RBA bets on informal sector as it eyes Sh3.2t in pension assets in new plan

The authority has lined up outreaches and forums to engage these entities alongside employer and employee sensitisation forums.

But while RBA sees this segment as an opportunity, it has listed morphing consumer expectations and the changing labour market structure as the expected challenges.

RBA says in the plan that it will spearhead regulations that are friendly and cognisant of the challenges faced by the informal sector with the view to expanding the pension bracket.

The authority says considering the unique challenges faced by informal sector workers, it is necessary to design a regulatory framework that addresses their specific requirements.

It says in the plan that proper formulation of informal sector needs shall be crucial for establishing a comprehensive regulatory framework that effectively captures the diverse workforce operating within this sector.

“However, the voluntary nature of starting up a scheme has posed challenges to the seamless implementation of reaching out to many workers, including the informal sector workers. This issue shall be addressed through a more effective and inclusive approach in targeted outreach programmes,” says RBA.

Government securities, at Sh1 trillion (51 per cent), are the leading investment portfolio pension assets. They are held in government securities followed by guaranteed funds at 20 per cent and immovable property at 12 per cent.

The confidence to target the informal sector has been informed by the successes of the 2019-2024 strategic plan, which the authority has recorded in the latest plan. The plan documents the centrality of the informal sector in the growth of pension coverage by eight per cent during the four years.

During this period, the authority focused on enhancing pension coverage in the informal sector by carrying out outreach programmes to spur uptake among these populations.

“As a result, there was a recorded improvement in asset base from Sh1.2 trillion to Sh1.7 trillion in 2023 and an increase in pension coverage from 18 per cent to 26 per cent over the same period,” says RBA in the strategic plan.

It adds that there were also enhanced pension education and outreach programmes targeting the informal sector during the period.

“The authority also realised enhanced research and market analysis as shown by over 20 research papers produced during the period which have been utilized to inform policy formulation and development within the sector,” says RBA. During the implementation of the plan, RBA points out challenges in policy and regulation, citing unpredictable taxation, weak regulations and oversight for service providers, and low coverage as some of the challenges witnessed.

These are some of the issues that inform the authority’s intention to formulate policies and regulations that are friendly to the informal sector.

Numbers from RBA as of June 2024 show pension assets under management stood at Sh1.9 trillion compared to Sh40 billion in 2000.

RBA notes that the retirement benefits sector plays an important socio-economic role in alleviating old-age poverty as well as mobilising long-term savings for promoting economic growth and development. “The sector has achieved tremendous milestones in terms of growth, sustainability, and governance. However, the sector continues to face challenges in terms of coverage and inclusion, adequacy of benefits, and fragmented legal and regulatory framework,” it says.

At the launch of the strategic plan, RBA also unveiled the National Retirements Benefits Policy, a key document that has been missing in the sector and cited as one of the challenges in the implementation of the previous 2019-2024 strategic plan.

“The National Retirement Benefits Policy focuses on expanding coverage to a broader spectrum of the population, including those in the informal sector, who have historically been marginalized in terms of retirement benefits,” noted RBA Chairman Nelson Havi.

Of the six strategic issues identified in the strategic plan, RBA hopes to prioritise innovation in pension coverage and adequacy benefits.

“The authority will focus on extending coverage to the excluded population segments, enhancing strategic partnerships on financial literacy, developing pension education programmes, fostering innovation and creativity, and championing responsible and sustainable investment of retirement benefits funds,” notes the agency. RBA’s target on the informal sector corresponds with several strategies being employed by industry players who are aggressively targeting this population that is underserved and unserved to a larger extent.

Britam Asset Managers is one of the service providers that recently unveiled a pension product for SMEs under the name Ngao Umbrella Pension Scheme.

The scheme is a multi-employer retirement benefits product that seeks to assist SME owners, who are largely informal, bypass the challenges of setting up a scheme. Instead, they can opt to join an umbrella scheme.

Director of Infrastructure Development, Technology and Innovation at the Micro and Small Enterprises Authority (MSEA) Edward Karani noted during the launch of the Ngao Umbrella Pension Scheme that one of the reasons why there is less participation of the informal sector in the pension contribution is the broad or blanket definition of what constitutes a formal enterprise which financial services firms use.

“What is a formal business? A simple question. Is it just an entity that is only registered by the Business Registration Service (BRS)? Is it a cooperative or an association? Can a body that pools people together for certain interests be considered in your formal pension scheme?” he posed.