RBA Developing a Dynamic and Secure Retirement Benefits Sector

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    Retirement Benefits Authority aims to develop, safeguard and deliver value to the retirement benefits sector through excellence in service delivery

    Traditional systems of old-age security that hold families together are fast breaking down. Are you sure that your children will take care of you when you retire?

    Advances in medicine and technology are making people live much longer after retirement. Wouldn’t you like to maintain or improve your standard of living when you are retired?

    “Your medical bills will continue to increase the older you get, so you need to start planning for them now. The power of compound interest, a small amount saved every month results in a huge payout later,” opens up Dr. Edward Odundo, the chief executive at Retirement Benefits Authority, Kenya.

    Pensions sub-sector is unique and requires specialized skills. The regulatory framework is important in many respects such as ensuring fares amongst the different stakeholders, protecting the interests of members of schemes and sponsors and the regulatory framework also ensuring growth and stability of the sector and the entire financial sector. As such RBA was established in 2000 as a pension regulatory authority.

    It has mandates to:

    • Regulate and supervise the establishment and management of retirement benefits schemes;
    • Protect the interests of members and sponsors of retirement benefits schemes;
    • Promote the development of the retirement benefits sector in the country:
    • Implement the governments national policy on matters relating to retirement;
    • Work with government in developing policies relating the sector

    As RBA aims to develop, safeguard and deliver value to the retirement benefits sector through excellence in service delivery, it is cognizant of the fact that the growth of the pension sector is tied to economic growth. The pension sector still invests heavily in the traditional assets classes (Government securities and quoted equities). The two assets constituted 53 per cent of the total asset portfolio as of Dec. 2015.  RBA is encouraging schemes to invest in alternative assets for better returns. “We have just introduced Private equity as a new asset class and the Capital Market is working to introduce new products in the market which we believe schemes will take advantage to diversify its portfolio,” reveals the executive.

    Dr. Edward Odundo, CEO, Retirement Benefits Authority
    Dr. Edward Odundo, CEO, Retirement Benefits Authority

    He adds that when the economy grows it creates more job opportunities and thus the potential to enroll more members into pension schemes to boost institutional investments some of which are loaned to government for development projects thus contributing to economic growth as well.

    Inculcating a savings culture

    Dr. Odundo comments that Kenyans need to be encouraged to save. This can be done through creation of more employment opportunities. “With high unemployment rate almost 40 per cent amidst poorly paying jobs and high cost of basic food items, not much is left to save. Creating better jobs is key to boosting savings.” Increasing access to the varied financial services such as banking, insurance and pension among others is also paramount.

    He also observed that improving the infrastructure for mobilization of resources from citizens including those in diaspora would be helpful for instance through technology aided linkages with financial institutions be they banks, Saccos, pension schemes or insurance companies.

    In Kenya, saving for retirement is voluntary except for NSSF that is mandatory.  In his views, he believes there is need for further reform of the pension system. The achievements of the past decade, particularly with respect to voluntary employer sponsored occupational schemes, provides a good basis on which to implement further reforms to increase coverage and reduce post-retirement poverty levels.

    There is need to bring some compulsion in the sector to make it mandatory for all employers to start a pension scheme to safeguard their workers against old age poverty. It is also important to ensure that all workers are enrolled into pension schemes.

    Improve financial literacy to create awareness on the benefits for different forms of savings, e.g., retirement savings, bank savings, Sacco savings, etc. The Financial Sector in collaboration with the Kenya Curriculum Development is working on a syllabus to be introduced in the school curriculum.

    “We need to continually improve our regulatory and supervisory frameworks to encourage innovation in the financial sector to overcome barriers to provision of financial services, e.g., distance between users and financial services providers, high transactions costs,” notes Dr. Odundo.

    The Authority in consultation with the stakeholders and the government is working on National Pension Policy. The objective of the policy is to provide adequate, affordable and sustainable retirement benefits to Kenyan workers through a robust pension system. The pension system will have secondary effects on mobilization of long term savings, maturity profile of public and private debt and new financial products. This will spur the growth of pension assets in the country to higher levels, he says.

    Why save through a retirement benefits scheme?

    1. There are four distinct ways in which a retirement benefits scheme enables em­ployees enjoy greater benefits than other forms of savings:

    In the case of occupational retirement benefits scheme both member and sponsor (employer) contribute to the fund all to the eventual benefit of mem­bers.

