Plans by East African governments to tap into the pensions
sector to fund infrastructure projects have come unstuck because of
sluggish reforms in the sector.
The World Bank is
therefore calling on the governments to change their laws to allow
pension funds more flexibility in investment and to scrap pre-retirement
access to savings by workers.
“The private sector
could be incentivised to participate in the provision of infrastructural
development through pension industry reforms to create greater
flexibility in their investment process, limit the ability of members to
withdraw and reduce trustee rotation,” said World Bank’s Kenya Economic
Update.
In response, retirement benefits bodies in
Kenya and Uganda are seeking to curtail early withdrawals and ensure
compulsory commuting of benefits when contributors change jobs. This
they hope will help minimise old-age poverty while releasing the funds
for government projects.
“We are developing a national
pensions policy whose focus is on value addition for pension products to
reduce attraction of withdrawals,” said Nzomo Mutuku acting chief
executive of Kenya’s Retirement Benefits Authority (RBA).
Liberalisation Bill
In
Uganda, the liberalisation Bill that has been in the works for five
years seeks to achieve a similar goal but through legislative changes.
The
Bill proposes breaking up the National Social Security Fund (NSSF)’s
monopoly over collection of mandatory workers’ savings in the private
sector, provides for portability among pension schemes (ability to
transfer an employee’s savings from one scheme to another in Uganda and
within the EAC) and also gives guidelines on sound corporate governance
standards to be adopted by local pension schemes.
Passage
of the Bill is seen as key to addressing the low penetration of
retirement savings. Presently employees who have worked for more than
seven years are allowed to receive a sizeable chunk of their savings.
Kenya’s
pensions sector has been pushing for changes especially on tax
incentives to attract more contributors but has registered little
success.
As at 2015 Kenya’s pension savings stood at
Ksh814 billion ($8.14 billion) of which 30 per cent, Ksh242 billion
($2.42 billion), was invested in government securities.
In
Uganda the investment in government securities is higher at 68.7 per
cent of total savings which stood at Ush7.6 trillion ($2.12 billion).
Most
of the investment is for less than five years as fund managers fear
being faced by liquidity challenges in case of withdrawals.
Kenya allows up to 75 per cent early withdrawal of pension savings when workers become unemployed before retirement.
Most
Kenyans have, however, turned to withdrawing the funds when changing
jobs instead of shifting them to the new employer’s scheme. This is also
the common practice in Uganda where employees can withdraw all their
funds on change of employment.
The RBA is seeking to
curb early withdrawals by making the returns on delayed pensions more
attractive rather than relying on legal changes.
The
RBA has previously complained that early withdrawals make it difficult
for fund managers to invest in high-yielding long-term investments, such
as infrastructure bonds.
Portability of pension savings
Uganda’s Liberalisation Bill seeks a similar goal by ensuring portability of pension savings from one employer to the next.
Early withdrawals also result in old age poverty as some of those who take the cash do not invest it in productive ventures.
Some of the value additions that have been floated in Kenya include use of the savings as security for construction loans.
Early withdrawals also result in old age poverty as some of those who take the cash do not invest it in productive ventures.
Some of the value additions that have been floated in Kenya include use of the savings as security for construction loans.
Most retirees use pension savings to build homes leaving them with little cash for upkeep.
Coverage
of pension industry has remained low in the region with Uganda at 10
per cent and Kenya, 15 per cent. Inclusion of more contributors would
increase the total country savings and give the respective government
financing options for their projects.
In Uganda only
employers with more than five employees are mandated to contribute to
the NSSF limiting the pension coverage. The regulation was to be
scrapped by the Liberalisation Bill.
Mandatory tax-free contributions
The Bill also contains tax incentives, which Kenya also hopes to ride on to grow membership. The tax model proposed in the Liberalisation Bill will enable mandatory tax-free contributions to a pension scheme and up to 30 per cent of voluntary contributions in occupational schemes.
Kenya’s Association of Retirement Benefit Schemes has asked for pension contributions to be exempted from tax as is the case in countries with a high savings culture such as Japan.
The Bill also contains tax incentives, which Kenya also hopes to ride on to grow membership. The tax model proposed in the Liberalisation Bill will enable mandatory tax-free contributions to a pension scheme and up to 30 per cent of voluntary contributions in occupational schemes.
Kenya’s Association of Retirement Benefit Schemes has asked for pension contributions to be exempted from tax as is the case in countries with a high savings culture such as Japan.
In a letter to the
National Treasury, the association had asked that if the tax exemption
was not agreeable then the ministry should recognise the impact of
inflation on the industry’s saving culture.
The Treasury has also been asked to review the age of pensioners who are tax exempt from the current 65 years given that most people now retire at 55. Pension payments to people over the age of 65 is tax-exempt.
Not so for those who exit early.
The Treasury has also been asked to review the age of pensioners who are tax exempt from the current 65 years given that most people now retire at 55. Pension payments to people over the age of 65 is tax-exempt.
Not so for those who exit early.
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