Businesses & Financial News

Kenya’s retirement gamble

By Steve Umidha

More than 10 million Kenyans face a retirement crisis as they fall short of adequate savings once they leave work, experts have warned.

Although cracks have been forming in the foundation of the country’s retirement security for decades now, analysts believe the Coronavirus pandemic has only made it worse with lean solutions in sight.

Statistics show that less than 10 per cent of Kenyan population retire financially independent with one of the reasons being cited for the sorry state being that when saving for retirement, most people underestimate how much they will have to pay for medical expenses during their retirement years.

As a result it is now feared that about 16 million salaried Kenyans could be sleepwalking into a retirement catastrophe unknowingly.

“I can tell you Kenyans are sleepwalking into disaster without even knowing it,” expressed a concerned Sundeep Raichura – the Chief executive of Zamara Actuaries, Administrators & Consultants, adding that the problem is widespread with as many Kenyans not having insurance life covers to cater for their crucial needs such as disability.

Warning signs

Unless Kenya prepares for the challenge, a retirement calamity of immense proportions could happen sooner rather than later, according to Raichura who has questioned the foot-dragging by authorities to implement the National Social Security Fund Act of 2013 whose execution was expected to provide an obligatory superannuation pension plan for all salaried Kenyans.

It was also expected to address some of the challenges facing the sector today.

The NSSF no 45 Act of 2013 was assented to by President Uhuru Kenyatta on December, 24 2013 and came into force on January 10, the following year but its implementation has been overlooked.

“The NSSF Act of 2013 is in the national interest of our country…because what it does is it brings a compulsory pension for everybody who is earning a salary, it makes savings at a sensible rate. For whatever reasons stakeholders went to court and blocked its implementation, I feel it is sad a solution hasn’t been found to date,” noted Raichura.

The Act provided the contribution at the rate of 6 percent and was to be phased over a period of five years. It establishes that the National Social Security Fund provides Social Security for Workers and Self Employed Persons and their dependents.

Hosea Kili, County Pension Fund (CPF) and Local Authorities Pensions Trust (LAPTRUST) chief executive, agrees with his concerns and has called for the sector regulator – the Retirement Benefits Authority (RBA) to consider expanding social security coverage by making pension contributions mandatory for all Kenyans if the sector is to grow beyond its potential.

The establishment of a universal fund, he believes, would assist by allocating a percentage of the national budget to go towards universal pension and medical coverage.

“This can be achieved by introducing a pension levy on mandatory goods and services to realize mandatory State social security. It could also look at a levy on vital goods such as airtime, a small portion of which can be built over time,” advised Kili.

The two now want sector players to focus on the informal sector which makes up for the 80 percent untapped market with financial literacy a key determinant if the industry is to grow beyond its current market value of Sh1.4 trillion.

While there have been improvements in the sector amid the pandemic, many industry experts such as the Association of Pension Trustees and Administrators of Kenya (APTAK) are surprised by the growing reluctance from Kenyans to subscribe to annuity covers, considering positive economic projections and expectations in the sector.

Racing against time

Stakeholders in the sector are now racing against time to switch to sustainable pension plans or ‘green’ retirement benefit products amid concerns that the effects of climate change could hit retirees hardest.

During the past seventh 2021 Devolution Conference, it emerged that uncertainty over the path of global warming posed profound risks for the country’s pension plans and many providers today are struggling to steer the transition to a lower –carbon future.

“As frontrunners in Kenya’s social security sector, we are taking comprehensive steps to mitigate our exposure to ESG risks as we pursue opportunities associated with sustainable investing,” said Hosea Kili, the Chief executive of CPF and Lap trust pension schemes in his presentation at the conference.

As a result, Kili now wants the Retirement Benefits Authority (RBA) to work with industry stakeholders to develop a measurement framework for climate and other ESG-related risks in an effort to promote incentives to allow pension funds establish robust internal expertise on climate and other ESG-related considerations.

Greening a pension system ordinarily involves developing awareness and expertise within the pension funds regarding climate change, including drivers of vulnerability and exposure by sector and ESG considerations, such as critical metrics and regulatory guidelines by RBA.

Local Authorities Pensions Trust (LAPTRUST) was established as a pension scheme for employees of the then Local Government Authorities but ceased admitting new members in 2012.

In its place, a new Defined Contribution Scheme, Laptrust (Umbrella) Retirement Fund, was registered to meet the retirement needs of new employees within the defunct Local Authorities of Kenya, now devolved units.

As a result, the change saw slow remittance of contributions by the defunct local authorities in addition to the initial delay by the county governments to handle inherited liabilities from the local authorities.

Today, the County Pension Fund has over 160 sponsors comprising County governments and associated organizations as well as independent organizations which join the umbrella fund for their employees’ benefits.

Mandatory pension contribution

The regulator has also been advised to consider expanding social security coverage by making pension contributions mandatory for all Kenyans.

In his presentation, CPF’s Kili says an establishment of a universal fund would be ideal in allocating a percentage of the national budget to go towards the fund for universal pension and medical coverage.

“This can be achieved by introducing a pension levy on mandatory goods and services to realize mandatory State social security. It could also look at a levy on vital goods such as airtime, a small portion of which can be built over time,” added Kili.

The proposed universal fund, he said should be implemented as a flagship project under Vision 2030 while benchmarking on Norway, which used proceeds from its oil resources to build a sovereign fund, which it invests in major projects such as infrastructure, affordable housing.

This follows a previous plea to pension scheme trustees in Kenya by the Capital Markets Authority (CMA) to diversify their investments in a bid to revitalize the sector that has been impacted negatively by the Covid-19 pandemic.

The Kenyan pension fund sector is ranked the biggest in the region with over Sh1.4 trillion worth of savings invested in various asset classes.

Last year, pensions recorded increased withdrawals and surrenders due to revenue crunch and Covid-19 induced job losses.

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