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10 April, 2023

The Pension industry in Kenya has been negatively impacted by various unprecedented economic occurrences, such as the slow rebound of the financial markets after the adverse effects of COVID-19 as well as uncertainties around the general elections, which slowed down economic activities in the country. Additionally, the high cost of living occasioned by elevated fuel and food prices as a result of sustained supply constraints has weighed down on the adequacy of disposable income available for saving for retirement as well as the sustainability of the pension industry in Kenya. Notwithstanding, according to the Retirement Benefits Authority (RBA), the retirement benefits schemes industry has registered significant growth, with Assets under Management (AUM) growing at a 10-year CAGR of 11.1% to Kshs 1.6 tn in 2022, from Kshs 0.6 tn in 2012.  However, assets grew at a slower rate of 1.2% in 2022 to Kshs 1.6 tn, from Kshs 1.5 tn compared to 10.6% growth in 2021. The diminished growth was partly attributable to the increased cost of living in the country as a result of high inflationary pressures, which led to reduced disposable income among the working population. The graph below shows the growth of Assets under Management of the retirement benefits schemes over the last 10 years:

 Source: Retirement Benefits Authority (RBA)

Despite the continued growth, the pension industry has been faced with a number of challenges hindering optimal growth. Below are some of the challenges facing the sector:

  1. Market Volatility – For segregated schemes, the investment returns are not guaranteed and vary depending on the market volatility. In 2022, the market volatility, witnessed in the Equities and Offshore investments, which recorded declines of 14.0% and 19.8%, respectively, led the schemes to record a 1-year return of 1.7% in 2022, a decline from the 11.6% return recorded in 2022, according to the ACTSERV Pension Schemes Investment Performance Survey (Quarter 4, 2022) report,
  2. High Unemployment Rate – According to the Kenya National Bureau of Statistics Q4’2022 labor report,  36.6% of Kenya’s 29.1 mn of the working age population aged between 15-64 years are unemployed. Such status makes it extremely difficult for them to commit to pension contributions towards their retirement,
  3. Access of Savings before Retirement - In retirement benefit schemes, members of Individual pension schemes can be able to access 100.0% of their contributions, provided that those contributions do not consist of the contributions made by the former employer when transferring into the scheme. As for umbrella and occupation schemes, employees can only access 50.0% of their total benefits. This gives employees access to their savings before actually retiring because of losing a job or leaving a particular employer. However, such actions can always prove to be shortsighted since it significantly depletes the value of savings upon retirement and will reduce the growth of the sector,
  4. Low Pension Coverage in the Informal Sector – According to the Retirement Benefit Statistical Digest 2021, there are 266,764 members registered in individual pension schemes. This is significantly low considering that according to the Kenya National Bureau of Statistics Economic Survey report 2022 , there are 15.2 million people engaged in the informal sector,
  5. Unremitted Contributions – Umbrella schemes and occupational schemes have, over the years, grappled with the issue of unremitted contributions from employers due to financial challenges, and this has led to some pension schemes being underfunded. Consequently, according to the Retirement Benefit Statistical Digest 2021, this has resulted in a total unremitted contribution to increase to Kshs 42.8 bn in 2021 from Kshs 34.7 bn in 2020,
  6. Delayed Processing and Payment of Benefits - Payments of members' benefits undergo a number of processes, from the determination of total accrued benefits by the pension scheme administrator to the approval of payment by the Trustees of pensions schemes and, in the case of Occupational or umbrella schemes, the employer has to give approval before the benefits finally reach the members. Delays may occur as the benefits files move from one service provider to there. This is quite disadvantageous, especially for those members who have reached the age of retirement. These delays, consequently, discourage those not in pension schemes from shying away from joining.

To enhance the performance of Retirement Benefit schemes, the Retirement Benefits Authority (RBA), in collaboration with the service providers, can work together by taking the following actionable steps:

  1. Diversification of Investments – Currently, the allocation to traditional assets such as Government securities and Equities constitute 59.5% of the total Asset under Management as of 31st December 2022. Fund managers of pension schemes should consider investing in alternative investments such as structured products, Real estate notes, private equities, and Commercial papers to diversify their portfolios. There are numerous benefits to investing in alternative investments, with key ones being high returns and low correlation of returns as they have their own value that is not dependent on factors that affect traditional investments, such as dwindling investor interest occasioned by volatility, and are thus able to provide a real return to the investor,
  2. Mass Education – The Retirement Benefits Authority and the service providers in the retirement benefits industry can adopt initiatives such as media campaigns and strategic collaboration with county governments, professional associations, religious institutions, SACCOs, as well as welfare associations that are closer to the masses to educate citizens on the importance of saving for retirement. This will help demystify that pensions schemes are not just for those in formal employment,
  3. Registration of More Service Providers – By having many diverse players in the pensions industry will lead to a more competitive environment that will ultimately lead to more innovations in terms of product development and better service delivery in the pensions market,
  4. Extending the Limits on Withdrawal to Voluntary Benefits in Individual Schemes - The RBA has provided withdrawal limits on benefits before retirement age, mostly to umbrella, occupational pension schemes, and personal schemes for savings transferred from occupational or umbrella schemes. As such, members of individual pension schemes are able to withdraw their benefits for which the trustees have given approval at any time before retirement. We believe that extending the withdrawal limits to the individual schemes will go a long way in ensuring that individuals have enough money at retirement and the pensions industry continues growing as scheme managers will have more funds and enough time to make long-term investments and,
  5. Proper Governance – The RBA has outlined the investment guidelines, which cap the maximum allocation of the AUM to the various allowed asset classes that pension schemes can invest in. At the same time, pension schemes are required by law to have Investment Policy Statement (IPS), which is a document prepared by the scheme's investment advisor/ actuary that outlines the general investment guidelines, uniquely tailored towards a particular scheme based on the schemes profile. The Trustees should strive to ensure that Schemes are compliant with both the RBA guidelines and the IPS to prevent the schemes from taking extremes risk that might potentially lead to members losing their benefits.

For detailed analysis, please see our report on Kenya Retirement Benefits Scheme FY’2022 Review & Cytonn Weekly #14/2023.