Workers in informal sector can plan for rewarding retirement

Statistics from the Retirement Benefits Authority (RBA) indicate that Mbao Pension Plan, a scheme for informal sector workers, has witnessed rapid membership growth to 55,000 with total savings of Sh85 million.

This is an indication that the informal sector is embracing retirement planning, which is a remarkable step considering that over the years saving for retirement has been a preserve of those in formal employment.

Whereas those in the informal sector have identified financial security after retirement as a key need, they are yet to ascertain whether their contributions will enable them maintain decent living standards when they finally retire.

Also, more people are living longer. Unfortunately, with modernisation, traditional ways of helping the aged to meet their daily needs have broken down.

RBA, together with other industry stakeholders, should work on creating more awareness and reach untapped workers who are yet to discover the need for retirement planning.
RBA should also sensitise existing contributors to save more if they have to maintain their desired lifestyles.

Although it is a significant milestone, the current membership of the Mbao pension plan is small considering that 11 million people are employed in the informal sector.
According to recent statistics, the informal sector accounted for over 82.6 per cent of employment last year.

Unexplored potential

The sector created 626,000 jobs or 84.3 per cent of all new jobs in 2012. These numbers show that the sector’s potential is huge and unexplored. To tap into these numbers, industry stakeholders should take a deeper look at what makes the sector tick.

Some of the characteristics that alienate informal sector workers from formal pension arrangements include: constant change of jobs, frequent opting for self-employment, temporary nature of employment contracts, and financial illiteracy on retirement planning.

It has also been pointed out that most informal workers have been unable to plan for retirement due to lack of experience in dealing with formal financial institutions.

With the roll-out of financial inclusion programmes through mobile money innovations, the latter challenge is no longer a hindrance. This explains why the Mbao pension plan has continued to register growth with statistics showing that it has enrolled over 6,000 new members and received Sh15 million in savings in the current year.

Through mobile payment systems offered by local companies, members are able to remit their contributions either daily, weekly or monthly.

With the ongoing campaigns aimed at addressing lack of information on retirement planning, the temporary nature of employment in the informal sector remains a challenge for workers.

To address this, either new pension products should be launched or the existing scheme tailored to accommodate irregular earners.

Most insurers of products targeting informal workers face a similar challenge. They register a high lapse rate of insurance policies due to default by policy holders.

To reverse this trend, there is need for flexibility of pension schemes to allow workers to make advance contributions, or to regularly adjust their contributions above the set minimum and take advantage of months when their incomes are relatively higher.

Although the issue of affordability has been addressed through the set minimum contribution, which is relatively cheap and affordable to many informal workers, those on micro-pension plans should be encouraged to save more to enable them enjoy their desired lifestyles when they retire.

Higher inflation

They should be educated on how gloomy retirement without adequate income can be. Those still hesitant to join these pension schemes should be educated on the benefits and encouraged to start contributing.

It is also important for existing members to gradually increase their contributions to cater for the future increased cost of living arising from higher inflation.

This creates the need to put in place appropriate pension schemes that will ensure a comfortable retirement for informal workers even with the challenge of meagre and irregular incomes.

Opiyo is a training manger & coach with Tolerance Employee Financial Advisors Ltd. [email protected]