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Personal Finance

Pension puzzles that need urgent attention in Kenya

95 percent of individuals who leave employment
95 percent of individuals who leave employment opt not to preserve their benefits. FILE PHOTO | NMG 

Money is a word that resonates well with you and saving is a word that your parents, teachers or relatives always (probably) talk to you about while pension or retirement is a word that you probably don’t take seriously (or you do, if you are ready to retire)

This is a 25-year old Millennial writing to you about pensions and retirement.

Did you know, through a Zamara survey of retirement benefits industry in Kenya, around 20 percent of the employed population is covered by a retirement benefit scheme. This is equivalent to 3.2 million people.

However, the vast majority of these simply participate in the National Social Security Fund (NSSF) where a low level of statutory contributions apply and too low to support an adequate retirement benefit.

There are around 20 million people who are excluded from any form of retirement benefit coverage. One may ask why we should care about these 20 million people. It is because they have no means of living a dignified life after they stop working.

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This may mean that poverty among the future elderly will soon emerge as the driver for global poverty and an increase in dependency on the working population and youth in the future.

Assets in the retirement benefits industry have risen at an average rate of around 12 percent per year over the past 10 years to approximately Sh1.2 trillion in December 2018.

Most of the monies are put in traditional asset classes like fixed income assets, including government securities, fixed deposits, corporate bonds and equities.

On average, 95 percent of individuals who leave employment opt not to preserve their benefits and take the maximum available under the legislation as cash.

This cash is fully used in less than three years (after leaving employment) on businesses that end up closing down or on emergencies like children’s school fees or repaying a loan.

Retirees are making sub-optimal decisions and are able to replace only 34 percent (on average) of their earnings before retirement as a pension per month, when the should ideally replace 75 per cent.

It is quite clear that our retirement benefits industry is growing and has its challenges. When comparing our retirement benefits industry with those around the world, there are similar challenges. Even though global pension assets crossed the $40 trillion-mark last year, global coverage and adequacy of pensions even in the developed world is a challenge.

In Bangladesh, only 9.2 percent of working age population are covered and in places like Nigeria, South Africa and Indonesia, the figures are 5.2 percent, 3.7 percent and eight percent respectively.

This is mostly due to illiteracy in areas to do with finance and retirement, which is a universal challenge. Around the world, the concept of saving for retirement does not resonate with the person and this is especially true with the youth.

In the US, the American College of Financial Services conducted a survey for those nearing retirement and in retirement and it was revealed that 75 percent of the respondents failed a 38-question retirement planning quiz.

A UK Adult Financial Literacy Capability Survey found that 22 percent of people in the UK are unable to read a bank statement and 40 percent do not understand the impact of inflation on the real value of money.

The situation of retirement benefits industry in Kenya is puzzling. In every puzzle, it is expected that the pieces are put in a logical manner to successfully complete the challenge.

In the case of pension, we have identified pieces of the puzzle that are already fitting well, pieces that need re-ordering or re-fitting, those that are missing and areas that need to be hit by a hammer.

We believe the pieces touch upon each of the following categories: adequacy challenge, including role of investment strategy; improving at retirement decisions; delivering value to members and effective member engagement.

Another one is rethinking pensions.

We hope to solve the pension puzzle.

The writer is Millennial and Actuarial Analyst at Zamara Group.

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