Pension schemes should be mandatory for private sector

County Pensioners Association members protest outside the National Treasury building in Nairobi last month. PHOTO | EVANS HABIL   

By SIMON WAFUBWA

Decades of low savings rates, lack of adequate disposable income and competing financial priorities have left nearly 80 percent of Kenyans uncertain about their
financial future.

Alarming data from Treasury shows that Kenya’s public sector pension debt has tripled in the last five years from Sh8.9 billion in 2013 to Sh27.8 billion, bringing the government’s total expenditure on pension in the fiscal year starting July 2019 to Sh86 billion.

The pension time bomb is also projected to hit Sh104 billion in fiscal year 2020/2021.

The pension crisis build-up has been partly attributed to the massive number of employees in Kenya’s public sector who are exiting the workforce despite the government’s resolve almost a decade ago to raise the retirement age from 55 to 60 years in order to defer and slow down the pension liabilities.

Between March 2018 and September 2019, a total of 50,000 public servants retired and an additional 10,000 retirees are almost due.

With the recent statistics from the census report showing that Kenya’s population has grown to 47 million, the odds will soon push government to revise the retirement age upwards to 65 years.

While the government attributes retaining senior citizens in public service positions to a skills gap, its connotation alludes to the need to slow down the number of retirees entering the pension pool due to the unavailability of retirement benefit funds to cater for the already ballooning cost of funding accrued pension liabilities in public service.

The proposed reforms where civil servants were to contribute two percent of their income to a pension scheme in the first year, five percent in the second and 7.5 percent from the third year onwards have stalled since 2013.

The private sector on the other hand has very few workers with access to a workplace retirement savings plan.

This is evidenced by the fact that pension coverage in the country has stagnated at only 20 percent.

Very few SME employees and other informal sector workers have on-the-job savings options and are more likely to be left out altogether due to lack of suitable products to rope them into pension coverage.

What would be interesting to note in the awaited final census report is the number of Kenyan households headed by someone aged 55 or above who has no retirement savings but on whom the family financially depends.

The poverty level in retirement has risen over the past few years. This means that a growing number of older households remain vulnerable to economic insecurity.

The few Kenyan workers who are part of a pension scheme are also increasingly falling short in their savings for retirement, even as the need to save more grows.

By estimate of a 2018 retirement confidence report released by Enwealth Financial Services in partnership with Strathmore University, every six out of seven working-age Kenyans are at risk of not being able to maintain their standard of living when or if they stop working.

Against the backdrop of a broke economy and the government’s failure to push through necessary reforms, including kick-starting the long-awaited defined contribution plan for the public sector, the retirement outlook for many Kenyans remains bleak.

Too many Kenyans are shut out of the employer-based retirement system because their employer has no plan or they work in the informal sector. The NSSF and Mbao pension plan are some of the retirement programmes available.

But a lot more needs to be done to help Kenyans, with their unique financial situations, make informed financial decisions.

Employees need to understand how much they need to save especially when their employers do not offer retirement benefits, as is often the case. Likewise, workers in the informal sector need formal but user-friendly financial products that will help them save more for the future.

Creating mandated saving programmes will see the value of social security benefits improve significantly. Among the reforms, government should enforce is to make it mandatory for private sector employers to enrol their workers into defined contribution plans.

Pairing individual savings plans with workplace retirement plans could also bring promising results but expansive regulatory guidance is called for.

Options such as cashing out savings when switching jobs should be vetoed until employees finally reach retirement age.

Due to the current challenges of funding the pension budget and the impact of inflation reducing the value of accrued pension funds, it is glaring that poverty in old age lurks for many Kenyans and the state of the pension industry is not going to improve unless drastic measures are urgently taken.

As it is, many Kenyan families are a stride away from serious financial woes and the absence of a sustainable financial cushion makes long-term saving more difficult.

Wafubwa is CEO, Enwealth Financial Services.