Could RBA proposals improve Kenya’s pension industry?

Retired teachers protest over failure to get their pension funds. Kenya’s Retirement Benefits Authority has proposed measures to improve the sector. Photo/FILE  Nation Media Group

By PETERSON THIONG’O The EastAfrican

In Summary

• The RBA wants the government to reconsider a decision allowing members to access half of their contributions before they reach retirement age, saying the move is putting pension schemes under liquidity pressure.
• Fund managers have welcomed the RBA proposal, saying it will help them better plan their investment decision without facing the risk of having to exit investments early in order to meet their cash obligations.
• The main challenge for protection funds in Kenya has been poor funding, lack of institutional and operating autonomy.

The Retirement Benefits Authority of Kenya is proposing to reverse a law that allows pensioners to access half their contribution before retirement age and the creation of a protection fund to cushion schemes from massive financial crises.

The RBA wants the government to reconsider a decision allowing members to access half of their contributions before they reach retirement age, saying the move is putting pension schemes under liquidity pressure.

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In 2011, the government allowed early retirees and those changing jobs to have full access to their pension savings regardless of the period they worked for a single employer.

By June last year, members had withdrawn about Ksh2 billion ($23.5 million) from various funds.

“There are some schemes that had to process huge pay-outs. Such schemes may have experienced liquidity challenges,” said Edward Odundo, the RBA chief  executive.

The RBA further said this rule goes against the very reason of having retirement schemes, since if members withdraw funds it means they will not have enough savings by the time they retire.

“Access to benefits before attaining the retirement age works against the pension policy as it allows leakage of the benefits while members are still active,” said Mr Odundo.

Fund managers have welcomed the RBA proposal, saying it will help them better plan their investment decision without facing the risk of having to exit investments early in order to meet their cash obligations.

“When members come to you and demand funds that at that moment are tied up in investments, you may be forced to exit some of your investments and at times you may end up making losses,” said Einstein Kihanda, a fund manager at ICEA Lion Group.

But some fund managers, while agreeing on the benefit of limiting withdrawals, said there is a need to look at the underlying reasons why members opt to get their funds.

“For most people, when they opt for withdrawal they do it as a last option. If there was a social cushion for the unemployed through say unemployment benefits or free health care, most members would probably not opt for the option,” said Tom Odongo, the managing trustee of Kenya’s National Social Security Fund (NSSF). He added that while good for the industry, the decision to limit withdrawals should be debated further.

The RBA also proposes a retirement protection fund that covers all types of schemes from losses arising due to counterparty default or fraud on the part of trustees and service providers.

The RBA said the proposed fund should be placed under the Retirement Benefits Act and should only cover those defaults not covered by other financial protection funds.

If the proposal becomes law, retirement schemes will pay risk based premiums calculated according to their risk score with those that have a higher score paying higher premiums. Contributions to the fund will be mandatory for all schemes.

Though the RBA made the suggestions earlier, they coincide with a similar step by the Central Bank of Kenya. Last month, the country’s banking regulator said it would review the amount of deposits that banking customers are guaranteed in case a bank goes down.

Currently, customers can only receive a maximum of Ksh100,000 ($1,160) should a bank go under.

The RBA is also proposing to have the protection fund run independently from the regulator, saying that this would shield the board from any governance challenges that may face the regulator in future.

“Institutional autonomy from the regulator ensures that any governance weaknesses in the regulator are not replicated in the fund and also removes the moral hazard of the same institution controlling a safety net for what may be perceived as its own failures of regulation,” said the RBA.

The main challenge for protection funds in Kenya has been poor funding, lack of institutional and operating autonomy.

For example, the Investor Protection Fund and the Deposit Protection Fund Board (DPFB) are departments within the Capital Markets Authority and the country’s Central Bank respectively.

The RBA said the proposals, if adopted by Treasury, will help deepen the pension industry as the country battles growing old-age poverty.