NSSF Tier 2 refers to a category of contributions within the National Social Security Fund (NSSF) system in Kenya. NSSF is a government agency responsible for providing retirement benefits to employees. In 2013, the NSSF Act was amended to introduce a new system for pension contributions, which divided employee contributions into two tiers:

NSSF Tier 1:

This covers lower-income earnings up to the national minimum wage (or a set minimum threshold).

Tier 1 contributions are mandatory for all employers and employees who fall within this income bracket.

Contributions in Tier 1 are typically lower, focusing on basic pension coverage.

NSSF Tier 2:

Tier 2 covers income that exceeds the minimum threshold defined under Tier 1, up to a specified ceiling.

This tier allows for larger contributions, providing enhanced retirement savings for higher-income earners.

Employers with approved private pension schemes can opt out of making contributions to NSSF Tier 2, provided that their private scheme meets or exceeds the benefits offered by NSSF.

Contribution Structure:

For each tier, both the employee and the employer contribute a percentage of the employee’s gross monthly earnings:

Tier 1: The contributions are set at a fixed percentage for income within the lower wage band.

Tier 2: The contributions apply to any income above the lower band up to a certain ceiling, allowing for higher pension contributions.

Tier 2 contributions are designed to boost retirement savings for employees earning more than the minimum wage.

The NSSF Tier 2 contributions in Kenya are calculated based on an employee’s salary and the pensionable earnings. Under the NSSF Act of 2013, pensionable earnings are divided into two tiers:

1. Pensionable Earnings:

The pensionable earnings are the employee’s monthly gross salary, capped within specific limits. The limits are reviewed periodically to reflect changes in the minimum wage.

2. Contribution Rates:

For both Tier 1 and Tier 2, the contribution is calculated as a percentage of the employee’s salary. These contributions are shared between the employer and employee at a 50-50 rate. Here’s how the contributions are divided:

Tier 1: This applies to the lower band of pensionable earnings, up to the statutory minimum wage.

Tier 2: This applies to the earnings above the Tier 1 limit, up to a specified upper limit.

As of the latest NSSF reforms, the contribution rate is 12% of the pensionable earnings, split evenly between the employee (6%) and the employer (6%).

Calculating NSSF Tier 2 Contributions:

Step 1: Identify the employee’s gross monthly salary.

Step 2: Apply the NSSF contribution structure, which splits the salary into Tier 1 and Tier 2 pensionable earnings.

Let’s break it down using an example based on common salary brackets:

Tier 1 Contribution:

Assume the minimum wage (or lower earnings limit) is KES 6,000.

For Tier 1, the maximum pensionable earnings are capped at KES 6,000.

Contributions on this portion are 12% of KES 6,000 (6% employer + 6% employee).

Tier 1 contribution = 12% of 6,000 = KES 720.

Tier 2 Contributions:

For Tier 2, contributions apply to the portion of earnings above KES 6,000 up to the ceiling (let’s say the ceiling is KES 18,000).

So, if an employee earns KES 25,000, the earnings between KES 6,000 and KES 18,000 (i.e., KES 12,000) will be subjected to Tier 2 contributions.

The Tier 2 contribution = 12% of 12,000 = KES 1,440 (6% employer + 6% employee).

Total Contribution:

Tier 1 contribution: KES 720

Tier 2 contribution: KES 1,440

Total NSSF contribution: KES 2,160 (shared equally between the employer and the employee, so each pays KES 1,080).

Employers with private pension schemes approved by the Retirement Benefits Authority (RBA) may opt out of Tier 2 NSSF contributions, provided their pension scheme offers equal or better benefits than NSSF.

To calculate how much someone earning KES 40,000 should contribute to NSSF Tier 1 and Tier 2, let’s break it down step by step, using the current NSSF Act structure.

Key Assumptions:

NSSF contributions are capped at 12% of pensionable earnings (6% from the employer and 6% from the employee).

Tier 1 applies to the first KES 6,000 of an employee’s salary.

Tier 2 applies to earnings between KES 6,001 and a maximum pensionable earning, which is currently capped at KES 18,000.

Step-by-Step Calculation:

1. Tier 1 Contributions:

The maximum pensionable earnings for Tier 1 is KES 6,000.

The contribution rate is 12% (6% from the employee and 6% from the employer).

So,

Tier 1 contribution = 12% of KES 6,000 = KES 720.

This is split equally between the employer and the employee:

Employer’s share = 6% of KES 6,000 = KES 360

Employee’s share = 6% of KES 6,000 = KES 360

2. Tier 2 Contributions:

Tier 2 applies to earnings from KES 6,001 to KES 18,000. So, Tier 2 will cover KES 12,000 (18,000 – 6,000).

The contribution rate is also 12% (6% from the employee and 6% from the employer).

So,

Tier 2 contribution = 12% of KES 12,000 = KES 1,440.

This is also split equally between the employer and the employee:

Employer’s share = 6% of KES 12,000 = KES 720

Employee’s share = 6% of KES 12,000 = KES 720

Total Contributions:

Total Tier 1 contribution = KES 720

Total Tier 2 contribution = KES 1,440

Total contribution (Tier 1 + Tier 2) = KES 2,160

Employer’s total contribution = KES 360 (Tier 1) + KES 720 (Tier 2) = KES 1,080

Employee’s total contribution = KES 360 (Tier 1) + KES 720 (Tier 2) = KES 1,080

Therefore, for someone earning KES 40,000, the total NSSF contribution would be KES 2,160, with the employer and employee each contributin