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Treasury moves to inject more pension funds in housing sector

By Awal Mohammed | September 24th 2020
Kenyans Qeueing to view the 228 completed units out of 1370 being constructed by government at Parkroad Nairobi under the affordable housing programm. Friday March 6, 2020. [Jonah Onyango, Standard]

Kenyans will be able to purchase houses using their savings in pension schemes, as the government adds more energy into the affordable housing programme.

Under the Retirement Benefits Mortgage Loans Amendment Regulations, 2020 published in the Kenya Gazette this week, members of pension schemes can use up to 40 per cent of their saving to buy a residential house.

The Retirement Benefits Authority Regulations serve as subsidiary legislation to the Act and contain guidelines for the treatment of members’ benefits, investments, withdrawals, reports and restriction on the use of scheme funds.

But the regulation has thrown off balance those who have attained retirement age and would like to purchase a house using their benefits.

“A member who is paid a pension by the scheme, or who has taken early retirement, or has attained retirement age shall not be eligible to utilise a portion of the member’s retirement benefits to purchasing a residential house,” read the gazette notice by National Treasury Cabinet Secretary Ukur Yatani.

The pensions industry plays a big role in the country’s economy with assets worth Sh1.32 trillion as at December 2019, and average 13.55 per cent of the country’s GDP over the last 10 years. 

Pension schemes have in the past invested billions of shillings in building commercial properties and high-end residential properties for sale, but that could change into rent-to-own projects when the 40 per cent rule sees cash released purposely for buying homes.

Schemes that own large tracts of land across Kenya have for years pushed for law reform to allow them to introduce tenant-purchase schemes or rent-to-own plans, where members buy houses via a plan in which they save and repay mortgages with their pension.

By allowing early access to retirement savings, households can now afford to buy homes or take mortgages for houses, which they would ordinarily not have been able to acquire from their regular cash flows.

The new regulation will enable commercial banks and Saccos to help members of a pension scheme to buy houses, treating the pension savings as security.

Previously, existing law allowed retirement scheme members to allocate up to 60 per cent of their benefits towards securing a mortgage loan.

However, the mortgage was never really used because banks preferred to have the actual house as security rather than the pension savings.

But with the new regulation, it means that a worker who wishes to buy a residential house can do so directly from their pension utilising up to 40 per cent of their accumulated benefits.

The maximum they can use is Sh7 million and the amount they use should not exceed the buying price of the house.

The accumulated benefit here refers to the total pension contribution over the years plus interest earned.

Despite the coronavirus pandemic ravaging the economy, the pensions sector has remained bullish, with industry leaders oozing optimism that they will bounce back once normalcy resumes.

A recent analysis by fund administrator Zamara, showed that retirement schemes’ returns picked up in the second quarter of this year compared to a negative position seen in the first quarter of 2019.

The recovery was attributed to good performance from equities and offshore investments.

According to the gazette notice, members in a defined contributory scheme stand to benefit more compared to those in a defined benefits scheme.

In a defined contribution scheme - where employers match workers’ deductions - the amount accessible for buying a residential house is capped at 40 per cent of the employee’s accrued benefit, to a maximum of Sh7 million.

According to the regulation, members can opt to top up from their voluntary contribution scheme.

The law also allows a member to combine benefits if they are in more than one pension scheme, with spouses who are in different pension schemes also allowed to combine their benefits to buy a home.

The industry has witnessed significant growth of 17.6 per cent in nine years from 700,000 registered members in 2010 to 3.01 million as at December last year, according to the Kenya National Bureau of Statistics (KNBS) FinAccess Report 2019.

Despite the growth, many Kenyans still suffer from low pension adequacy upon retirement. This is due to poor savings, where many employees withdraw their allowable portion of their retirement savings when moving from one employer to another.

Citing data from KNBS, asset manager Cytonn notes that approximately 74.5 per cent of the formal working population in Kenya earns Sh50,000 or below per month.

“With the average mortgage size in Kenya at Sh10.9 million, interest rates at 13.6 per cent and an average tenure of 12 years, an average Kenyan household earning Sh100,000 per month… is required to part with monthly repayments of Sh153,905, which is unaffordable to this income class,” Cytonn said in a research note.

“However, using 40 per cent of their gross income on monthly mortgage payments under similar market conditions, the household can afford a Sh2.8 million home.”  

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