Why you should not bank on pension for good life in old age

Kenyans are saving much less with pension schemes than experts recommend as daily basic needs and other saving and investment opportunities take priority, reveals a NationNewsplex review of pension data.

Consequently, pensioners are leading a much lower quality of life than they did during their active years.

Several studies show that in most cases pension income is way below what the pensioners used to earn before retirement. On average, the monthly pension received on retirement is equivalent to a third of retirees’ last earnings, according to a study that covered 65,000 members from 200 pension schemes by financial services firm Zamara Group. Another survey by Enwealth Financial Services Limited, a social welfare financial services company, puts the rate much higher at 55 percent of last wages. The Enwealth survey worked with a smaller sample involving 515 pension scheme members.

“Currently, the biggest competitors to pension schemes are saccos and land because Kenyans are not finding what they need in pension schemes. If we can widen the scope, we can achieve a lot,” says Mr Sundeep Raichura, Zamara Group CEO.

But both firms point out that the figures are way below the 75-80 percent replacement rate recommended by pension and personal investment experts to enable individuals to maintain the same standard of living in retirement. This implies that poverty lurks for many people once they hang up their boots, unless they have a retirement plan that also includes other sound savings and investments.

However, such alternative investments are not a perfect replacement for a pension scheme. Good habits such as maintaining a savings bank account, having an emergency fund and promptly repaying loans do not guarantee a comfortable retirement, since such resources can always be used way before an individual retires, according to the Enwealth Financial Services report, Retirement Confidence: How well are Kenyans prepared for retirement?

Despite the reality that Kenyans are falling short in their plans, a majority of those surveyed by Enwealth are looking forward to a comfortable retirement, with a significant number very confident they will outlive their savings. Nine in 10 respondents surveyed said they were either very confident, confident or slightly confident about their financial state in retirement. A similar ratio had no worries about adequately meeting their daily and long-term care expenses and medical costs. One in seven said they were very confident they would outlive their pension savings while another two-thirds were either confident or slightly confident.

Data from the Retirement Benefits Authority (RBA) indicates that there are 3.2 million members registered, with the 1,287 pension schemes in the country, over five times the 600,000 in 2006.

But this accounts for just one in six of wage-employed workers, both in the formal and informal sectors, and the same ratio among Kenyans age 24 and above as at 2016.

Mr Sundeep Raichura, Zamara Group CEO, says the reason most pension schemes are not attractive is that they are designed in such a way that funds are locked in until a certain time, thereby they do not cater for immediate and pressing needs. He thinks the scope of pension schemes should be expanded to allow a portion to be taken to sort out emergencies.

To boost the uptake of pensions among the public, there is a need to expand the priorities within the schemes so that they can actually serve the needs of the people.

“Currently, the biggest competitors to pension schemes are saccos and land because Kenyans are not finding what they need in pension schemes. If we can widen the scope, we can achieve a lot,” he says.

Similar sentiments were recently echoed by the retirement benefits regulator during the launch of the RBA 2019-2024 strategic plan when CEO Nzomo Mutuku said a product with a wider service than just savings was necessary to enable people in the informal sector to borrow against what they have set aside for retirement.

The Enwealth survey that involved Kenyans with pension plans showed that pension savings come third (15 percent) in the various modes of investments preferred, after real estate (41 percent) and land (20 percent). Saving cash in a bank came last at two percent.

Due to low savings, two in five pension schemes are below the level required to enable one to maintain the same lifestyle they had before retirement, shows the Zamara survey.

But many clients might not even know it because many schemes do not provide adequate information that can assist them to make proper decisions in the form of financial targets.

When was the last time you got to know how much your pension savings have accrued, or how much more you needed to contribute to be guaranteed a stable retirement? Despite the assurance of a lump sum of money at retirement, has your pension scheme briefed you on the looming shocks such as health costs or inflation during your retirement years?

The study by Enwealth showed that of the 66 percent of pensioners that sought knowledge about their retirement savings from their employers, 56 percent accessed the information, presenting a 10 percent information gap.

Apart from competing priorities, little information and low financial literacy, some people also see their sunset years as too distant and not worth attending to, with Mr Raichura asserting that even people who should know better do not make an effort.

The informal sector is largely uncovered by the available pension schemes. One effort made to address this gap was through the introduction of the Mbao Pension Plan in 2009, in which any Kenyan above 18 years could be contributing, via M-Pesa, a minimum of Sh20 daily, Sh500 monthly or Sh6,000 yearly, without any penalty for a lull in contributions. The fund has over 100,000 members, but this is less than one percent of the 14.8 million people engaged in the informal sector.

A move by the National Social Security Fund (NSSF) to compel workers to save more was resisted by the Federation of Kenya Employers (FKE) and the Central Organisation of Trade Unions (Cotu) through a court order in 2014 after FKE complained that employers, besides implementing statutory NSSF deductions, had in-house pension schemes in which they contribute higher rates and thus the increase would compel some to stop these private arrangements.

Mr James Chege, co-founder of Usalama Tech Group Limited, an IT start-up company with four employees, is concerned about the financial costs the business would have to incur once its staff grows but considers such increased contributions a worthwhile investment if the workers would receive all their dues on retirement. “While the new regulation will hugely affect firms with many employees, I would not have an issue if it would have tangible impact on the employees once they retire, but the fund (NSSF) must show what the increase directly translates to once we retiree,” he adds.

Given the recent scandals dogging some of the public pension schemes, many Kenyans are less willing to increase their contributions, concerned that they will not benefit from the fruits of such higher contributions if the fund is not properly secured.
For instance, about Sh970 million that NSSF had banked with Chase Bank and Imperial Bank could not be accounted for after the two banks were placed under receivership, according to the Auditor-General’s NSSF Audited Financials for the year ended June 30, 2017. Only about Sh27 million was recovered from Chase Bank. The audit report also revealed stalled construction of the Hazina Trade Centre in Nairobi, with Sh1.9 billion already spent on the project.

The state-run pension scheme also had its total expenses (Sh5.5 billion) as a share of total assets (Sh198.5 billion) standing at three percent, above the set ceiling of two percent, implying that less was available for investment.

The RBA has already warned six public universities called out by the Auditor-General for failing to pay Sh5 billion worth of pension arrears that they risk losing their pension assets. Pensioners under the Kenya Ports Authority Pension Scheme also moved to court last week to bar the fund’s trustees from transferring pension houses to real estate agents, over fear of a hike in rent and evictions.

The 2019 FinAccess survey shows a drop in the share of Kenyans saving for retirement, be it in pensions or otherwise. About one in four (23 percent) Kenyans age 16 and above saves for old age, a decline by half from two in five (44 percent) in 2016.

Whether people save for the future or not is also dependent on their socio-economic status. The reluctance to lock into a pension scheme a sizeable share of one’s income is not only pervasive in public pension schemes.

The study by Zamara indicates that nine in 10 Kenyans with private pensions choose to have back the maximum possible amount of their retirement savings when they leave employment or change jobs, indicating that they might spend it and would have to start saving for retirement all over again in their next ventures. It also shows that 100 percent of members of provident funds opted to access their benefits as a lump sum and used all within less than three years of retirement.