EA push for pension reforms to adequately cover retirees

Pensioners wait to receive their monthly stipend at the Nakuru Post Office in Kenya in December 2013. Kenya and Uganda run social safety net programmes for the elderly. Photo/FILE 

By STEVE MBOGO Special Correspondent

In Summary

• New data by fund manager Alexander Forbes shows that Kenya, Uganda, Rwanda, Burundi and Tanzania have among the lowest pension contribution rates in Africa, exposing them to a potential retirement poverty crisis.
• Tanzania has the highest average pension saving rate of 20 per cent. Uganda has 15 per cent; Kenya and Burundi workers save 10 per cent. Rwanda is the lowest at eight per cent.
• Pension experts say East Africa needs to fast-track pension reforms to reduce the growing burden of public pension on taxpayers, and increase coverage especially among workers in the informal sector.

East African countries are racing to institute pension reforms to increase the number of people covered, and reduce the burden on taxpayers who finance government-run schemes.

New data by fund manager Alexander Forbes shows that Kenya, Uganda, Rwanda, Burundi and Tanzania have among the lowest pension contribution rates in Africa, exposing them to a potential retirement poverty crisis.

The firm said Senegal and Equatorial Guinea have the highest pension savings levels on the continent, as workers there save at least 25 per cent of their gross salary in retirement schemes.

In the EAC, Tanzania has the highest average pension saving rate of 20 per cent. Uganda has 15 per cent; Kenya and Burundi workers save 10 per cent. Rwanda is the lowest at eight per cent.

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The data from Alexander Forbes focused on compulsory contributions (by the employee and employer) through public-run pension schemes. The relatively low pension savings could lead to retirees relying on their families for survival, especially if there are medical costs involved.

Over the years, governments have borne responsibility for the welfare of retired civil servants.

Now Kenya has rolled out a new pension law, effective from the end of May, making pension contributions mandatory. Workers will be expected to save at least 12 per cent of their monthly pay, half of which will come from the employer.

Kenya’s public service pension scheme is to be reformed to reduce the burden of funding it. Under the new plan, civil servants will contribute two per cent of their salary to the retirement scheme in the first year, five per cent in the second and 7.5 per cent from the third year onwards.

The government plans to match each worker’s monthly contribution with the equivalent of 15 per cent of their salary. It will also take out and maintain a life insurance policy worth a minimum of five times each member’s annual pensionable emoluments.

READ: Proposed law bars Kenyan workers from getting cash before retirement

Uganda is preparing to pass a law that will allow private pensions managers to enter the market. The law proposes that the Public Service Pension Scheme be fully funded to reduce the burden on taxpayers. Contributors will be allowed to transfer their accrued benefits from one scheme to another.

Rwanda is also expected to pass a law that will allow private players into the sector currently managed by the Rwanda Social Security Board. The proposed law will also govern the functioning and supervision of mandatory and voluntary pension schemes.

Tanzania too has been working to harmonise the operations of state-run pension schemes, and has been considering opening its market to private firms.

Low coverage

The reforms are driven by low coverage among formal workers and near zero coverage for people in the informal sector. Only about 10 per cent of the working population is covered in the region, according to statistics.

The majority of those covered are under national social security schemes, whose contribution is low and therefore pays very little money to retirees. The payment is further eroded by high inflation rates. The schemes are also beset by corruption, and low return on investments compared with private-run schemes.

As a result, dependency on the working population, especially among people above the age of 60, is increasing, further burdening the earnings of the working population and reducing their capacity to save.

Pension experts say East Africa needs to fast-track pension reforms to reduce the growing burden of public pension on taxpayers, and increase coverage especially among workers in the informal sector.

“The priority is to adopt the global best practice of converting the scheme from the current defined benefit, which is funded by taxpayers directly and whose liability increases all the time, to a defined contribution scheme,” said Sammy Muthui, general manager of AON Consulting, a risk consulting company.

Beneficiaries will know the amount they have contributed and the employers’ contribution.

“The other reform measure needed is having a mix that allows for robust private sector participation, while at the same time having a good social pensions scheme. They can co-exist as long as one does not raid the other,” he said.

“The idea is that the state offers an attractive package to low-income earners to encourage them to save through the social pensions scheme.

“This can happen if the NSSF is reformed to give better returns, because that is what makes the pension product attractive. The most sustainable reform is to allow for competition, so that savers are attracted by the returns and not by legislation.”

Currently, Kenya’s NSSF pays less than 5 per cent annual interest to its contributors, compared with private sector-managed schemes that pay more than 20 per cent annual interest. This scenario is replicated across the region.

The CEO of Alexander Forbes, Sundeep Raichura, said the reforms are healthy for the industry and will help the region streamline its pension systems. He said Kenya and Uganda need to prioritise reforming their state-funded pension schemes for civil servants.

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Ansgar Mushi, the director of research, actuarial and policy development at Tanzania’s Social Security Regulatory Authority, said more reforms are required in the region to extend coverage and restructure expensive underfunded public service schemes, particularly in Kenya and Uganda.

To mitigate old-age poverty, Kenya and Uganda run social safety net programmes where elderly people receive monthly stipends. Currently, about 118,000 elderly Kenyans benefit from this social safety net programme, which began in 2004, and is financed by the taxpayer.

Age dependency

Uganda has one of the highest age dependency ratios in the world, according to 2012 statistics by the World Bank.

Age dependency ratio is the ratio of older dependants — people older than 64 — to the working-age population aged 15-64. Uganda has a ratio of 104, Tanzania 92, Burundi 87, Rwanda 85 and Kenya 82.

With the low contributions, retirees find it hard to meet their basic needs with the meagre payments they receive.

In Kenya, of an estimated 12 million working population, some 1.5 million are covered under the NSSF. Another 450,000 are covered under the government pension scheme for the public; membership of employer-sponsored occupational plans and individual plans is about 400,000 and 80,000 respectively.

Most retirees in Kenya rely on their NSSF savings, which, due to low monthly contributions, have meagre returns.

Only up to 4 per cent of retirees under the NSSF are able to find an income replacement; 21 per cent of Kenyan pensioners find an income replacement that is still way below the globally recommended 75 per cent of their pre-retirement income.

In Uganda, the NSSF covers about 450,000 workers, which is 3.5 per cent of the working population. Overall coverage for the working population is about 9 per cent. Rwanda’s pension coverage ranges between 8 and 9 per cent, about the same level as Tanzania and Burundi.