Early retirees get access to pension cash amid fund managers’ concerns

A participant at the Retirement Benefit Authority Open Day at KICC grounds, Nairobi in October last year. The agency is planning public campaigns to enlighten pension contributors on the importance of preserving their savings to avert old-age poverty. Photo/FILE 

By STEVE MBOGO smbogo and MOSES MICHIRA

Early retirees can now access part of their employers’ contribution to pension schemes.

This brings to an end a nearly five-year freeze on the funds that began with amendment of the retirement benefits law in 2005.

Treasury has reversed the law that barred anyone leaving formal employment before the age of 50 from accessing their employers’ contribution, opening the huge pile of cash that pension fund managers have built in the recent past to heavy raids by early retirees.

Finance minister Uhuru Kenyatta made the decision after months of pressure from retirees, who argued that maintaining a freeze on the funds while they lived on the edge of poverty amounts to a breach of their rights to a decent living.

Investment income

Under the new rules Mr Kenyatta published last Friday, workers leaving an employer after contributing for more than three years into a retirement scheme will be entitled to own contribution and investment income as well as 50 per cent of their employer’s contribution.

Contributors emigrating out of the country and those quitting employment due to ill health will access their entire savings.

Previously, the workers were only entitled to their own contributions and had to attain a mandatory retirement age of 50 before tapping their investment income and employer’s contribution.

Though it offers a lifeline to thousands of Kenyans living in poverty with billions of shillings in frozen pensions, critics warn the new rules could reverse gains the retirement benefit industry has made.

Concern is also rising over the fact that the prevailing structure of the labour market where individuals change employment frequently would expose the three-year cap to abuse.

This threatens to leave retiring workers with no savings at the end of their work-life and with huge social implications.

“Experience shows that most Kenyans are not good at managing lump sum payment and the new rules could be a set-back to the fight against poverty,” said Justus Mutiga, the general manager, Life and Pensions at Insurance Company of East Africa.

“Pension schemes should also be prepared to deal with massive outflows of benefits, especially for people who have opted for early retirement since 2005 when the freeze came into force,” he said.

The pool of Kenya’s pension savings has grown from Sh176 billion in 2005 to Sh313 billion in 2009 — feeding the equities and bond market where pension managers have become some of the single largest investors.

But the Retirement Benefits Authority (RBA), that initially opposed the repeal of the 2005 law, is more worried about the impact of the new regulations on old-age poverty. 

“In the long-term, the adequacy of pension funds may be a challenge,” said Edward Odundo, the chief executive officer of RBA.

He said the agency is planning public campaigns to enlighten contributors on the importance of preserving their retirement nest egg to the very last minute.