An introduction to pensions law

1. PENSIONS LAW
LYLA LATIF
COMMERCIAL LAW DEPARTMENT, SCHOOL OF LAW

2. CONTENT TO BE COVERED:
1. TYPES OF PENSION PLANS/SCHEMES
2. PENSION FOR GOVERNMENT EMPLOYEES
3. SAMPLE PENSION CLAUSES;
a. IN EMPLOYMENT CONTRACTS FOR PRIVATE SECTOR, AND
b. IN CLAUSES FOR PENSION IN LETTERS OF APPOINTMENT FOR CIVIL SERVANTS
4. CONSTRUCTION OF PENSION CLAUSES FROM A JUDICIAL PERSPECTIVE
5. ESSENTIAL CHARACTERISTICS OF DESIGNING THE TRUST DEED
6. THE LEGAL FRAMEWORK OF THE RETIREMENT BENEFITS ACT

3. 1. TYPES OF PENSION PLANS/SCHEMES
Scheme Type Government Sponsored
Plans
Personal
Plans/Individual
Schemes
Annuities Employer Sponsored
Plans/ Occupational
Schemes
Particulars The largest government
sponsored plans is the social
security plan – NSSF Act and
the Pensions Act
Can be the most
popular. Different
options to choose
from according to
their tax treatments
These are contracts
established with an
insurance company.
There are fixed and
variable annuities.
2 types:
Qualified and
Non Qualified
Funding Funded Funded Funded Funded
Regulation NSSF/Pensions Act RBA Act RBA Act RBA Act
Legal
Structure
Act of Parliament Established under a
Trust
Established under a
Trust
Established under a
Trust
1. RBA Act only permits qualified schemes to operate
2. Are of several types

4. The Types of Qualified Schemes
Defined Benefits Plans (DBP) Hybrid Plans Multi Employment Plans (MEPS)
Defined Contributions Plans
(DCP)
Client Contribution Plans Supplemental Employee Retiree
Plans (SERPS)
The RBA Act permits the establishment of the DBP, DCP along with 2 other types of schemes:
1. Provident Fund
2. Pension Fund

5. Defined Benefits Plans
Definition:
Where a retired employee receives a SPECIFIC AMOUNT based on SALARY HISTORY and YEARS
OF SERVICE and in which the employer bears the INVESTMENT RISK.
Who contributes?
Employee, employer, or both may make contributions. DBP defines the MAXIMUM AMOUNT a
participant is to contribute.
What are the benefits?
DBP can be to pay either PENSION OR ANNUITIES.

6. Benefits under the DBP
Benefits Pension Annuities
Description Guarantees a SPECIFIC AMOUNT to be
paid to the employee during retirement
It’s a FIXED MONTHLY payment at the age of
retirement.
Calculation Based on employee salary, years of
service and a fixed percentage rate.
Depends on 6 categories (whichever is chosen)
Joint & 50%
Joint & 66 2/3
Joint & 100%
10 year certain
& life
Life only
Lump sum

7. Defined Contributions Plan
Definition:
Allows the employer and/or the employee to make contributions so that the final benefits
depend on how much was in the account and the rate earned by the accounting investments
Different types of plans:
1. Profit sharing
2. Stock bonus plus
3. Money purchase pension plan

8. Hybrid Plan
Definition:
It is a DBP which includes elements of money purchase pension design. It combines features of
DBP and DCP in some way and can take different forms.
Types:
1. Sequential hybrid schemes (nursery schemes)
2. Combination hybrid schemes
This is where ONE SPECIFIC TYPE OF
PENSISON BENEFIT IS ACCUMULATED
first and is then followed by the
second pension arrangement.
E.g., employer provides the scheme
members with money purchase
benefits until say age 45 which are
then held until the benefits are due.
Thereafter the scheme members
accumulate their pension benefits in
the form of DBP.
This is where pension benefits are built up at the same time in both DB
and MPB of the scheme.
E.g., employer offers scheme members benefits based upon DB up to a
salary of 300,000 per annum PLUS for members whose salary is greater
than this amount, additional MPB are accumulated in a separate ‘pot’ –
whatever you earn above 300,000 is given earnings on it.

9. Provident Fund and Pension Fund
Provident:
It is a scheme for the payment of lump sums and other similar benefits to employees when they
leave employment or to dependents on death.
Pension:
At the point of retiring a proportion of the retirement fund is commuted as lump sum with the
remainder paid out as periodical payments.

