Types of Pension Schemes

Guaranteed pension funds

These pension funds managed by Insurance Companies. Contributions from clients are pooled together and assets of the pool invested in a diversified range of assets.

The creation of a huge pool of funds has the advantage of economies of scale in investment. Each year, interest is credited at the declared rate which depends on economic conditions and returns on investment.

Unlike segregated funds, guaranteed funds have the unique advantage of offering binding guarantees against capital depreciation, in addition to specified levels of minimum future earnings.

The Guaranteed Funds offers formidable security due to the fact that the fund forms part of the statutory fund that Life Insurance companies must maintain and this is strictly regulated under the Insurance Act.

They include:

Occupational (Employment-based) Retirement benefit schemes
This is an arrangement where an employer establishes to provide retirement benefits for its employees. The scheme is set up under a binding trust and it operates as a separate legal identity from the employer.
The management of the scheme is done by elected Trustees and regulated by RBA.

Defined contribution scheme

This plan defines the rates of contribution in at the start of the scheme. At the time of retirement, the overall benefit is determined by the total amount of contributions and the accrued interest earned on the contributions. For example, 5% of an employee’s salary may be deducted every month and the same rate or different rate applied to the employer portion.

Together with the employer’s contribution, retirement benefits are projected based on different years of service of employees.

These types of plans are further categorized as Provident Funds or Retirement benefits schemes depending on the mode of benefits payment at retirement.

A provident Fund pays a lump sum amount of all accrued contributions plus interests at retirement while a Retirement benefits scheme pays 1/3rd of accrued benefits in lump sum and the balance of 2/3rds is used to purchase a pension in form of annuity in the open insurance market.

It’s important to know that, annuity conversion rates differ from providers and hence advisable to get quotations widely.

Segregated Pension Plans

This pension fund plans are normally adopted for schemes with very huge funds running into billions of shillings to enable the scheme to take advantage of the economies of scale in terms of investments and afford the investments costs on their own due to size.

The investments risks and costs are directly borne by the members of the scheme. Any drop in the funds as a result of an investment risk, directly reduces the member’s benefits.

They include:

Defined benefit scheme

This is an a pension plan where an employer promises a specific monthly benefit at retirement which can be estimated in advance based on factors such as age, earnings, and years of service. The “cost” of a defined benefit plan is not easily calculated, and requires an actuary to do it. However, even with the best of tools, the cost of a defined benefit plan will always be an estimate based on economic and financial assumptions due factors that influences investments.

The employer contribution is therefore a variable and can change depending on the investment performance in a specified span of time normally 3 years after which the contribution rate is reviewed by an actuary to match the expected funding which will achieve the targeted pension benefits for members. The employee contribution is however fixed.

On retirement, the member gets 1/3rd of accrued benefits in lump sum and the balance of 2/3rds is converted to pension per month or quarterly or as the member may elect, for life.

They are normally managed elected Trustees together with independent Administrators, Fund Managers and Custodians

Trust – A trust is a fiduciary arrangement that allows a third party referred to as a trustee, to hold assets on behalf of a beneficiary or beneficiaries. These assets could include things like money, title deeds, life insurance policies and other investments. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Trustee- This is a legal term which, refers to any person who holds property, authority, or a position of trust or responsibility for the benefit of another. A trustee can also refer to a person who is allowed to do certain tasks but not able to gain income.

Sponsor – A sponsor is a person who establishes a scheme. In occupational retirement benefit schemes, employers are usually the sponsors.

Scheme Administrator -This is the person/institution responsible for day to day running of the Scheme. The administrator is usually appointed by the trustees to administer the scheme on their behalf. Some of the functions of administrators include:

  • Setting up schemes.
  • Collecting contributions.
  • Liaising with trustees, regulatory bodies and service providers.
  • Preparing member certificates and fund balances
  • Ensuring full compliance of the scheme regarding the provisions of the Retirement Benefits act.
  • Arranging for member’s annual general meetings.

    Fund manager – A fund manager’s role includes the management of funds and other assets of a scheme. Investment management firms play this role. Another important role is to give advice and ensure investment of scheme funds are in accordance with the adopted investment policy.

    Custodian -A custodian’s role includes taking responsibility for the safe custody of what is contained in the trust such as funds, policies and other documents and financial instruments.

    The regulation under the Retirement Benefits Act requires that pension scheme assets be held and maintained by the custodian except where funds are fully invested in guaranteed funds. In such circumstances contributions are paid directly to the approved issuer.