Kenya’s population is aging and the number of the elderly as a percentage of the population is expected to hit 7% by 2050, from the current 3%. This is as a result of an improvement in life expectancy from an average of 49 years in 2006, to 59 years in 2016, and 64 years in 2018. The reducing birthrate has not helped as we have seen the average number of children per family fall sharply, from 8.1 children in 1978 to 4.6 children in 2008, and it is projected to possibly reach 2.4 children by 2050. These changing demographic trends reinforce the need to ensure that some form of old age protection is provided to the elderly and ensure security against destitution during old age.
Prior to the formation of the Retirement Benefits Authority (RBA), the Retirement Benefits Industry did not have effective regulation and supervision, and the interests of members were not sufficiently protected. This era was characterized by poor administration, mismanagement of scheme funds as well as outright misappropriation of funds. Consequently, confidence in the sector was low.
This necessitated the enactment of the Retirement Benefits Act in 1997 and a comprehensive framework of regulations that was implemented three-years later, in 2000. The Retirement Benefits Authority was formed in 2000, to strengthen the governance, management and effective running of the Retirement Benefits Industry. This marked the beginning of a regulated, organized and more responsible Retirement Benefits Sector in Kenya. The establishment led to;
Improvement in Protection of Member’s Benefits. The legislation required that existing schemes be registered by the RBA and a transition period given for the schemes to comply with the regulations. The new regulations included the separation of the roles of scheme sponsors, trustees and service providers. In addition, in-house investments and custody of schemes funds was no longer allowed and the RBA required that each scheme appoint a professional fund manager and an external custodian approved by the RBA. The RBA also imposed investment limits for various asset classes to ensure diversification and protection of funds.
Improved Governance of Schemes. The legislations provided guidelines on the election and appointment of trustees as the legal owners of the scheme. It also made explicit requirement for schemes to perform annual audits and service providers to submit various documentations regularly to the RBA for inspection and to track the compliance levels with legislation and exposure to risk. This resulted in better governed schemes.
With the milestone however, the industry still has challenges that regulations have not been able to solve;
Low Penetration Rate: Despite RBA’s initiatives to boost pensions coverage, penetration by retirement benefits schemes is still low at 20% of the labour force, and poses the biggest challenge in the Kenya’s pension system, with the Authority having a target of increasing this to 30% by 2024 according to their strategic plan. One of the causes of this is the structure of the industry as it is highly biased towards formal employment where employees generally contribute from source at the salary level and employees adhere to legislation issued compared to those in the informal employment sector, where there are no regulations requiring contributions to a pension scheme.
Pension’s Adequacy: Even for those who are in a pension, pension adequacy exacerbates the already low penetration, with studies showing that currently, the income replacement ratio for retirees in Kenya is at 34% compared to the desired target of 75%, according to research done by Zamara. This means that for Kenyans earning Kshs 100,000 per month they are only saving to earn Kshs 34,000 per month during their retirement years as opposed to Kshs 75,000, which is recommended.
This low adequacy has been attributed to, (i) lack of legislation that prescribe minimum contribution or benefit levels for retirement schemes, and (ii) frequent access to the benefits before retirement by members. Studies show that 95% of members who leave employment withdraw the maximum allowable benefits every time they change employers. It was therefore imperative that the RBA comes up with checks and balances that would enhance benefits preservation and reduce old age poverty.