Leveraging pension for home-purchase the best idea
Tuesday, February 9th, 2021 00:00 | 3 mins read
The housing deficit in Kenya stood at two million in 2012 and continues to grow at the rate of over 200,000 units a year.
Furthermore, there is a growing proliferation of informal settlements in urban areas.
It is my opinion that Kenya’s housing quagmire can be resolved by leveraging pension savings to unlock homeownership for the young populace.
The role of pension fund assets in supporting access to housing is largely attractive to housing development advocates.
Pension funds, unlike commercial banks, fall into that small group of asset holders with long-term horizons, which housing advocates see as a natural source of the needs of borrowers for housing, who seek long-term finance.
Conversely, trustees and managers of pension funds, tend to be conservative in their approach to fund investment, protecting member assets in support of their retirement.
Nevertheless, trustees are increasingly recognising the need to continue seeking appropriate and profitable investment opportunities, in new areas that include property in general and housing in particular.
The Treasury recently revised and published draft regulations, showing rules and limits of accessing pension savings for home purchase.
The clause, which proposes to allow contributors to access up to 40 per cent of their savings ahead of retirement will free tens of billions of shillings for home ownership given that Kenya’s pension schemes currently control Sh1.2 trillion in property, cash, shares and government bonds.
It is important for the pension and retirement benefits sector, as well as Kenyans at large, to view this milestone in the greater context of the prospects this could usher-in.
Kenya’s pension and retirement benefits industry plays a big role in the economy and has averaged 13.55 per cent of the country’s Gross Domestic product over the last 10-years.
The sector is highly regulated thus giving little room for pilfering of funds. With the new law in place, workers will have an incentive to save in retirement benefits schemes as well as boost one of the government’s Big Four Agenda, which aims to improve homeownership rates by enhancing the diversification of sources of funds to be used in the purchasing of residential homes.
In this tep, Kenya can benefit immensely from learnings from the Asian tiger – Singapore.
In Singapore, the statutory pension scheme, the Central Provident Fund (CPF), housing is integrated as one of the three key pillars of the pension scheme.
The contribution rates to the statutory fund are: 20 per cent of employees’ income; which is supplemented with an additional 20 percent from their respective employer.
Mandatory contributions to Singapore’s statutory fund are tax-exempt for both the employer and employee. Under the CPF of Singapore, however, contributions are distributed to three accounts: an ordinary account (whose funds are used to secure housing insurance and education); a special account (that holds funds for old-age and invests solely on retirement related products) and a MediSave account (that holds funds specifically meant to cushion members against hospital and medical insurance bills).
In Singapore, savings under the ordinary account can only be used if you are buying a private property with a remaining lease of at least 30 years, provided one’s age plus the remaining lease is at least 80 years.
Moreover, there are no limits to withdraw your savings under the ordinary account to buy a new flat from Singapore’s Housing Development Board (HDB). As a result, Singapore consistently records the highest home ownership rates on a global scale.
Kenya can indeed adopt several lessons from Singapore’s statutory retirement fund. In the greater context of what this shift in policy means for young Kenyans, we ought to consider it a step in the right direction. —The Writer is the Group Managing Director & CEO of CPF Financial Services