10. 2. PENSION FOR GOVERNMENT
EMPLOYEES
Brief history of pensions
Initially introduced to entice people to enlist in the military. E.g., Roman soldiers guaranteed income
after they retired.
After 1875 in the USA, plans for workers were developed for those who had been with the company
for over 20 years of service, had reached 60 years, had been recommended for retirement by a
manager, approved by the Committee along with the BOD, the employee would then receive ½ of
his/her salary in retirement.
By 1940 labor unions became interested in pensions schemes and pushed for more benefits. BY
1950, 25% of the private sector work force had pension. BY 1960, 50% had a pension. Some of the
pension schemes began to fail and government intervened with regulation.
The Pensions Act, Chapter 189 of the Laws of Kenya
Payment of pensions and other benefits to civil servants in Kenya was started by the colonial
government – firstly for Europeans in 1927 and non Europeans from 1932. In 1946 the Pensions Act was
enacted.

11. Pensions Act
Civil servants and their dependents may be paid the following on:
1. Leaving the service of government, and
2. Fulfilling certain conditions one or more of the following benefits
Should not have resigned nor been dismissed
Should not have been guilty of negligence, irregularity or misconduct
(pension may be reduced or withheld)
Should not have been convicted (pension: stopped, see section 13 PA)
Should not be adjudicated bankrupt or declared insolvent
Officer wants to transfer his services from government (to another public
service: pension will be preserved and kept in “cold storage”, calculated
separately and paid to him on retirement)
Service
pension plus
commuted
pension
Service gratuity
Marriage gratuity
Injury pension
Death gratuity
Dependents pension
Compassionate gratuity
Annual allowance

12. Calculating Pension
A, 10 years with EPC at a monthly salary of Kshs 100,000
2 Options:
1st Option:
10 years x 12 months x 100,000 = 25,000 per annum
480
2nd Option:
A at the time of retirement says that he wants to receive ¾ of his annual pension and to receive in lieu
of the remaining ¼ a lump sum gratuity equal to 20 times its amount. A will then receive a reduced
pension and a gratuity in lieu of full pension.
Example:
¾ of 25,000= 18,750
¼ of 25,000 x 20 = 125,000 to be paid on retirement

13. 3. SAMPLE PENSION CLAUSES
Private Sector
The Company does not operate a pension scheme or provide access or contributions to a personal pension scheme
and there is no contracting out certificate in force in relation to this employment. When the Company reaches its
staging date for the purposes of establishing a pension scheme, the Company will comply with any duties it may have
in respect of You under the said scheme.
You are eligible to join the Company’s pension scheme, details of which may be obtained from the Human Resource
Department. Membership of the scheme is strictly subject to the rules of the scheme as amended from time to time.
The Company reserves the right to vary or discontinue any scheme in place from time to time.
The Company shall be entitled to deduct from your salary any amounts payable by You as member contributions to
such pension scheme as the Company is using from time to time.
The Company is currently using the direct benefits pension scheme. Membership of the scheme is strictly subject to
the rules of the scheme as amended from time to time. The Company reserves the right to vary or discontinue the
scheme in place from time to time. The Company shall be entitled to deduct from your salary any amounts payable by
You as member contributions to the pension scheme as the Company is using from time to time.

14. Government
“If you are confirmed in your appointment, you will be eligible on retirement for retiring
benefits in accordance with the provisions of the Pensions Legislation of the Public Service of
Kenya”.

15. 4. CONSTRUCTION OF PENSION CLAUSES
1. Re Courage Group’s Pension Schemes (1987) 1WLR 498
2. LRT versus Hatt (1993) PLR 227
3. National Grid versus Laws (1997) PLR 157
4. Lloyds Bank Pensions Trust Corporation versus Lloyds Bank (1996) PLR 263
5. Davis versus Richards & Wallington (1990) 1 WLR 1511

16. Specifics rules from the 5 cases
Re Courage Case (1987) LRT Case (1993) National Grid Case (1997) Lloyds Bank PTC Case (1996) Davis Case (1990)
Rule 1:
No special rules – give a
reasonable and practical
effect to the PS
Therefore interpretation
cannot be strict and liberal.
Rule 1:
Practical and purposive
approach rather than
detached and literal
Rule 1:
Look out for clarity and
unambiguity, look out for the
technical words. This is
because the purposive and
practical approach does not
necessarily provide an easy
route to an answer.
Rule 1:
Confine your interpretation
to the text of the PS as it
stands and “not attempt to
find inspirational guidance in
doing so by interpreting the
earlier deeds or rules which
they have superseded”
Rule 1:
It is legitimate to consider
the earlier scheme when
construing an interim trust
deed, however, it will not be
of much help.
Rule 2:
Test the PS by reference to
the situation at the time of
the proposed alteration and
not by original rules
Rule 2:
Look at the language of the
scheme and construe it fairly.
Remember pension schemes
are often complicated and
obscure.
Rule 3:
Inquiry into the history.

