Mandatory pension can step up retirement security for all workers

Majority of workers still lack easy access to pension plans and savings products. In many cases, options are available but acceptance is low and the situation is further compounded by factors that inhibit or do not incentivise saving. This severely limits many people’s ability to accumulate savings.

Over 86 per cent of Kenyan workers are not covered by any form of retirement benefits scheme - meaning the burden of catering for senior citizens will continue to grow. The self-employed and workers in the informal sector are least likely to have access to a workplace savings plan while those in smaller companies are also at a disadvantage.

The informal sector employs over 75 per cent of the workforce.

Rising cost of living means the majority have to dig deeper to find surplus money to save for their future. The problem is made worse by low levels of financial literacy that threaten pension systems, which are self-directed and rely mostly on private savings in addition to employer, or Government-provided savings.

Financial literacy

Yet pension systems increasingly require individuals to make key decisions on how much to save, and when, requiring a level of financial literacy that many individuals do not possess. For example, the lack of awareness of how interest and returns will compound over time, how inflation will impact savings, and how holding a broad selection of assets can be beneficial and diversify risk means that many individuals are ill-equipped to manage their own pension savings.

Some groups are particularly vulnerable, including women, the young and those who cannot afford or choose not to seek financial advice.

Given the current environment, it is unrealistic for workers to expect that saving around five per cent of their pay each year of their working life will provide a retirement income comparable to their level of income while working.

Unless drastic measures are taken to address the low savings culture, majority of workers will retire into abject poverty while the Constitution prescribes that ‘every person has the right to social security.’ The goal of social protection is not mere survival, but social inclusion and preservation of human dignity.

Policies to promote saving for retirement and old age should ideally use both tax incentives and compulsion to promote social protection. It is time for the Government to implement automatic enrollment to boost retirement savings.

The case for compulsory provision is based on the need to overcome the blinkered behaviour of some workers – especially in the middle income tier - and to protect society from those who make inadequate provision for their old age.

Where the workforce can be easily reached, the Government should consider a gradual approach that will phase-in automatic enrollment programmes to allow for employers or self-employed to understand the implications for their business and be prepared to make the necessary arrangements to comply.

For the hard-to-reach groups, automatic enrollment using an efficient ICT system will ensure all Kenyans can be netted. Auto-enrollment in pension schemes and paying the advance on contributions using mobile phone can be used.

A contribution to pension schemes could be applied automatically on every airtime top-up on mobile phone. Mandatory SIM registration means every mobile phone number is linked to a National Identification number of the user.

The ID could be linked with a social security number for everyone above 18. If 30 per cent of the country’s 40 million subscribers spend more than Sh1,000 of airtime per month, charging 10 per cent of this amount as pension, and matching  shilling for every shilling contributed through this mode, the Government could collect a minimum Sh2.4 billion monthly or Sh28 billion annually.

Over a 10-year period, the Government will have accumulated a conservative Sh280 billion in assets, which can finance major development projects; while ensuring social protection for the majority as they retire.

Pension reform in Kenya should generally be a top Government agenda to create comfortable retirement for the citizens.

The writer is the Group Managing Director of County Pensions Fund.