Why Rotich locked up Sh385bn pension cash for workers below 50 years

The Retirement Benefits Authority (RBA) has come out to defend a legal amendment that will see more than Sh385 billion of workers’ pension savings made inaccessible to those below 50 years.

Treasury Secretary Henry Rotich has, through a legal notice, amended pension rules effectively cutting out workers’ access to their employers’ portion of savings before clocking the official retirement age of 50.

“Regulation 19 of the Principal Regulations is amended in paragraph (5) by deleting the words “and fifty percent of his employer’s contribution and the investment income that has accrued in respect of those contributions” appearing in sub-paragraph (a) (ii),” reads the legal notice by Mr Rotich.

Kenya’s total pension industry assets were valued at Sh1.14 trillion as at December, out of which Sh384.6 billion was employers’ contribution.

In a statement, the RBA said the amendment, which is a reversal of yet another change in law made about eight years ago, is intended to protect workers from old age poverty.

"A number of recent studies… have found the pension replacement rate in Kenya to be on average only 34 percent against an ideal target of 75 percent in terms of pension income as a proportion of pre-retirement income. This is in line with findings from earlier studies by the Authority," the RBA said.

"The primary cause of this low pension adequacy in Kenya was traced to frequent access to the benefits before retirement with 95 percent of individuals who leave employment opting not to preserve their benefits but taking out the maximum available under legislation in cash. This was likened to "going on a long distance journey and emptying the fuel tank at every stop."

Critics of the new regulations, however, see the amendment as yet another scheme by the Treasury to gain easy access to long-term loans from the hundreds of billions held by the pension sector.

The RBA pointed out that workers who are younger than 50 years can, however, still access their employers’ retirement contribution in cases of illness or emigration to other countries.

The pension savings can also be used to secure mortgage loans. The amendment will be a boon for fund managers and financial markets including Nairobi Securities Exchange (NSE) where pension assets are invested.

Mr Rotich’s amendment to the pension rules has once again renewed debate on what is prudent in terms of the minimum investment duration for pension assets. The lock-up of employers’ contributions takes the country back to 2005 when then Finance minister David Mwiraria introduced the golden handcuffs, arguing that retirement benefits should be used for their intended purpose of alleviating old-age poverty.

The government in 2011, however, amended the law allowing employees to access half of their employers’ contributions after facing pressure from retrenched workers asking to be allowed to utilise billions held up in their pension schemes.

With more than half of Kenya’s 2.7 million formal sector workers changing employers or losing their jobs before age 50, the lock-up was seen as unfair as individuals could suffer poverty or a major cash emergency even as a substantial part of their net worth remained inaccessible.

Players in the industry argue that while the new changes may be unpopular, they bode well for individual retirees and the financial markets.

"This is good for individuals since they will now save more money for longer in preparation for old age. Pension assets will rise and these will be invested in the financial markets," said Sundeep Raichura, the chief executive of pension administrator Zamara.