17. 5. ESSENTIAL CHARACTERISTICS OF
DESIGNING THE TRUST DEED
1 Declaration of trust 9 Preservation of benefits on leaving pensionable
service
2 Eligibility & membership 10 Pension increase
3 Calculation of service 11 Forfeiture, commutation and alienation
4 Member contribution 12 Undertakings and taxation
5 Employer contribution 13 Administration
6 Benefits on retirement 14 Amendments
7 Benefits of death 15 Termination and winding up
8 Benefits on disability 16 Dispute resolution procedure

18. Declaration of trust
1. The trustees are to hold the fund upon trust to provide benefits for members and other
beneficiaries becoming eligible in accordance with the rules.
2. Indicate what shall constitute the fund:
a) Investments, cash and other assets held by the trustees or transferred by the trustees of any fund;
b) All contributions by members;
c) All amounts paid by the employer to the trustees;
d) Any donations, legacies or other exceptional receipt; why is this important?
e) The interest, dividends and income of the Fund.

19. Eligibility and Membership
1. The issue of admitting part timers should be dealt with as their exclusion may amount to
indirect discrimination.
2. ECJ in Bilka Kaufhaus v Weber von Hartz (1986) ECR 1607: where the rules of the pension
scheme exclude part timers and the exclusion affects more employees of one sex than of the
other, then that will amount to indirect discrimination in violation of Article 119 of the Treaty
of Rome.
3. The rules must be explicit about whether the membership is optional or automatic.
4. Compulsory membership is frowned upon.

20. Sample clauses on eligibility and
membership
“Employees who are eligible for membership are all full time permanent employees who are over
the age of 21. Membership of the scheme shall be optional. The employer with the consent of the
trustees may admit to membership any employee who is not otherwise eligible”

21. Calculation of service
1. Consider what to do (the procedure) in cases of transfer (e.g., member who joins and wants
his contributions from another previous scheme transferred into the current scheme/
current member wants to opt out and have his contributions transferred to another scheme)
2. Absence from work due to illness or any other capacity, death how are the benefits to be
calculated? Deduct the days absent from salary? Remember the vesting schedule.
3. Absence as a result of secondment, to take up work of national importance, to take up a
course/study. Is the period of absence to be considered in calculation of service?
4. What about maternity and family leave? Is it to be treated as pensionable service?

22. Contributions
It is important to be clear about the definition of salary to be used for the purposes of members
contributions. Is it basic salary or salary defined in some other way?
When are members contributions to cease? On attaining normal retirement?
“Contributions commence with the first payment of Salary after becoming a member and
stop at normal retirement date, or leaving pensionable service”.
Will voluntary contributions entitle a member to further or additional benefits?
How much is a member to contribute?
What of the employer? How much, what rate? Discretion? Suspension?

23. Benefits
Dependent on the scheme.

24. Preservation of benefits on leaving
pensionable service
What options shall be given to an early leaver? E.g., right to take a transfer value to be taken to
the approved scheme of her choice?
What if the member has been making additional voluntary payments? Is he entitled to a refund?

25. Pension increase
There ought to be a clause on the regular review of pensions.
“The employer and the trustees shall make in each year a regular review of pensions on payment
and any pension in payment may from time to time be further increased by such amount and at
such times as the trustees, with the consent of the employer, and having regard to the
availability of funds, may decide. Such increase may not exceed the limit specified in Appendix 1”

26. Forfeiture, commutation and alienation
Have a clause that permits the employer and the trustees to have charges and set off to the
extent and in the circumstances permissible by law.
Forfeiture of unclaimed benefits.
“Any sum which has become due to or in respect of a member may be forfeited if it has not been
claimed for at least 6 years from the date upon which it became due”

27. Undertakings and taxation
Have a clause that permits the trustees to be the direct contact persons to deal with the RBA
and give undertakings.
Have a clause that allows the trustees to deduct tax from members’ benefits.

28. Tax treatment of pensions
DTA Domestic legislation (Income Tax Act)
Article 20: Pension derived by a resident of State A
from sources within State B, may be taxed in State B
Pension paid by or out of funds created by State A,
local authority thereof to any individual shall be
taxable only in State A
Pension defined as: a periodic payment made in
consideration of services rendered in the past or by
way of compensation for injuries received during
the course of an employment.

