Pension law

Types of pension benefits according to the new Private Organization Employees Pension Proclamation No. 715/2011

The Ethiopian government has issued a new law which extends pension benefits to permanent employees of private organizations. The bill was signed by the head of state i.e. President of the Federal Democratic Republic of Ethiopia, President Girma Woldegiorgis on June 24, 2011. However, the effective date of the bill starts on the date of its publication in the Negarit Gazeta, as it is the case with other statutes issued by Parliament. Even though the exact date of the publication of the law has not been officially declared, it is almost a week since the publication of the proclamation by Bernanena Selam Printing Press, the official printing press for the law maker for the last 60 years.

When one looks into the transitory provisions, specifically those provisions providing for time limit in which contribution by the employee/employer and payment of pension benefits by Private Organizations Pension Agency will start, it becomes clear that the new law will not fully enter in to force from the date of its publication. According to article 57 sub article 6(a) of the proclamation, payment of pension contribution starts as of July 8, 2011. Similarly, pension benefits shall commence to accrue as of the next month of one year after the effective date of this proclamation.

Types of Pension benefits

Generally speaking, the private organization employees pension proclamation provides for four categories of pension benefits. These are;

  1. Retirement benefits
  2. Invalidity benefits
  3. Incapacity benefits
  4. Reimbursement of contribution

Except for the fourth one each type of pension benefit includes for two kinds of pension payments. Accordingly, retirement benefit includes retirement pension and retirement gratuity. An employee qualifying for invalidity benefit will be entitled to get either invalidity pension or invalidity gratuity. Lastly pension payment for incapacity benefit may be incapacity pension or incapacity gratuity.

Factors determining the type of pension benefits

Entitlement to any of the pension benefits and payments is dependent upon some specific conditions laid down by the proclamation.

These may be broadly mentioned as length of service, ground of termination of employment contract and the degree of employment injury. The grounds of termination of employment contract could those mentioned in the proclamation (“pension law grounds) and those not mentioned in the proclamation (“non-pension law grounds”)

There are three main grounds of termination of employment mentioned by the pension proclamation. These are attaining retirement age, incapacity due illness or sickness (the specific term used by the proclamation is “health problems”) and incapacity due to employment injury. Resignation is also mentioned as one ground of termination with its own special effect as regards entitlement to reimbursement of the employee’s contribution or pension payment depending on the length of service.

Once the pension law grounds become clear, it will not be very difficult to identify the non-pension law grounds or grounds not mentioned in the pension proclamation. To the exclusion of the above ground, any ground of termination of employment contract will be considered as non-pension law ground.

In general terms, retirement benefits are to be paid to an employee who attains retirement age, which is 60 years. Once an employee has reached the retirement age he will be paid either retirement pension or retirement gratuity depending on his length of service. Pension benefit for invalidity is paid for an employee who is unable to engage in any type of remunerated work due to illness or sickness caused by factors not related to his work or work place. Depending on the length of service of the employee, the pension benefit to be paid could be either invalidity pension or invalidity gratuity. Lastly, incapacity benefit refers to payments to be made to an employee for total or partial loss of capacity to work caused by employment injury. Article 27 sub 1 of the proclamation defines employment injury as occupational accident or occupational disease. For an accident or disease to be considered as occupational the cause should generally be related to the type of work performed by the employee or his work place. An employee totally or partially incapable of performing work will be entitled to get incapacity pension or incapacity gratuity. Unlike retirement pension and invalidity pension, pension for incapacity i.e. incapacity pension or incapacity gratuity will be paid to the employee without any minimum requirement of length of service. The extent and degree of incapacity will be taken in to consideration to determine whether the employee is entitled to incapacity pension or incapacity gratuity.

Difference between pension and gratuity

As indicated in Article 46 and 47 of the proclamation, the main difference between pension and gratuity lies in the fact that pension is paid monthly for life i.e. until death of the employee whereas, gratuity is paid in the form of lump sum i.e. it is a one time payment. The amount to be paid for gratuity is also less than the pension payment.

Calculation of the amount of payment for pension and gratuity

The specific amount of payment an employee is entitled to get is calculated based on his salary, length of service and percentage provided in the proclamation.

Accordingly, the amount to be paid for retirement pension and invalidity pension is 30% of the average salary of the employee for the last three years preceding retirement plus 1.25% for each year of service beyond 10 years. However, the amount could not exceed 70% of the average salary of the employee for the last three years preceding retirement.

A fixed rate is provided to calculate the amount of incapacity pension.  According to article 36 of the proclamation, an employee entitled to get incapacity pension will be paid 47% of his salary which he was receiving during the month of prior to the occurrence of the injury.

The amount of pension gratuity and invalidity gratuity is the same. According to article 21 this will be calculated by multiplying 1.25 month salary of the employee preceding retirement or incapacity by the number of years of service. Here, 1.25 month salary is to mean one month salary and the salary for quarter of a month which is approximately 7.5 days salary.

As it is the case with incapacity pension, the law also provides a fixed rated for the calculation of incapacity gratuity. As indicated in Article 47, incapacity gratuity is equal to 47% of the monthly salary of the employee which he was receiving during the month prior to the occurrence of the injury multiplied by sixty again multiplied by the percentage of injury sustained.

The following table tries to provide a brief summary of the types of pension benefits and the conditions for entitlement by the employee

DOWNLOAD Types of Pension Benefits Table

3 replies »

  1. Hello – I am looking for information o setting up an additional Occupational Pension (DC) plan for up to 400 employees in Ethiopia. This would be in addition (so a top up) to the state sponsored Private Employers plan per the 2011 Proclamation. I would like to better understand the tax and regulatory framework, as well as local pension providers (if any). Are you able to provide a start place please – I note some multi national employers in Ethiopia are already doing this, but I am struggling to identify local regulation, beyond the Provident Fund based scheme.

    Thank you


  2. Dear I am working in international NGO and I have some question on the table as types of pension benefit the condition of entitlement what about if the fund is for 5 year and the employees as well as the employer contribution was paid continuously and after five year phaseout and the employees are terminated ? I couldn’t see these things .also if you have any document on the implementation of privet pension scheme please send soft copy .Thank you

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