Ageing population: Time bomb waiting to explode
By Jackson Okoth
Old age poverty is expected to rise in the next decade, as more people without any meaningful life savings go into retirement.
What is particularly worrisome is that although the Sh300 billion-pension industry has a huge potential for growth, unprecedented challenges remain.
The main one is increasing coverage, which currently stands at only 15 per cent of the workforce, leaving out more than 85 per cent of the target group, mostly in the informal sector.
"While it may not be possible to unwind the clock and prevent this group from falling into the poverty net, it is critical to develop a compulsory pension scheme for all, going forward," said Lazarus Muema, Chairman, Association of Retirement Benefits Schemes (ARBS).
Figures indicate that there are an estimated 1,350 registered schemes. However, most of these are geared towards those in formal employment, leaving those in the informal low-end income pyramids out of the radar.
"We need to create a more conducive legislative environment to allow employers in the informal sector set up pension schemes," said Muema.
This includes strengthening the role pf pension regulator, Retirement Benefits Authority (RBA), as well as improving tax breaks on both contributions and pension benefits.
"It is also critical to establish schemes suitable for individuals in the informal sector," he added.
While players in the pension industry have been unwrapping new products and plans, the public’s response has been rather slow in the uptake, especially amongst those at the low-end of the income pyramid.
As a result, RBA has been on the offensive, putting flyers, running radio and TV messages, and holding seminars to make a case for a need to put aside something for old age.
The specter of an ageing population living in abject poverty, without any social safety net, threatens to become a heavy burden in the future. This is the reality that policy experts, demographers and players in the pension industry are beginning to grapple with.
"We can only intervene through poverty eradication programmes such as the cash transfer plan for the old poor, proposed in this year’s budget," said Muema.
Matters were worsened by the lack of a universal pension plan in the country.
With the changing balance of young and old, those born in the 1960’s, just before and in the post-independence golden era, are expected to go into retirement.
Amid rapid urbanisation and the fast disintegration of the communal family set, the working population is now struggling to provide for those who have retired.
Incidentally, a growing number of young educated people are finding themselves still dependant on the pensions of their parents as unemployment rises.
And the idea of transferring the traditional responsibilities of looking after aged parents and relatives to private nursing homes is yet to become acceptable. The elderly have been traditionally venerated, and the today’s elderly population expects to be looked after.
Unless further action is taken, experts say the burden of caring for senior citizens could begin to have a major impact on the country’s development.
"Empowering the elderly out of poverty creates effective demand, especially in the rural areas. This is good for the economy," said Muema.
Unlike in the 1980s, when an estimated 80 per cent of the working population was in the formal sector and only 20 per cent in the informal sector, this pattern has been reversed completely.
And while a majority of those without any form of pension arrangement are in the informal sector, penetration is equally low in the formal sector.
Figures indicate that out of the two million people engaged in the formal sector, about 1.2 million are not adequately covered, especially those relying on the NSSF where contributions are low.
"There is a huge potential in the formal sector that is yet to be tapped. The Government needs to make it compulsory for all employers to set up pension schemes, with guidelines on minimum contributions defined", said Sundeep Raichura, Managing Director, Alexander Forbes.
While providers are now shifting focus to the informal sector, significant challenges remain in the design of products for this segment.
Low disposable income
"Those in the informal sector have low disposable income, are mostly rural – based, and have seasonal earnings," said Raichura.
Further, it is expensive to collect cash from contributors at the low-end of the income pyramid, especially because the terrain lacks organised structures.
"It is still a challenge to design flexible, tailor made products for this segment, that must also be cost-effective," said Raichura.
The strain to the country’s weak pension system is happening as experts and policy makers call for state-run National Social Security Fund (NSSF) be transformed into a compulsory pension scheme. At present, it operates as a provident fund and does not cover the unemployed.
RBA has been toying with the idea of introducing a universal pension scheme, that will make it mandatory for all to save for retirement. If its proposals are implemented, all workers in both the informal and formal sector will have to join a pension scheme.
"We are working on a draft that will include a universal pension scheme," RBA Chief Executive, Edward Odundo, said in an earlier interview with Financial Journal.
This scheme is expected to cover all Kenyans, and pay a monthly pension to all upon attaining 65 years.
The regulator says making retirement saving compulsory will have significant impact on poverty reduction, and increase the level of savings in the economy.
According to industry figures more self-employed professionals and individuals are purchasing personal pension schemes currently offered by insurance companies and fund managers.
There is also a growing trend of people already in employer-sponsored schemes, increasing their contributions to the same. One way is through Additional Voluntary Contribution (AVC) provisions.
For those in the high-income bracket, up to 30 per cent of one’s salary, or Sh20,000, can be exempt from tax, if it goes straight into a pension scheme.
This tax-free income, if put in a pension scheme as additional contribution, can be invested by a fund manager.
Presently, insurance companies and a few fund managers offer pension products for the self-employed. They are flexible and portable, set up in one’s own name and enjoy the same legal standing with group pension schemes.
In the past, individuals preferred to have their retirement benefits paid out in lump sum, but industry trends indicate that now, retirees prefer to have a portion in lump sum, and the rest in monthly payments.
Investing in pension products has minimal risks, owing to the Chinese walls between different service providers.
For instance, trustees of a scheme are independent of the company in an employer-sponsored scheme, but with representatives for employees on the board of trustees. The board is autonomous, and appoints service providers, administrator, custodian, fund manager and auditor.
It is because of this separation of duties that there is a sense of security for those investing in pension funds.
The law requires that all service providers register with RBA and Kenya Revenue Authority (KRA). Custodians and administrators have to file quarterly and annual returns on the contributions and provide audited accounts to KRA and RBA at the end of every year.
Pension funds are also invested according to RBA guidelines, reducing the risk exposures. For instance, RBA investment guidelines require that schemes do not invest more that 100 per cent of their portfolio in equities, more than 30 per cent in property, and more than 15 per cent offshore.
There are two types of pension schemes: defined contribution and defined benefit contribution schemes.
In a defined contribution scheme, one decides on the amount to contribute, while the employer also decides on a percentage. This is the most common type of pension scheme.
In the defined benefit scheme, what one gets upon retirement is what is defined at the beginning. This type of scheme is usually not preferred by the employer. This is because if your salary goes up, it becomes a cost to the company.
Employers also face the risk of investment. Therefore if returns are low, the employer has to fund the deficit, and when the returns are good, the employer goes on a contribution holiday.
The other distinction between various schemes is the type of benefits that accrue to an individual upon retirement. One can choose either a lump sum or an annuity, which offers monthly payments.
"All schemes have their strengths and weakness," explains Mang’ee.
There are those with a history of low returns, while for others there is a penalty for movement from one scheme to another.
To deal with the fear that inflation could wipe out retirement benefits, companies unveiled inflation-proof pensions. Under this product, the monthly pension escalates by a certain percentage each year.
The pension industry has also spelt out new guidelines that allow contributors to access mortgage loans, using funds from their pension schemes as security, so that at retirement, one will be able to have a house.
This is a welcome development for the industry and those who are not able to secure loans from mortgage providers during their working life.
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