Former Kenya Ports Authority employees at a past press conference called to highlight challenges claiming their retirement benefits. PHOTO | LABAN WALLOGA
What you need to know:
Pension system should be expanded to accommodate other savings objectives such as financing home ownership and children’s education.
Time does indeed fly. It is hard to believe that 20 years have passed since the Retirement Benefits Act came into force, establishing the legal framework that has brought the pension industry this far.
Without a doubt, the pension legislation in Kenya has been a success story and the envy of many other countries in Africa and beyond.
It has seen significant improvements in the governance of retirement funds and members of retirement funds enjoy much higher levels of protection for their pension benefits.
During that time pension assets have grown from Sh84 billion in 2000 to close to Sh1 trillion this year — a no mean achievement.
Those who follow developments in this industry will, however, agree that some key statistics in there give us less reason to celebrate.
First, the fraction of formal sector workers covered by pension schemes remains at less than 50 per cent and less than 10 per cent of all working Kenyans.
Besides, inadequate contribution rates and the habit among most Kenyans to access a significant portion of their pension savings before retirement have meant that the average pension replaces less than 28 per cent of earnings.
It does not help that Kenya’s savings rate remains low at 12 per cent and could be much higher if pensions coverage and savings are improved and leakages such as non-preservation of benefits reduced.
Kenya’s pension system is heavily borrowed from the West, its primary focus being to provide a benefit on retirement.
I am a strong proponent of saving for retirement but also believe that in a country at our stage of development, we should contemplate a long-term savings model that is more suited to our needs and can have greater impact on meeting our unique challenges.
We must ask ourselves if remodelling the pension system or repositioning it differently can lead to better results. There are a number of issues we may want to address.
Top on the list is the question as to whether it makes sense to stretch our existing pension framework to include wider savings objectives.
Secondly, we must determine whether such an expanded system should be accompanied with compulsory pension savings at a meaningful level and whether the coverage can be extended to the majority of Kenyans working in the informal sector.
This far, the clear message coming from members of the retirement funds is a willingness to save but saving for retirement is not the only or most important saving need for Kenyans.
Most are struggling with other priorities, including buying a home, educating children and paying for emergencies, not to mention the pressures of making ends meet on a daily basis.
The point is that even if we have a good retirement system with a focus on the end goal of retirement, it would be of little consequence if individuals believe they have more pressing short-term and long-term priorities.
This requires a pension model that places as much attention on the journey as on the end game of retirement.
Our current retirement benefits legislation already allows individuals to use their retirement assets to fill their short- and medium-term needs through substantial access of retirement savings on exiting employment.
The very low rates of preservation of retirement benefits we see when people change jobs indicate that this function is important for many people.
It would probably make sense to phase in compulsory preservation, but then allow the retirement savings account or a portion of it to be used to meet life priorities.
Let us consider housing. The reality is that most Kenyans rate financing home ownership higher than retirement saving, and owning a home can be a critical retirement asset.
The government has a stated commitment to build more than 150,000 homes and to widen home ownership. Yet we have only 25,000 mortgages in the entire country.
If structured properly, pension savings can play an important role in financing home ownership for members of retirement funds.
The current pension regulations permit limited assignment of pension fund assets for financing a home. The legislation is restrictive and financial institutions have not responded by lowering mortgage rates, making the uptake negligible.
If, however, the legislation can be amended to permit individual cash-backed mortgages, then a member may place a portion, say up to 60 per cent of his or her pension savings to earn a lower return with a financial institution, but then benefit from a lower interest rate to make the mortgage affordable and meet the “ability to pay” criteria of the lending institution.
Whereas there is some sacrifice on the return the member earns on his or her own pension saving, this has the potential of improving overall family wealth and well-being by having a roof over the head.
Other approaches such as using the return earned on the pension saving each year to finance a mortgage repayment or using a tenant purchase scheme structure can also be considered.
In a country where 60 per cent of the population is below the age of 20, the need to educate one’s children is a bigger challenge than saving for retirement. The same approaches can be used to finance education for an individual or their children.
The point is that our pension system has the right building blocks to enable the expanded saving objectives to be accommodated and we should not shy away from such radical thinking if it meets our needs better.
Mr Raichura is an actuary and group chief executive at Zamara.
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