    Member contributions to registered retirement benefits schemes are tax de­ductible. For example, if you earn Shs 50,000.00 and contribute Shs 5,000.00 to a registered scheme, your PAYE income tax will be calculated on Shs 45,000.00 and not Shs 50,000.00 yet your contribution of Shs 5,000.00 still belongs to you.

    Contributions made into a retirement benefits scheme can be invested in long term assets so as to earn optimal returns over a period of time. Schemes are by law required to diversify their investments thereby reducing investment risk.

    1. All investment income earned by registered retirement benefits schemes is tax free, hence generating bigger funds for re- investment. On the other hand if you invest directly, say in treasury bills or bank deposits, you will be required to pay withholding tax on the interest that you earned.
    2. Payment of Benefits

    If you are a member of a pension scheme then on attainment of retirement age, the scheme will pay you a monthly pension for the rest of your life no matter how long you live. You can also commute up to 1/3 of the total benefit due from a pension scheme into a lump-sum payment. If you are a member of a provident fund, then on achieving retirement age you will be paid a lump sum which if you invest wisely can also provide you with income for the rest of your life.

    Access to benefits on leaving service

    If you have been a member of a scheme for less than 1 year you are entitled to benefits vested in you. To encourage saving for your retirement , if you have been a member of a scheme for more than one year and leave employment be­fore attaining retirement age, you will access your own contributions, plus 50 per cent of employer’s contribution.

    rbaIn a defined benefits scheme, you will access 50 per cent of accrued benefits. The balance of employer’s portion remains in the scheme and will continue to earn interest payable to you on attaining the retirement age of your scheme. However, should you retire on grounds of ill health, subsequently fall ill before retirement age or permanently emigrate out of the country you will be allowed to access your full benefits. You also have the option of transferring your benefits to another retirement benefits scheme of your choice.

    Member-level involvement

    Members of occupational schemes are now able to participate and influence the scheme’s operations unlike in the past. 1/2 of the board of trustees in defined contribution schemes and 1/3 in defined benefits schemes must be nominated directly by members. In addition, members are entitled to attend AGMs, receive their annual benefit statements and summaries of the schemes audited account statements from which they can monitor the usage of their funds.

    Professionalism

    All schemes must contract the expert services of fund managers to invest the scheme funds and custodians to settle all transactions and hold the scheme assets. These professionals ensure that investment returns are maximised and members’ funds are secure even if the employer’s company winds-up.

     Slow uptake

    “Today, we are proud to have a sector that is well educated, informed, aware and inquisitive on the importance of saving for retirement.” However, the main challenge the Authority has faced is extending coverage especially in the informal sector. The work to be done is on how to increase coverage to 20 per cent by June 2019 from the current 18.2 per cent. This will be possible through targeted awareness programs and products designed to reach out to segmented groups. The Authority will also pursue automatic enrolment. “If we achieve the latter, we could growth pension coverage to more than 50 per cent of the workforce,” he postulates.

    Dr. Odundo further shares his pessimism on the slow uptake of pension in the country. “At the end of 2015, the pension coverage was 18.2 percent of the total recorded employment. That means out of the 15,160,800 persons employed only 2,758,666 were persons contributing to a pension scheme,” he notes.

    He attributes this to the fact that 83 per cent of the Kenyan working population is in the informal sector. (According to the Economic Survey of 2016, there were 15.16 million workers in 2015 and 12.5 million were in the informal sector. Only 123,200 were self-employed while 2.57 million were in formal employment). It is important to note that majority of those covered contribute to NSSF (2.1 million). Only 400,000 members contribute to occupational schemes while 160,000 are members of individual pension plans. Close to 500,000 are covered under the civil service pension scheme.

    The Authority has taken a multi-faceted approach to overcome this and encourage growth. It is currently carrying out media campaigns to encourage individuals to save for their retirement.

    Road ahead

    Dr. Odundo says that the Authority is also engaging the people in the informal sector and various business owners to establish schemes for their employees or enroll them in already existing schemes. The Authority also undertakes various publicity campaigns, e.g., Roadshows, ASK Shows, sensitizing county governments through their fora, and placed adverts in media both radio and TV spreading the same message emphasizing on the importance for saving for retirement. Plans are also underway to develop a school curriculum to inculcate a savings culture among students from a very early age.