Financial education key to increasing pension coverage and adequacy

Financial literacy is the cornerstone of a prosperous and financially secure society.

It equips individuals with the necessary knowledge and skills to make sound financial decisions, manage resources effectively, and plan for their future.

Similarly, financial education serves as the linchpin for higher participation rates and achieving greater adequacy in retirement savings.

A study by Enwealth Financial Services in 2022 showed that only 12 per cent of Kenyans have an established savings culture.

Currently, only 20.4 per cent of workers in the formal sector and 1.3 per cent of the self-employed have a pension scheme according to the Retirement Benefits Authority.

As a result, many Kenyans risk old age poverty, a misfortune that has caused previous governments to intervene with measures such as ‘ Pesa kwa wazee’. The current government has tried to arbitrate by enforcing the NSSF 2013 Act which saw an increase in NSSF contribution rates for workers.

Although the move is expected to increase pension penetration and ensure future retirees have adequate savings to cover their sunset years, it was met with mixed reactions from the public.

Disposable income

Many perceived it as yet another deduction that chips away at their net pay and overall disposable income. Unfortunately, they fail to see the importance of a strong foundation for retirement.

While it’s natural for individuals to focus on the short-term impact on their take-home pay, it is crucial to recognise the long-term benefits and opportunities that can arise from increased pension coverage.

Key to bridging this knowledge gap lies in financial education, which empowers individuals to make informed decisions and see beyond immediate sacrifices.

By understanding the significance of retirement planning, employees can embrace the NSSF changes as a means of securing their financial well-being.

Similarly, the self-employed can see value in pension schemes and voluntarily enrol in one.

To maximise the potential of financial education, the State, in collaboration with the RBA, financial institutions, and employers, should prioritise initiatives aimed at increasing awareness and promoting trust.

Transparent communication about how pension funds are invested and managed will help build trust and confidence in the system.

Financial education should also be integrated into school curricula to instil a culture of financial responsibility and long-term planning.

The writer is the Head of Pension at Enwealth Financial Services