What industry must do in growing pension coverage

C.K. Prahalad in his book, The Fortune at the Bottom of the Pyramid, engages the reader with an interesting question. “Why is it that with all our technology, managerial know-how, and investment capacity, we cannot make even a minor contribution to the problem of pervasive global poverty?”

It is important to review old age poverty especially in light of shifting demographics.

According to World Population Prospects 2019 by the United Nations, the number of older persons is projected to be 1.5 billion in 2050, which means one in every six people or 16.7 percent in the world will be over the age of 65 compared to nine percent as of 2019. This scenario poses even greater concern as a majority of aged people in the world would be in Africa.

Micro pension plans (MPPs) are one of the key solutions to old age poverty.

MPPs are retirement fund vehicles where individuals mainly within the informal sector or low-income earners voluntarily contribute to with the main objective of saving for their sunset years.

However, to achieve the desired outcomes, financial discipline and awareness are key drivers as saving regularly does not come naturally especially amid competing financial needs.

Fortunately, industry stakeholders have over the years appreciated this need in the market and are working towards providing tailor-made solutions to address this gap.

MOBIKEZA, a micro-pension app by Octagon Pension Services, and Haba Haba by the NSSF, for example, provide simple and convenient platorms for low-income earners to save for retirement.

The Retirement Benefits Authority (RBA) has also been at the forefront promoting the informal sector as the key to driving pension coverage.

The informal sector is diverse as it employs a wide range of people —from wage earners to those that are self-employed.

Informal sector workers may also not have regular incomes and savings and are more susceptible to short-term shocks from external and internal events around them.

The unrealised potential for financial inclusion and prosperity can be harnessed for the realisation of economic growth.

Like in many developing countries, the informal sector in Kenya accounts for 80 percent of the total workforce. A majority in this category are not covered by any pension arrangement due to general unemployment, low income, a poor saving culture and pension plans which typically favour workers in the formal sector.

But the mobile penetration is 90 percent, according to the Communications Authority of Kenya’s annual report of 2019. The average mobile money transactions within the same period was Sh350 billion every month, according to Central Bank of Kenya statistics.

To demonstrate the potential value of micro-pension growth in Kenya, assume five million people (equivalent to 10 percent) of the untapped population contribute an amount of Sh200 a month or Sh50 per week, it means that the total collection in asset value on a monthly basis would be Sh1 billion and approximately Sh100 billion within the next five years. This, compounded over the long-term through smart investments, is a sure ticket to the chocolate factory.

To effectively build the capability of micro pension plans and initiatives and enhance coverage, a number of key issues must be addressed by pension players.

INNOVATION AND TECHNOLOGY-DRIVEN SOLUTIONS

The digital landscape system is slowly taking over the archaic paperwork system. The younger generation are tech-savvy, with the majority being mobile users. This creates an opportunity to reach out to this generation by developing innovative ways of incorporating pension savings. Industry players must innovate.

PROPER GOVERNANCE

The pension industry has over the years faced scrutiny over governance and management of pension funds. The RBA came into play to tighten the rules and ensure proper governance.

For instance, the recent 2020-2021 budget proposed several pension reforms, including developing a National Pensions Policy to strengthen the regulatory framework to achieve comprehensive pension coverage. But even more interesting is the proposal to establish a National Micro-Pension Scheme to enhance sustainability within the informal sector.

EDUCATION AND AWARENESS

Education and creation of pension awareness on the benefits of saving for the future is critical for the information sector. The regulator continues to undertake roadshows and educative forums to sensitise the public on pension. However, other players in the industry also need to take up the task of educating the public to ultimately increase pension coverage and curb old age poverty.

LONG-TERM FINANCIAL PLANNING AND INVESTMENTS

The focus should be on long-term financial planning and investments aimed at achieving adequate returns to provide value to the informal sector. For a long time, unlike property and real estate, pension has not been considered an investment vehicle. Pension is, however, a long-term investment plan set to secure financial preparedness after retirement.

FLEXIBILITY IN CONTRIBUTIONS

The current unprecedented times posed by Covid-19 have affected businesses and incomes. Therefore, to accommodate such uncertainties affecting low-income earners, flexible contributions ought to be embraced to ensure consistent saving towards retirement.

In hindsight, we are headed in the right direction but there is a need to do more to avert the rising cases of old age poverty and increase pension coverage.

Njuguna is general manager, Octagon Pension Services