Retirement, noted one writer, is wonderful if you have two essentials - much to live on and much to live for.
However, over the years, millions of Kenyan retirees have had neither of the two essentials, making their sunset years miserable.
And even as Kenya’s pension system ranks as one of the best among her East African peers in terms of regulation and product innovation, the country trails most of the developed world when it comes to pension penetration.
Pension uptake in the country stands at about 20 per cent among the formal working population, with some of the reasons for the poor penetration including low and short contribution periods and early withdrawals.
“Statistics show that over 80 per cent of retirees, retire back home into poverty… Kenyans also have a poor savings culture or investing for retirement, and many are the times when parents bank on their children whom they’ve educated to take care of them in their old age,” notes Head Retirement Benefits at CIC Life Vincent Ochoi.
Retirement is an expensive affair. Kenya’s income replacement ratio—the percentage of a person’s working income that they need to receive during their retirement years—is below 40 per cent compared to the recommended ratio of 75 per cent, according to the Retirement Benefits Authority (RBA).
The elderly are also more vulnerable to ailments owing to their reduced immunity, pre-existing conditions and psychological and environmental factors.
It’s against this background that President William Ruto’s government is pushing for the implementation of the National Social Security Fund (NSSF) Act, 2013, which began in February.
The Act had been crafted to widen Kenya’s social protection safety net, with the government mobilising more funds to build a bigger retirement pot.
NSSF contributions were last reviewed in 2001 when the rate was increased to Sh200 from Sh160 with employers matching it.
“If you compute the Sh400 and say you’ve worked for 30 years, that amount is not sufficient to warrant your retirement,” explains Mr Ochoi.
The amount comes to about Sh144,000.
The new rates require a monthly contribution equivalent to 12 per cent of an employee’s monthly salary. This comprises a six per cent contribution deducted from the employee’s salary that is then matched by a six per cent contribution paid by the employer.
This is, however, subject to an upper limit of Sh1,080 employee deduction that the employee then matches to make the total NSSF contribution Sh2,160 per month for employees earning over Sh18,000.
Workers are classified under Tier 1 and Tier 2 by NSSF, with the Act being implemented in yearly phases, meaning that contributions for both tiers, which are mandatory, will keep on increasing until every employed person will be contributing six per cent of their salary.
NSSF manages over Sh251 billion in retirement funds. The operationalisation of the NSSF Act, 2013 is projected to grow the fund by over 200 per cent, whose cash pool could lend money to the government.
NSSF currently collects about Sh1.2 billion in monthly contributions from members.
Private pension funds such as CIC have received approval from RBA to manage Tier 2 NSSF contributions from employers who opt out of the State pension fund.
The firm has the CIC Umbrella Retirement Benefits Scheme and the CIC Jipange.
Mr Ochoi points out that private schemes have suitable governance structures, transparency, and easy accessibility of funds, and have offered double-digit returns for the last decade, making them attractive to employers.
“We give guarantees on the principle and accrued income that in the event of any investment risk which may lead to subsequent losses, the principal and any accrued income will be maintained at 105 per cent at all times,” he said.
The new Act is set to increase savings contributions and financial security in old age, with Mr Ochoi projecting that within one year of implementation, contribution amounts for both NSSF tiers will hit Sh12.7 billion, which will double progressively on the back of increasing national average earnings.
During the pandemic, a growing number of companies applied for the suspension of contributions to pension schemes, throwing thousands of workers into a black hole of reduced retirement incomes.
For the new Act, there are stringent penalties for firms not adhering to mandatory employee contributions, including fines and jail time.
“In the next 10 to 15 years, people will be retiring with a good kitty as opposed to those who retired previously,” he said.
At the start of the implementation of the Act, some pension stakeholders warned that the implementation of the remaining clauses was also likely to rob some employees of their savings, noting that there are many whose savings are high at the moment but are likely to be eroded in case employers migrate them to NSSF fully and quit saving in the private schemes.
“Under the Act, contributions to NSSF will keep growing until the fifth year when they reach a maximum of Sh2,160. At some point, employers might be conflicted as to whether to continue with contributions to the private scheme. They might consider contributions to the private schemes as an expense that can be cut and mostly likely discontinue sponsorship of these schemes and contribute to NSSF instead,” said the Secretary-General Association of Pension Trustees and Administrators of Kenya (APTAK) Boniface Mwangangi.
“These are business entities, and they will want to keep their expenses to the minimum… they will see these schemes as unnecessary expenses and if anything they will have satisfied the law by contributing to just NSSF. Your scheme might not exist in its current form in another five or so years to come.”
According to Mr Mwangangi, should this happen and companies stop contributing to their private pension schemes and instead continue with NSSF, many employees will have lost as the contributions to NSSF will in many instances be lower than those being made to the pension schemes at the moment.
There have been calls for the Sh1.6 trillion asset-rich pension sector to venture into affordable housing and infrastructure projects.
This is amid calls to diversify its traditionally conservative portfolio from investments such as bonds and fixed deposits to long-term projects and other alternative asset classes.
Entry of the sector into affordable housing is tipped to be a game changer in plugging the housing deficit, lowering the cost of units by 30 per cent and creating about 1.8 million jobs annually.
This has seen Kenyan pension stakeholders back investment trusts to pool funds for capital-intensive and long-term projects such as affordable housing and infrastructure. However, this is yet to materialise.
NSSF previously was exclusively for the formal sector, but the new Act has opened doors for the informal sector with a provident fund, where workers can enrol and contribute on a voluntary basis.
In terms of benchmarking, CIC Life’s Mr Ochoi says Kenya should borrow a leaf from the UK, which is one of the countries with the largest pension assets in the world.
In the Kenyan model, when one resigns from employment today, they can cash out 50 per cent of their pension, which they end up misusing and starting afresh with every new job.
“In that way, we go into poverty at retirement because we lived poorly when we were young,” observes Mr Ochoi.