How Kenya compares to peers in pension savings

Tuesday, March 21st, 2023 00:50 | By
Sacco savings illustration. PHOTO/Courtesy

The February Court of Appeal Ruling on the implementation of the National Social Security Fund (NSSF) Act, 2013 – which sought to increase pension deductions — was a significant turning point for Kenya.

Under the Act, the government seeks to build a bigger retirement pot, increase coverage and offer workers monthly annuities after retirement instead of one-off payment.

Interestingly across Africa, most people lack social protection. There is a widespread belief on the continent that social protection is only possible for the small percentages of populations in formal employment.

In a society where the informal sector is burgeoning, the large informal sector presents a dual challenge. On the one hand, those in informal employment are not keen on savings for retirement; on the other hand, their contribution is marginal.

Retirement is expensive. When you stop doing whatever you are engaged in today, you’ll need 75 per cent of your pre-retirement income to maintain your standard of living. Over the years, more and more people have found themselves needing more savings in retirement and are stuck with lives of never-ending work. It’s common to find seniors taking up odd jobs to make ends meet while other retirees rely on their children, increasing dependency on the working population.

According to the Retirement Benefits Authority, the income replacement ratio — the percentage of a person’s working income that they need to receive during their retirement years— in Kenya is below 40 per cent compared to the recommended ratio of 75 per cent. This can be mainly attributed to low savings for retirement or reliance on the NSSF savings alone.

The net impact is a rise in senior poverty at a time when they are more vulnerable to lifestyle diseases.

Understanding how much you’ll need during retirement is essential, yet only a few people have calculated how much they need to save.

It is also vital that you adjust the spending level to account for the impact of lifestyle changes that come with retirement. These include anticipated changes in spending patterns— supporting your children and even your grandchildren’s school fees or other support— and changes in how one chooses to spend their time and money. This calls for retirement planning.

Financial security in retirement doesn’t just happen. It takes planning and commitment and, yes, money.

The NSSF Act 2013 is paving the way for better retirement packages for Kenyans. The Act increased pension contributions tenfold to 12 per cent of the pensionable wages made up of two equal portions of 6 per cent from the employee and 6 per cent from the employer subject to an upper limit of Sh2,160 for employees earning above  Sh18,000 in the first year of implementation.

The increased deduction is in the realisation of the current economic situation. Over the years, the cost of living has continued to rise and the pensions management industry must establish a framework that ensures that retirement savings keep pace with these changes.

The implementation of the NSSF Act, 2013, although it increases deductions, ensures that Kenyans have the financial security they need in retirement, allowing them to enjoy their golden years.

The Act, in essence, reaffirmed the industry view that without progressive reform to the pensions and savings environment, the government would face mounting pressure to provide appropriate social welfare.

Under this new proposition, Kenya now compares favourably across the continent.

In East Africa, Tanzania has the highest contribution to retirement benefit schemes. The law provides for 10 per cent savings of one’s gross earnings, with the employer contributing a similar amount. In Uganda, NSSF requires that everybody saves 5 per cent, and the employer matches with a 10 per cent contribution.

In Rwanda, the social security contribution is at 5 per cent, with the employer contributing 3 per cent. Burundi has a mandatory pension scheme for formal sector employees to the Institut National de Securité (INSS) at 6 per cent, with the employer contributing 4 per cent.

Further afield, the maximum contribution in Zambia is 5 per cent, with the employee and employer each contributing 5 per cent.

In Ghana, the law provides for savings of 13 per cent of one’s gross earnings and the employer contributing 6 per cent.

Although African pension funds are still relatively small in global terms, the accelerating pace of reform in the sector across the continent in savings for retirement and the introduction of private pension funds are likely to improve coverage and increase asset growth within the continent’s pension industry.

In the Kenyan context, expanding coverage to the informal sector will be essential even as the nation expands deductions to the retirement pot.

—The writer is the Group CEO of Octagon Africa [email protected]

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