How retirement plans take care of your cash

The retirement benefits sector in Kenya had more than Sh800 billion in assets in 2016 and is surging towards the Sh1 trillion mark this year.

This represents a significant amount of savings and makes retirement schemes one of the largest institutional investors in the country.

However, the retirement sector is not particularly well known or well understood by many Kenyans. Let’s try to demystify the whole thing.

Registered retirement schemes are regulated by the Retirement Benefits Authority (RBA) under the Retirement Benefits Act and Regulations. The main mandate of RBA is to supervise the establishment and management of retirement benefits schemes in Kenya, protect the interests of members and sponsors and promote its development.

When combined with the well-structured operational model that all registered schemes must follow, it creates a very healthy environment for the safe investment of retirement savings and stable investment growth.

Given that these savings are targeted towards supporting members in their old age, retirement schemes are structured to control risk and to ensure investments are diversified and carefully monitored.

Registered retirement schemes are structured with several levels of checks and balances, with a separation of duties between various professional service providers. The scheme structure and key service providers in a registered retirement scheme are depicted below:

For starters, all registered schemes are set up under Trust. This means that the scheme is a separate legal entity from the sponsor (for example, the employer that establishes the scheme) and the assets of the scheme are not assets of the sponsor.

The Board of Trustees is ultimately responsible for the safe operation of the scheme and enforcing the rules of the Trust.

The Board can either consist of individuals (a mix of individuals selected by the scheme sponsor and the scheme members) or a corporate trustee (a company that specialises in providing trust services). The Board of Trustees is required to ensure the rules of the scheme are enforced correctly and fairly.

Although the Board takes overall responsibility for the scheme, they delegate certain functions to professional service providers. While the Board may delegate the function, it cannot delegate the responsibility and they must maintain oversight.

Each service provider has strict licensing requirements and provides a specific service to the scheme. By separating functions among different licensed professionals, the risk of mismanagement, fraud, misappropriation and the like is greatly reduced.

For example, when a contribution is paid into a scheme, the funds are deposited in the scheme’s account with the custodian. The contribution is credited to the specific member’s account by the Administrator.

The Fund manager will determine a suitable investment, but the transaction is executed by the custodian, with the custodian paying the seller and ensuring the safekeeping of the asset.

When a benefit is paid from the scheme, a similar approach is taken and all payments must be authorised by the Board of Trustees.

The administrator must be licensed by the RBA and plays the role of the record keeper. They track the individual contribution receipts for each member; maintain the member records and books of accounts of the scheme (which are externally audited each year).

The custodian is effectively the askari for the scheme investments and must be licensed by both the Capital Markets Authority (CMA) and the RBA.

The Fund Manager handles the day to day investment decisions for the scheme. The Manager must also be licensed by the CMA and RBA.

The actual investments, cash receipts and cash payments are processed by the Custodian and also require Trustee authorisation.