Kenya's ticking pension time bomb

AFTER THE TOIL, POVERTY: Workers born at independence face a penniless life in retirement and why the government will pay a high price 

By JUSTUS ONDARI

Kenyans born at independence in 1963 or immediately after – the group popularly known as Uhuru generation – are set to retire in the next few years.

Even with the government’s help by extending the retirement age from 55 years to 60 years, those born in 1965, for instance, have only 15 years of service. With improved medicare and hygiene, life expectancy has increased and majority of the retirees are expected to live longer in retirement.

This will call for more resources to sustain them in their sunset years by taking into account issues like medical costs, which will escalate as they advance in age. But something is not right somewhere and for many, sustaining their current lifestyles will be wishful thinking as their nest egg is virtually empty.

“Unfortunately, majority of the Uhuru generation, just as most Kenyans, have not saved and invested enough for retirement,” says Mr Edward Odundo, the chief executive of the Retirement Benefits Authority (RBA), the pensions industry regulator.

With high inflationary trends eroding retirement savings, as it happens to most people who have retired or been retrenched, the Uhuru generation will walk into a life of virtual penury. “The breakdown of the traditional social security system means that no longer can the society accommodate the retirees,” says the executive director of the Pensions Advisory Centre (K) Ltd, Mr Fred Nyayieka.

Yet this does not come as a surprise. According to Mr Odundo, Kenyans are a consuming society with a poor saving culture. “As a society, we need to change our culture and start saving more,” he says, noting that currently Kenyans save less than 10 per cent of their total income against the recommended level of 23-30 per cent.

That is why, despite the industry growing from Sh40 billion in 2001 to Sh300 billion currently, it only covers 15 per cent of the country’s total workforce. In terms of structure, the National Social Security Fund (NSSF), with about two million members accounts for the lion’s share (65 per cent) of membership with savings worth about Sh80 billion.

The unfunded civil service pension scheme with about 450,000 members accounts for 22 per cent while occupational retirement schemes offered by different employers take about 230,000 members and account for 12 per cent worth about Sh130 billion. Individual retirement schemes with just below 10,000 members account for about 0.8 per cent.

While the country’s pension industry is more developed than Uganda’s and Tanzania’s, it scores highly only on occupational schemes. Its two neighbours have more robust national social security schemes.

Notwithstanding management challenges, analysts say contribution rates to NSSF in Uganda and Tanzania are more reasonable in achieving the objectives of the respective schemes than in Kenya.

For instance, the aggregate contribution rates to the NSSF in Uganda and Tanzania is 15 per cent and 17.5 per cent of the total income respectively. This is way above the absolute Sh400 per month currently in
Kenya, which works to about 0.5 per cent of average income. Furthermore, the civil servants pension scheme does not have assets set aside. This means when civil servants retire, the government has to make a budgetary provision for their benefits from that year’s income.

Enslaving future generations

“In the event that revenue collection is poor, or investment returns are disastrous, the government would need to redeploy its financial resources from other areas in order to pay pensions,” says Mr Einstein Kihanda, the business development manager at Sanlam Investment Management Kenya.

This means Kenya has enslaved future generations economically by incurring pension debts at their expense. Perhaps why the government is trying to replace the current defined benefit scheme, which requires it as the sole contributor to guarantee what it will pay the retirees from the Consolidated Fund.

The Permanent Secretary in the Ministry of Public Service, Mr Titus Ndambuki, said the Public Service Superannuation Scheme Bill 2009 is ready and awaiting Cabinet approval before being taken to Parliament.

“We are working to ensure that by January 2011 the scheme will be up and running. We are aware of the delays but we are not far off schedule,” Mr Ndambuki said. It was initially scheduled to come into force this year.

Because the proposed scheme is a defined contribution scheme, in which individual civil servants contribute 7.5 per cent, the government’s financial responsibility will be limited to the 15 per cent contribution of its employees’ pay.

Besides a labyrinth of legislative reforms needed to implement the scheme, it also faces resistance from various quarters, particularly the country’s 240,000 teachers who, through the Kenya National Union of Teachers (Knut), maintain that they would only join a State-run pension scheme created purely for them.

But analysts maintain that the problem goes beyond the profligate lifestyle of Kenyans and requires more than what the State is currently doing. The country still does not have a national pensions policy, more than 13 years since Parliament enacted the Retirement Benefits Authority (RBA) Act.

“A national pensions policy will provide a roadmap for implementation of a broad strategy of achieving social security in the country. It is the first step to achieving social security for Kenyans,” says Mr Nyayieka. 

Worse still, under the NSSF Act, NSSF operates as a provident fund, where retirees only get their contributions and their employers top-up when they retire. This despite the fact that Kenya is the second country in Africa to establish a national social security fund after Ghana.

But RBA CEO says unless Parliament amends the Act to change NSSF into a pension fund, there is little they can do about it. While admitting that a national pension policy is critical, Mr Odundo says the Ministry of Labour plans to come up with National Social Protection Policy. “The Ministry is preparing cabinet paper on the policy.

That is why we felt we didn’t need to come up with a pension policy because it will amount to duplication of issues,” he said. However, this does not wash with some analysts. “What the Ministry of Labour is trying to do is a knee-jerk reaction to a vacuum created by the RBA which has abdicated its mandate,” said an analyst on condition of anonymity because he is not mandated to speak to the press by his organisation.

Analyst also say the recent introduction of cash transfer to elderly persons under the Ministry of Gender and Social Services points to a failure by the industry regulator. “The financial resources of pension schemes still remain untapped. Participation of schemes in public private partnerships would greatly improve infrastructural development in the country,” said Mr Abed Mureithi, a resident actuary, Actuarial Services (E.A) Ltd.

Pension experts attribute Kenyans’ poor retirement planning to the fact that it is not mandatory for employers to set up a pension scheme. Only 1,400 employers in the country currently have occupational schemes for the employees since, under the law, pension planning is optional in the country.

This is negligible compared to South Africa, which has 16,000 pension schemes. “We are working on the voluntary buy-in strategy to build a critical mass of members that will put pressure on other employers to set up their schemes,” said Mr Odundo.

Roping in the informal

He singles out the sudden increase of interest among the informal sector players. Since the National Federation of Jua Kali Associations-sponsored Mbao Pension Scheme debuted in December 2009, it has netted some 20,000 artisans who contribute Sh20 per day.

The public transport sector, under the Matatu Owners Association, is also expected to start a similar scheme at the end of this month targeting public service vehicles (PSV) owners and crew. But the industry regulator does not rule out making it compulsory in future. “As usual, we will continue making our recommendations to Treasury and would like a situation where pension planning is compulsory,” he added.

If and when that comes to pass, Kenya will join South Africa, which has a universal pension system. Under such a social security system, NSSF will form the so-called first pillar while the occupational schemes become the second pillar and individual schemes third pillar.

In the meantime, there are plans to start inculcating a culture of saving for retirement from the formative years among the current generation of Kenyans through education. RBA says it is working with the Kenya Institute of Education to have pension included in the syllabus.