We must look to the larger future. We seek the security of the men, women and children of the nation. That security involves the agencies of government to assist in the establishment of means to provide sound and adequate protection against the vicissitudes of modern life — in other words, social insurance.”
US President Franklin Delano Roosevelt said these words in his speech a day before he signed the executive order that established the Committee on Economic Security, which designed the US social security’s dependable monthly benefit checks.
Treasury Cabinet Secretary Ukur Yatani may have his day with history, like President Roosevelt, if he succeeds in cracking a dependable pension system that covers a majority of Kenyans.
In his budget speech, he announced that the government was working on reforming Kenya’s pension system by harmonising laws to establish one national retirement policy which will seek to achieve comprehensive pension coverage across formal and informal sectors.
This is laudable because Kenya’s pension system is largely based on employer-employee relationships, which only cover 15 percent of the labour force. In addition, there is need to reform social security because of the position the economy finds itself, more urgent need for fiscal consolidation, rising fiscal deficit as well public debt.
With increased need for social security, there is need to target the informal sector. The National Social Security Fund (NSSF) serves the formal sector together with the other 1,300 occupational and individual pension schemes covering 2.2 million, when the total labour force is over 16 million.
Currently, the social protection scheme includes the tax-financed Inua Jamii Senior Citizen’s Grant running together with the NSSF contributory scheme. There is also a private sector-led programme targeting the low-income informal sector workers called the Mbao Pension Plan — a voluntary individual savings plan with a minimum periodic contribution of Sh20 per day.
Launched in 2011, over 76,000 accounts are associated with the Mbao Pension Scheme after seven years of operation. However, active members have been declining in the last couple of years.
Despite these schemes existing for some time, they have not attracted informal sector workers who account for over 80 percent of the labour force and the major challenge has been scale. There is need for these schemes to have a big population of Kenyans covered, which will translate into a bigger pool of savings thus establishing a dependable social security system.
Pension contributions can be made in two ways. The first is the Pay As You Go (PAYG) where the young workers agree to pay the pension of retired people in lieu of a promise that their younger generation will follow suit. The second is each individual contributing a share of their current income to a fund which accrues over a period of time. Whichever model government choses it has to be the big financier in order to provide the ground for the schemes to scale.
One of the well-designed structures Kenya can borrow a leaf from is Ghana’s pension system, which has a three-tier structure. Tier 1 is a mandatory scheme exclusively for the formal sector run by the Social Security and National Insurance Trust. Tier 2 is mandatory but privately managed defined contribution scheme.
Tier 3 is a voluntary privately managed defined contribution scheme that provides incentives and consists of the provident fund scheme and the personal pension scheme. The Personal Pension Scheme targets the self-employed and the informal sector.
The underlining factor is that these schemes are fully funded and make provisions of a retirement account which cannot be accessed until retirement and a savings account which can be accessed after five years tax-free in case of informal sector work and 10 years for formal sector work.
So, it will be interesting to watch which innovative structure the CS Yatani comes up with.
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Note: The results are not exact but very close to the actual.
