The Treasury recently revised and subsequently published draft regulations indicating new rules and guidelines for accessing pension savings for home purchase. The clause, which proposes to allow contributors to access 40 percent of their savings ahead of retirement will free tens of billions of shillings for home ownership given that Kenya’s pension sector currently controls Sh1.2 trillion in value; held in property, cash, shares and government bonds among other investment instruments.
The proposed changes to the pension laws will inevitably make it easier for individuals to buy their first homes, given that most households are unable to raise the minimum house purchase deposit or afford the typical monthly mortgage repayments.
Additionally, owing to the fact that a sizeable number of middle-class Kenyans hold millions of shillings in retirement savings, the rules will make it easier for them to buy homes; as the amount accrued from the implementation of these regulations will supplement their savings and incomes.
It is important for the pension and retirement benefits sector, as well as Kenyans at large, to view this milestone in the greater context of the prospects this could usher-in for her young populace.
For the sake of clarity, it is important to acknowledge that Kenya grapples with high rates of unemployment and under employment with a vast majority being in the informal sector. This leaves a paltry 20 percent working in the formal sector of the economy; with 74.5 percent of them earning Sh50,000, and below, per month.
Cognizant of the fact that the country’s median age is 19 years, this translates to a large population of young Kenyans having to struggle to meet pressing daily needs, with little to spare for their life in old age. This often ambitious yet neglected demographic, holds the cards for the industry’s success if steps such as the amendment of regulations to allow partial access to pension by way of home ownership are actualised.
In the battle between daily needs and saving for retirement, the former will always carry the day. Finding innovative ways for pension scheme beneficiaries to start accessing some of the benefits from their savings while still in active employment is therefore not only necessary but perhaps the only way to get more people saving.
In the current scenario, some people in the formal sector try to beat the system by resigning from employment, accessing up to 75 percent of their savings, and jumping right back in and starting all over again.
This obviously depletes their retirement savings in the long run. Introducing a provision for such people to access the housing benefit will therefore go a long way in addressing one of the most important and basic needs that a lot of Kenyans struggle with – having a ‘retirement home’ much earlier in their working lives. Unlocking the 40 percent is nothing else but a benefit for the member.
Kenya’s pension and retirement benefits industry plays a big role in the economy, and has consistently averaged 13.55% of the country’s GDP over the last 10-years. Additionally, while the sector has struggled with increasing pension penetration and access, it has witnessed significant growth from 700,000 registered members in 2010 to 3.01 million members as of December 2019, according to the Kenya National Bureau of Statistics (KNBS).
Furthermore, the sector is highly regulated thus giving little room for pilfering of funds. With the new law in place, workers will have an incentive to save in retirement benefits schemes as well as boost one of the Government’s Big Four Agenda, which aims to improve home ownership rates by enhancing the diversification of sources of funds to be used in the purchasing of residential homes by Kenyans.
When it comes to leveraging retirement savings to guarantee home ownership, Kenya can benefit immensely by modelling after the Asian tiger – Singapore. In Singapore, the statutory pension scheme, the Central Provident Fund, is integrated as one of the three key pillars of housing policy in the country. The contribution rates to the statutory fund are: 20 percent of employees’ income; which is supplemented with an additional 20 percent from their respective employer. This is similar to the defined contribution arrangement provided by the County Pension Fund – which is the retirement scheme for county governments in Kenya.
In the same vein, mandatory contributions to Singapore’s statutory fund are tax-exempt for both the employer and employee. However, contributions are distributed to three accounts: an ordinary account (whose funds are used to secure housing insurance and education); a special account (that holds funds for old-age and invests solely on retirement related products) and a MediSave account (that holds funds specifically meant to cushion members against hospital and medical insurance bills).
Under this arrangement, savings under the ordinary account can only be used if you are buying a private property with a remaining lease of at least 30 years, provided one’s age plus the remaining lease is at least 80 years. All properties in Singapore have a renewable lease of 99 years old, just like in Kenya.
The total amount by a household is capped at a percentage of the property purchase price or the value of the property at the time of purchase. Moreover, there are no limits to withdraw your savings under the ordinary account to buy a new flat from Singapore’s Housing Development Board (HDB). As a result, Singapore consistently records the highest home ownership rates on a global scale.
Kenya can adopt several lessons from Singapore’s statutory retirement fund. This allows 23 percent out of the 37percent total contribution to be utilised for purchase of a house; this translates to 62 percent of a member’s total contribution. Additionally, there is no limit for usage of the retirement savings to purchase a house developed by their Housing Development Board.
In the greater context of what this shift in policy means for young Kenyans, we ought to consider it a step in the right direction as we chart the path to the attainment of the Kenyan dream.
The writer is Group Managing Director CEO of CPF Group.