29. Administration & Amendments
Who has the power to remove and appoint trustees? Employer? What does the RBA say?
Are funds to be invested?
Any discretionary powers?
Delegating powers of trustees?
Indemnity?
Liability? See – Armitage v Nurse (1997) CA. Millett LJ; “In my judgment Clause 15 exempts the
trustee from liability for loss or damage to the trust property no matter how indolent,
imprudent, lacking in diligence, negligent or wilful he may have been, so long as he has not
acted dishonestly”.

30. Termination, Winding Up & Dispute
Resolution
Termination Winding Up Dispute Resolution
Employer given option to terminate
on notice. 1 month is standard for
contracting out especially where trade
unions are not involved.
Clause to deal with bulk transfers
following liquidation or sale of an
employer or sale of business.
Bulk transfers to pass to trustees
(Insolvency Act – insolvency
practitioner).
Internal mechanisms, which if they fail
utilize external measures.
Can be through withdrawal of the
employer or expiry of the perpetuity
period.
Those members to whom benefits
have not yet accrued to be treated in
accordance with the clause on
preservation of benefits on leaving
pensionable service.
Set out how the trustees will deal
with surpluses. Unclaimed financial
assets/ public trustee?

31. LEGAL FRAMEWORK OF THE RB ACT
Administrative (Regulatory &
Supervisory in establishment
and management of the pension
schemes)
Advisory in terms of national
policy on pension schemes
Investigatory and Enforceability
objective in terms of protection
of stakeholder interests and
fulfilment of legal and regulatory
measures
Development and Investment
oriented
1. Establishes the Authority under S3 and sets out its objectives under S5.
2. These objectives are central to the money market and to the success of the pension schemes
registered. The objectives are as follows:

32. The Objectives of the Authority to be
exercised by the Board
Investing of
funds not
currently in use
Assess capital,
recurrent
expenditure
and reserves
Making of
legitimate
disbursements
Entering into
associations
for furthering
purpose
Retirement Benefits Levy
on contributions made to
the scheme funds. S16
+
Penalties on non payment
or delayed payments
Paid into the RBA Fund
Can be invested in the
NSE and perhaps with
the NIFC if registered as a
NIFC firm

33. The Authority’s power to deregister a
scheme/manager/custodian or administrator
Grounds:
a. False or untrue statements made during application
b. When scheme is liquidated
c. Breach of laws and regulations
d. An event occurs that renders the M/C/A ineligible or where the business of the M/C/A is
dissolved
Deregistration based on (a) to be in accordance with section 28 of the Act as well as section 4 of
the FAAA, 2015
Deregistration is NOT to prejudice the claims of members under the scheme.

34. Protection of schemes against
attachment
36. Protection against attachment
Notwithstanding anything to the contrary contained in any other written law, where a judgement
or order against a member of a scheme is made, no execution or attachment or process of any
nature shall be issued in respect of the contributions or funds of the member or his employer
except in accordance with the scheme rules and such contributions shall not form part of the
assets of the member or of his employer in the event of bankruptcy.
Civil Procedure
Act/Rules,
2010

35. Restrictions placed on scheme funds. S38
1. Cannot be used to make direct or indirect loans to any person
2. Cannot be invested with a bank, non banking financial financial institution, insurance
company, building society or other similar institution with a view to securing loans, at a
preferential rate of interest (exceptions can be prescribed by the CS)

36. Unsafe and unsound practices. S39
39. Unsafe and unsound practices
(1) Where, in the opinion of the Chief Executive Officer, a trustee, manager, custodian or
administrator of a scheme is pursuing an act or course of conduct which the Chief
Executive Officer considers to be an unsafe or unsound practice, or in any way detrimental
to the scheme, the Chief Executive Officer shall, by notice in writing, direct such trustee,
manager, custodian or administrator to refrain from pursuing such act or course of
conduct.
(2) A trustee, manager or custodian who acts in contravention of a direction under this
section commits an offence and shall be liable, on conviction, to a fine not exceeding five
hundred thousand shillings, or to imprisonment for a term not exceeding two years, or to
both.
Emmanuel Titus Maundu &
2Others v The Registered
Trustees of the Kenya Ports
Authority Pension Scheme
(2011) eKLR: trust
obligations; accounting for
funds; disposal of real
property; good faith in
the management of
assets; allegations of
fraud; conduct of
general meetings.

37. Pensions Law