Bright future for pensioners

By Anthony Ngatia

One of the greatest challenges holding back economic development in most African countries is that governments move from solving one socio-financial crisis to another.

Seven years ago, Kenya implemented the free primary education programme to shore up the declining numbers of children accessing basic education.

Today, the Government is starring at yet another great task — taking care of about three million senior citizens in the next six to ten years.

When the Government raised the minimum retirement age from 55 to 60 years, two years ago, many people read it as a tact to delay pension claims payment. However, this can only be a temporary reprieve due to improved healthcare and increased life expectancy, hence people are bound to live longer after retirement, and the government will continue paying monthly pension.

According to the UN, life expectancy for retirees has increased from 55 to 60 and the possibility of retirees living 20 years after retirement is high.

This means a much longer post retirement care for the senior citizens is inevitable.

Like in many African countries, pension coverage is low in Kenya thanks to a relatively small size of the formal economy relative to the informal economy, and low disposable income. Currently, pension penetration in Kenya stands at 15 per cent among seven million formal sector employees.

Low penetration

Pension penetration in the informal sector is quite negligible according to statistics from the National Social Security Fund (NSSF), which is a worrisome situation.

Lack of adequate pension awareness among the public is partly to blame for the low penetration levels, hence the Retirement Benefits Authority (RBA) immediate goal is to increase the penetration rate by five per cent every year, according to Ms Priscilla Macharia, a communications officer at RBA who was quoted recently.

According to the World Bank, there are three pension pillars; basic pensions which ought to be public, mandatory contributions to an earnings–related pension, and voluntary savings which should be private and pre-funded with individual money.

As of now, the urgency for Kenya to put in place a universal pension scheme that will cover all those aged 60 and above is high. This is due to various reasons.

There has been a profound social demographic change in the country and unlike in the past where the family took care of the aged, this obligation is no longer assured.

Second, the current civil servants pension scheme is inadequate and ineffective with systemic failures. Giving a retiree lump sum after retirement and thereafter paying monthly stipends hardly a tenth of one’s pre-retirement salary is a recipe for creating poverty among senior citizens.

The third reason for the urgency is that the population of the aged is increasing quite fast. According to the International Labour Organisation (ILO), in Africa, it is expected to triple by 2050.

In addition, the current civil service pension scheme is not portable and any civil servant quitting employment early for has no chance of moving with their retirement benefits.

Furthermore, increased pension bill under the current set up implies that the Government will continue bearing a huge burden as it is forced to spend a huge chunk of tax revenue on pensions. Currently, the annual bill is Sh26 billion.

One quarter

According to actuarial projections, the cost of unfunded accrued pension liabilities is about 25 per cent of the gross domestic product, which means that liability to pensioners is about one quarter of the wealth created in this economy.

That the current civil service pension scheme is due for reforms can be underscored by the fact that since 1999, pensioners have been taking home about 2.5 per cent nominal rate of return on their account accumulations which is way below the consumer inflation rate which averaged 13.1 per cent last year.

Kenya is a signatory to the International Plan of Action on Ageing adopted in 1982 in Vienna, Austria, during the first World Assembly on Aging (WAA) and so it has to honour the agreement by making adequate care for the aged.

In addition, the Government is trying to achieve Millennium Development Goals by 2015 and one of the goals is to alleviate old age poverty.

This can be easily done by either having a universal pension scheme where every retiree will benefit equally without regard to previous earning history or having a funded pension scheme that will adequately take care of retirees.

Retirement savings culture among Kenyans is wanting. Whereas the recommended levels should be ideally 25 to 30 per cent, Kenyans are saving just under 10 per cent of their income.

The World Bank has been urging governments to leave the pensions management to the private managers.

In Kenya too, pension fund managers have also been asking the Government to leave pension fund management to the private sector together.

This, they argue, together with the introduction of mandatory contribution by civil servants to their pension savings instead of the Government being the sole contributor would increase pension payouts.

Public service

It seems the Government has been aware of the inadequacy of the current pension scheme.

A new scheme Contributory Public Service Superannuation Scheme, which was to be affected July last year has been waiting the outcome of the August 4 referendum, according to the Public Service PS Titus Ndambuki.

The new scheme, if implemented, is revolutionary and is a departure from what we have today. Each civil servant will be deducted a maximum of 7.5 per cent of their salary and on its part, the Government will contribute 15 per cent to the scheme. This scheme is expected to guarantee a substantial monthly income for a retiree as opposed to the current situation.