Pension industry bullish amid Coronavirus bite on contributions

Liason Group Managing Director Tom Mulwa.

The Covid-19 pandemic continues to erode people’s livelihoods five months after it was detected in Kenya, leaving many with reduced retirement income.

Suspension of pension contributions was among the first cost-cutting measures taken by employers in a bid to trim their payroll expenses.

Over a million Kenyans have so far lost their jobs owing to the restrictive measures put in place to curb the spread of the virus.

At a low penetration of 20 per cent in both the formal and informal sectors, the Kenyan pension industry is set to dip further with gains in membership rolled back.

However, industry experts believe this might be a “silver lining” moment, saying the unprecedented pandemic has taught people the benefit of setting some savings aside for a rainy day.

Association of Retirement Benefits Schemes Chairman Simon Nyakundi says increased awareness on the importance of savings will boost the national pension coverage.

“There is a silver lining for the pension industry in this country once the pandemic is over. More people will want to save up in case such an emergency occurs again to remain afloat,” he told Weekend Business.

Liason Group Managing Director Tom Mulwa predicts an upsurge in the number of Kenyans motivated to contribute to a pension scheme or a savings plan.

“One thing we’ve learnt from Covid-19 is that it’s important to have savings. Pension is a means of savings many Kenyans – both in the formal and informal sectors – will be wanting,” he said.

At the moment, due to reduced disposable income, Kenyans are finding it hard to strike a balance between daily expenses and savings.

“The most important strategy at the moment is efficiency. Everyone needs to apply it by cutting wastage as much as possible,” said Mr Mulwa.

Records at the Retirement Benefits Authority (RBA) show that the suspensions applied by firms vary, with some stretching up to nine months.

This means that employees will have to do with the mandatory contribution of National Social Security Fund (NSSF), whose monthly contribution is considerably small unless topped up voluntarily.

NSSF contributions are capped at a minimum of Sh200 with people working for decades known to be shocked when they go to collect their pension contributions only to get paltry amounts.

Pension assets under management in Kenya currently stand at Sh1.2 trillion.

A recent analysis by fund administrator Zamara showed that retirement schemes’ returns recovered in the second quarter of 2020 compared to a negative position seen in the first quarter of 2019.

The recovery was attributed to good performance from equities and offshore investments.

Mr Nyakundi said this will be reversed, considering that contributions have reduced to a trickle and the end of the pandemic is not in sight.

“Investment portfolios of pension schemes will be depressed this year, but luckily pension is a long-term investment. Once the pandemic is over, people will increase their contribution to catch up with the period they had not contributed,” he said.

Recently, the Postal Corporation of Kenya’s retirement benefit scheme was put under administration by the RBA after it failed to collect Sh1 billion dues.

Mulwa said a lot of regulator intervention into schemes is expected.

He gave examples of the big schemes at universities that might be unable to remit member deductions owing to the long closure of the institutions.

Universities are scheduled to reopen for face-to-face sessions next year.

“We expect many casualties and a lot of regulator intervention,” said Mulwa.

He, however, said they advised against firms taking drastic measures such as suspending pension contributions.

“All employers are naturally seeking ways of suspending pension contributions and we’ve persuaded them not to take those drastic measures because we believe that at the end of the day there will be life after Covid-19,” said Mulwa.

He said the pension industry should prepare for a rebound but it is projected that there would be a shock to the sector until a vaccine is found.

For civil servants, their pension script would have been worse if provisions in the Finance Bill, 2020 had sailed through parliament to impose a monthly tax on pensions for senior citizens.

The Bill had proposed to delete the paragraph exempting monthly pension, granted to a person who is 65 years of age or more, from tax. However, legislators rejected the clause, saying this would discourage saving into pension schemes.

But the government is expected to make inroads this year on lowering the recurrent expenditure on pension and gratuities it pays to civil servants yearly.

Earlier this month, Treasury Cabinet Secretary Ukur Yattani announced the rolling out of a contributory pension scheme for civil servants to tame the ballooning pension payout by the government.

Expenditure on pensions and gratuities is now estimated at Sh87 billion from Sh105 billion that the Treasury had initially budgeted, latest exchequer statistics covering 10 months to April show.

Aging workforce

Retirees’ payroll, however, still hit a record Sh71.8 billion between July 2019 and April 2020, a growth of 36 per cent compared to the same period a year ago, largely because of a rapidly aging workforce in the public service.

This is despite a policy decision nine years ago to raise the retirement age in public service from 55 to 60 years to defer and slow down the pension liabilities.

Yatani expressed confidence that the Public Service Superannuation Scheme will help tame government expenditure.

“This process has been driven mainly by the necessity to alleviate the financial burden imposed by relatively generous public employees’ pension schemes, enhanced labour mobility and the desire to build more equitable and financially sustainable social security systems,” the CS said during the launch earlier this month.

The scheme, which will come into force in January next year, will be mandatory for 333,460  government workers aged below 45 years with those above that given an option to join or remain in the old scheme.

But even before Treasury can enjoy taming the pension bill, Parliament ensured the celebration would not last long as they made a new attempt to raise their retirement package.

In a Bill sponsored by minority leader John Mbadi, the lawmakers agreed to pay 150 parliamentarians who served between 1984 and 2001 a pension of Sh100,000 per month.

If the Bill is assented to by the president, taxpayers will have to shoulder Sh1.15 billion to cater for the arrears and Sh136.2 million every year for monthly pension.

Treasury Principal Secretary Julius Muia, in a memorandum to the House, argued that the proposal would stretch the government’s pension contribution. “This would lead to a huge increase in the public pension wage bill, thereby negating the efforts by the government to tame the rising public wage bill,” he said.

The Salary and Remuneration Commission also opposed the move by the MPs, saying it was an unnecessary burden to taxpayers.