State offers 40pc of pension savings for home purchase

Workers could soon use up to Sh7 million or a maximum of 40 percent of their retirement savings to buy their first residential house in changes to the law aimed at boosting home ownership and lift the sluggish property market.

Treasury Secretary Ukur Yatani Tuesday published draft regulations showing rules and limits of accessing pension savings for home purchase.

The clause allowing contributors to access 40 percent of their savings ahead of retirement will free tens of billions of shillings for home ownership given that Kenya’s pension schemes control Sh1.2 trillion spread across property, cash, shares and government bonds.

Despite its promise to boost home ownership and unlock money in the sluggish economy, the early withdrawal of pension savings runs the risk of deepening old age poverty in a country where retirement contributions offer pensioners an average of 34 percent of their incomes during their working years, compared to the desired target of between 75 to 80 per cent.

Proposed changes to the pension laws are meant to make it easier for individuals to buy their first homes given that most households are unable to raise the minimum house purchase deposit or afford the typical monthly mortgage repayments.

The current law allows workers to use their pension savings to guarantee deposits for the purchase of homes and related transaction costs, but they have failed to lift home ownership over the past eight years.

This prompted the proposed change in law to allow for direct use of the savings for home purchase.

“Funds applied towards the purchase of a residential house under these regulations shall first be deemed to have been drawn from the member’s own contributions together with earned investment income and any balance shall be applied from the employer’s contribution and the investment income thereof,” the draft regulations read in part.

Mr Yatani has added homes constructed or financed by the government, saccos and insurers among those that can be purchased using retirement money.

Previously, the list was limited to houses offered by banks, building societies, microfinance firms, the National Housing Corporation and entities running tenant purchase arrangements.

Trustees of the various retirement schemes will lay out the rules to be followed before one can access their pension to fund his or her home purchase.

The trustees will also make sure the houses are priced at market value and their ownership will only be transferred under special circumstances, including death of a member, in measures aimed at preventing abuse of the incentive.

“Trustees of the scheme shall ensure the title to the residential house to be encumbered to restrict transfer to any persons,” state the regulations, adding that members can sell upon retirement, death or ill health.

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

For defined benefits schemes, where an employer undertakes to offer specified retirement perks, the amount is capped at 40 percent of the accrued benefits as determined by an actuary and also subject to a maximum of Sh7 million.

With a significant population of the middle class holding millions of shillings in retirement savings, the rules will make it easier for them to buy homes by supplementing their regular incomes.

Rising real estate values have seen the mortgage size grow to outprice most of the working class in terms of the minimum deposit required and monthly payments.

Citing data from the Kenya National Bureau of Statistics (KNBS), asset manager Cytonn notes that approximately 74.5 percent of the formal working population in Kenya earns Sh50,000, and below, per month.

“With the average mortgage size in Kenya at Sh10.9 million, interest rates at 13.6 percent and an average tenor 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 percent of their gross income on monthly mortgage payments under similar market conditions, the household can afford a Sh2.8 million home.” 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.

Commercial banks in Kenya had only 26,504 mortgage accounts in their books, worth Sh224.8 billion as at the end of 2018, according to Central Bank of Kenya data. At about 2.5 percent of gross domestic product (GDP), the mortgage penetration rate compares poorly to South Africa’s mortgage industry that makes up 31 percent of GDP.

Most households finance their home purchases or construction through short-term bank and sacco loans, according to a recent study by the World Bank.

The Retirement Benefits Authority (RBA) has been critical of provisions allowing employees to raid their pension funds before reaching retirement age.

RBA notes that about 95 percent of individuals who leave employment usually take out the maximum amounts possible from their retirement accounts. The agency has likened this to “going on a long distance journey and emptying the fuel tank at every stop.”