Future of pension in era of disruptions

cash money
The pension industry in Kenya is characterised by rampant mismanagement and misappropriation of funds. FILE PHOTO | NMG 

Last month, AON Minet asked me to facilitate a workshop on the future of pension in the face of technology disruptions. A quick research on the emerging employment dynamics, investment choices and management of pension funds, revealed that the future of underfunded schemes might be bleak. Emerging technologies could help minimise this eventuality.

Pension plans in Kenya mainly fall within the following categories: the statutory (mandatory) which is managed by the National Social Security Fund (NSSF); individual or defined contribution funds where an employer, employee or both make contributions on a regular basis and benefits are based on their contributions; and occupational benefit schemes, which are also defined contributions where an employer promises to pay on retirement a predetermined amount using a formula based on the employee's earnings history, tenure of service and age.

There are many risks associated with different pension plans. At the macro level, changes in technology and employment dynamics are likely to impact all pension schemes.

In the future, there will be less people in formal employment. The rise of the gig economy and informal entrepreneurship pose the risk for underfunded schemes. Whereas underfunded schemes were largely a risk of developed countries where birth rates have significantly declined leaving too many retirees without young workers making the contributions, it is something to worry now in developing countries.

The makers of our constitution envisaged that such a problem could arise and in Article 43 1 (e) provides that every Kenyan has a right to social security and commits the government to take adequate measures to ensure social security of the citizenry.


Article 45 of the NSSF Act 2013, established two funds: the Pension Fund and the Provident Fund. The pension scheme is mandatory for all employees in the formal economy while the provident fund is voluntary and will cover the self-employed.

The problem with the law is the voluntary aspect for the informal sector, which means that many in the sector are not members.

Mismanagement of the fund also makes it unattractive to join unless it is mandatory. The murky world of taking insurance for the future is still complex to many citizens. Which is the reason why the spirit of the law should have focused on building a culture making savings for an uncertain future. The numbers don’t show that we have our act together with respect to securing Kenyan citizens in the days to come.

As of June 2018, the total pension assets in Kenya amounted to about Sh1.3 trillion (Sh1.16 trillion in private pension funds and Sh0.221 trillion in public pension fund) of which 35 percent was invested in Government bonds, 20 percent in listed companies, 19 percent in property, 14 percent in guaranteed bonds. The remaining 12 percent is scattered in corporate bonds, fixed deposits, offshore, non-quoted companies and REITs.

The returns from the investments oscillates between negative six percent in 2011 to 26 percent in 2010, making an average return on 9.5 percent over a ten-year period between 2008 and 2017. Inflation over the same period averaged about seven percent leading to an effective average return of 2.5 percent.

We could make pension more sexy and attractive to millions who are not covered today if the returns are better than other investments in property for example where appreciation of assets makes a joke to consider any of the pension schemes we have.

Several studies established that the pension industry in Kenya is characterised by rampant mismanagement and misappropriation of funds that leads to underperformance.

These problems arise as a result of limited disclosure and shadowy accounting practices to enable investors evaluate risk.

The Retirement Benefits Authority and the Insurance Regulatory Authority (IRA) could help if they make it mandatory that every scheme is on blockchain where the regulator and contributors will have visibility of what is happening with investment decisions made by fund managers.

It should also be mandatory that investors be allowed to participate in deciding their investment portfolio.