, competition, and employer decision-making.
Sustainability of the 17% Return
The first concern is whether this level of return is sustainable.
Pension schemes are long-term vehicles whose success is measured by consistency over decades rather than by exceptional annual performance.
A 17% return may be driven by: favorable equity market performance, revaluation or disposal of property assets, one-off investment gains, or accounting treatment of unrealized profits.
If the return is driven by cyclical or one-off factors, it cannot be reliably projected into the future. Pension members and employers risk making long-term structural decisions based on a short-term performance spike. Sustainability must therefore be assessed not only by headline return but by asset allocation, risk exposure, liquidity profile, and governance structures supporting those investments.
Fair Competition and the Role of the State
A second concern is whether such performance reflects fair competition. NSSF operates with implicit government backing and regulatory advantages. Unlike private schemes, NSSF benefits from: compulsory participation, quasi-sovereign investment status, and access to large-scale public or strategic investments.
Private retirement schemes operate under market discipline: poor performance leads to member exits and reputational damage. NSSF, by contrast, enjoys guaranteed inflows by law. This creates an uneven competitive environment, particularly when NSSF markets its performance against private schemes that must justify their value proposition without statutory protection.
This imbalance is amplified by the fact that occupational schemes are voluntary for employers, while NSSF participation is a compliance obligation. Employers may logically ask why they should incur additional administrative and governance costs to maintain occupational schemes if NSSF is delivering superior headline returns under state protection.
Implications for the Private Retirement Sector
The NSSF announcement places private schemes, especially guaranteed schemes, in a difficult position as they prepare to declare their own returns by March 2026. Matching a 17% return is unlikely for most diversified, prudently managed funds. The risk is that employers and employees will equate higher returns with better management, without appreciating differences in risk, volatility, and governance.
The private sector’s response should not be a race to match NSSF’s number, but a shift toward: emphasizing risk-adjusted returns rather than absolute returns, reinforcing transparency around investment strategy, highlighting member services, governance standards, and portability, and educating employers on long-term performance consistency.
Private schemes must reframe the narrative from “who earned more this year” to “who will reliably protect and grow retirement income over 30 years.”
Considerations for Employers Yet to Contract Out
Employers who have not yet contracted out face a strategic decision rather than a tactical one. Their evaluation should include:
- Long-term consistency – Has NSSF demonstrated stable performance over multiple market cycles, or is this return an anomaly? Governance and accountability – How do dispute resolution, reporting, and fiduciary oversight compare between NSSF and private schemes?
- Member flexibility – Occupational and umbrella schemes offer portability, employer-driven benefit design, and often better member communication.
- Risk profile – A higher return may reflect higher exposure to volatile assets, which may not align with employees’ risk tolerance.
- Regulatory independence – Private schemes are regulated by Retirement Benefits Authority, while NSSF’s dual role as regulator-subject and state instrument raises structural concerns about neutrality.
Employers should therefore avoid making decisions based solely on a single year’s performance and instead apply a governance lens: what system best protects employee retirement outcomes over time?
Conclusion
The declaration of a 17% return by NSSF is a disruptive signal in Kenya’s retirement benefits sector. While it may reflect improved investment performance, it raises serious questions about sustainability, competitive neutrality, and policy balance between public and private provision of retirement savings.
For the private sector, the appropriate response is not panic or imitation, but differentiation through governance quality, transparency, and long-term value creation. For employers, the contracting-out decision should remain rooted in structural considerations rather than short-term performance optics.
Ultimately, the health of Kenya’s retirement system depends on maintaining a pluralistic model where public and private schemes coexist under fair rules. If performance becomes the sole narrative without regard to risk and governance, the sector risks repeating the very trust deficit that originally motivated the contracting-out regime.
The writer is an experienced Pensions Consultant, a Certified Trustee of Kenya and a Member of the Insurance Institute of Kenya.
_chrispineoduma@gmail.com
