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29 October, 2021

Regulatory Changes in the Kenyan Pensions Industry

As at the end of 2020, the pension industry ranked second as the most preferred mode of saving with assets worth Kshs 1.4 tn after bank deposits at Kshs 4.0 tn. The graph below highlights the sizes of different saving channels and capital market products in Kenya as at December 2020:

Despite the historical growth, there is still room for improvement given that the Kenyan Pension Schemes’ AUM was equivalent to 13.3% of the country’s GDP in 2020. Compared to other countries, the difference remains significant with the AUM for some of the developed countries exceeding the size of their domestic economy. The graph below shows the AUM as a percentage of GDP for select Africa countries:  

Source: OECD Pensions in Focus Report

Over the past few years, the government together with the Retirement Benefits Authority has developed and amended pension schemes’ regulations aimed at strengthening the legal and regulatory framework in the pensions industry. The goal has also been to achieve a comprehensive pension coverage across the formal and informal sectors and better protect the interests of beneficiaries and rights of pension contributors. Some of the major changes that have taken place over the last five years include:

  1. Qualification criteria for Corporate Trustees – In June 2021, the President of Kenya assented to the Finance Act, 2021 which amongst other changes, introduced provisions for the registration and regulation of corporate trustees in the retirement benefits industry through amendments to the Retirement Benefits Act, 1997. Some of the eligibility requirements for a pension corporate trusteeship applicant include having a minimum capital requirement of Kshs 10.0 mn and the applicant should have the professional and technical capacity and adequate operational systems to perform its functions,
  2. Corporate Trustee Compliance: In 2020, the Retirement Benefits Authority Act, 1997 was amended introducing penalties where a trustee fails to submit a copy of the actuarial report to the Chief Executive Officer of the Retirement Benefits Authority. A penalty of Kshs 100,000 will immediately be imposed in case of delay and a further penalty of Kshs 1,000 shall be charged for each day or part thereof during which the report remains un-submitted,
  3. Introduction of New Asset Classes – Also in 2020, the RBA introduced two asset classes as investment options for pension schemes; Exchange Traded Funds (ETFs) and Public Private Partnership Debt instruments (PPPs) after introducing Commercial Papers and non-listed bonds in 2016. Previously, pension schemes exposure to infrastructure was through listed companies, Real Estate Portfolios or Private Equity Funds. The introduction allowed a 10.0% allocation of assets under management in PPPs to invest in Debt instruments for the financing of infrastructure or affordable housing projects, and,
  4. Income Drawdown as an Alternative Option to annuity at Retirement: In 2019, the Retirement Benefits Regulations saw the introduction of the provision requiring schemes to include Income Drawdown as an option for members to access their retirement benefits at retirement, in addition to an annuity or a lump sum. The income drawdown fund allows a member the chance to leave inheritance to his/her beneficiaries in the event of death. Currently, there are 13 income drawdown funds registered under the RBA compared to only 5 in 2019.

Legal Notices Published in August 2021

The key changes in the two Legal Notices, No. 163 and No. 165 published in August are as below:

  1. Access to Retirement Benefits before Retirement: The RBA recently published a legal notice which has amended the access rule to allow members of Umbrella and Occupational schemes, before retirement age who wish to transfer their accrued retirement benefits to an individual retirement benefits scheme, to access a maximum of 50.0% of the total accrued pension benefits and the investment income that has accrued in respect of those contributions. This is down from the previous regulation where members could access 100.0% of their own contributions plus 50.0% of the employer's portion, and,
  2. Independence of Trustees/ Service Providers: In the recently published legal notices, the Retirement Benefits Authority has included an additional clause indicating that a trust corporation shall not appoint an administrator, fund manager, custodian or approved issuer who is related to the trust corporation by way of ownership, directorship or employment. Prior to this, the trustees of the scheme was only required to notify the Authority of the details and qualifications of the person administering the scheme.

While acknowledging the growth and development in the pensions sector, more still needs to be done to increase the pension coverage in Kenya given that the coverage is still low at 20.0%, with only 3.0 mn people in Pension Schemes out of the 27.1 mn people in the labor force. As such, we recommend that the RBA increase member education and collaborate with other bodies like county governments to ensure that the public is made aware of the importance of retirement benefits. We also recommend that the Authority issues guidelines on procurement of pension services where new players will be considered and hence increase completion in the industry.

For more information, please see our topical on Regulatory Changes in the Kenyan Pensions Industry.