RBA tightens supervision of retirement schemes

Retirement Benefits Authority CEO Edward Odundo. Photo/FILE 

By Jackson Okoth

While the pension industry controls an asset portfolio worth over Sh264 billion, and contributes five per cent of the Gross Domestic Product (GDP), it is one of the least understood sectors.

Most people, especially the young, consider saving for retirement a venture not worth the bother, while those already saving for old age have no idea what happens in their pension schemes.

In the past, retirement benefit schemes were few and far between, with unscrupulous employers taking advantage of the unregulated environment to misappropriate employee benefits.

But that is changing. "Supervision of pension schemes has been a challenge in the past. But we have made tremendous progress in ensuring they comply to laid down regulations," said Mr Edward Odundo, Chief Executive of Retirement Benefits Authority.

The industry has also been growing over the past few years, largely due to a number of factors.

"We have had tax incentives from the Government which has boosted growth," says Odundo.

There is a growing awareness among Kenyans on the need to save for retirement. This trend is unlike in the past, when parents invested and relied on their children for support in their old age.

Apart from aggressive public awareness campaigns, and education on the need to save for retirement, pushed by a fully fledged corporate communications department at RBA, a huge demand for funds by the Government for its public projects has also created market for pension funds.

"A large percentage of pension funds are invested in Government treasury bonds-used mainly to finance projects such as infrastructure development.

Also on the list of growth factors is an upward trend by companies to issue corporate bonds and IPOs, creating room for involvement of pension funds.

"Pension schemes have been allowed to invest in the East African Region, where this is treated as local investment, thereby expanding the savings horizon of the various schemes," says Odundo.

Expected to set the pace for the entire pension industry will be a national pension conference in November, where all stakeholders will craft a policy document.

"At this conference, we shall be discussing a draft policy that includes introduction of a universal pension scheme," says Odundo.

Such a scheme is working in countries such as Botswana and South Africa where the state offers pension for all its citizens, funded by Treasury.

In the case of Kenya, the idea is to have a basic scheme, which provides pension to all citizens who attain the age of 65 years, to be paid by the exchequer.

At the head of RBA, Odundo’s strategy involves setting up at least four pillars to ensure all citizens have a reasonable and sustainable standard of living upon retirement. There is a plan by RBA to construct at least four pillars, to ensure this objective is achieved.

The first pillar will be a universal pension scheme, a basic safety net that will cover all Kenyans attaining the age of 65 years and above.

The second pillar, already in place, is the National Social Security Fund (NSSF), a provident fund, where employees make statutory contributions. The third is the promotion of more pension schemes, where both employers and employees contribute.

stepped up

And the last pillar is the individual pension scheme plan, where an individual contributes.

"When all these pillars are in place, one is able to have a reasonable and sustainable level of living upon retirement. This is our vision," says Odundo.

RBA is pushing for a policy document that will realise this objective, including making it compulsory for one to contribute to a pension scheme.

Those already targeted are people in informal sector, which comprises more than 60 per cent of the country’s workforce.

urrently, there are more than 11 companies running individual pension schemes. Most of these are insurance companies, with products that also cater for people in informal employment.
Following the rapid growth of the industry, the regulator has also stepped up its supervision. Previously, its role has been to ensure compliance by the various schemes, to the laid down regulations and procedures. But following impressive compliance rates, the regulator has now scaled up to risk-based supervision.

"We are now looking at risks faced by various schemes after which we pre-empt them before the scheme collapses," says Odundo.

The role of RBA is basically to supervise the establishment and management to monitor the various pension schemes on a quarterly basis, to ensure they are run professionally, effectively and efficiently.

At present, the regulator receives basic compliance documents on a quarterly basis from the schemes, ensuring money is there to pay out when one retires.

RBA is also receiving an increasing number of complaints from the public, an indicator that the level of awareness about operation of pension schemes is improving.

In the past, a number of pension schemes had problems with record keeping, while others were poorly managed due to poor supervision. Often many were avenues of outright theft of funds belonging to members.

But the arrival to the scene of RBA has streamlined the industry.

"There is a Chinese wall between members of a pension scheme and the employer, thus ensuring transparency," says Odundo.

Apart from routine compliance supervision, RBA has moved to risk-based monitoring, including checking on the funding levels, expenses and risks.

The law requires that the custodian of a pension fund only keeps five per cent of the portfolio in cash, while the rest is invested in equity, bonds, property, offshore or in any other instrument.

It is projected that with a mandatory pension scheme for all, there will have a significant impact on poverty reduction, deepening of the capital and financial markets and increasing the level of savings.