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Millions Faced With Poverty Trap Upon Retirement

By Steve Mbogo, Business Daily

April 13, 2009




Kenya faces extreme levels of old age poverty in the next 20 years as the number of people above 60 years doubles with no corresponding increase in pension coverage. 

This, together with youth unemployment and shrinking formal sector jobs, presents a two-pronged recipe for social upheaval as the elderly looks up to a helpless younger generation for support.

The ensuing dependence crisis will mean that less is saved for investment both at the family level and nationally, limiting the economy’s capacity to create jobs. 

Figures from the United Nations Department of Economic and Social Affairs reveal that by 2030, the number of Kenyans aged 60 years and above will rise from 1.6 million currently to 3.4 million. 

That contrasts sharply with pension coverage growth of just 100,000 people per year, according to the Retirement Benefits Authority, which says that the coverage grew by 15 per cent from 3.2 million to 3.8 million Kenyans between 2000 and 2006.

Of those expected to retire by 2030, only 15 per cent of them and mostly those working in the formal sector have a pension, RBA said.

With the fraction of Kenyans covered by pensions schemes expected to drop due to continued shrinkage of formal sector jobs through retrenchment and retirement, RBA is warning that the ranks of the aged joining the poverty bracket could swell further. 

Kenya is estimated to have a working population of 9.4 million people, out of which two million are formally employed while the rest work in the informal sector, where pension coverage is at dismal levels.

Last year’s Economic Survey indicates that formal sector employment shrunk from 75 per cent in 1988 to 28 per cent in 2007 and is projected to thin progressively. 

It’s only in 2006, that the Government opened the state run National Social Security Fund (NSSF), a provident fund, to workers in the informal sector.
NSSF however offers only Sh80, 000, as lump sum payment upon retirement, an amount considered too low.

Players in the pension industry now say Kenya must adopt a compulsory pension system to ensure that retirees go home assured of a regular income.

Statistics show that the number of old people in Kenya is increasing because of improvement in healthcare services and gains made against poverty levels. 

The Kenya National Bureau of Statistics released data last year showing these factors had already changed the projected life expectancy for the country from 53.45 years in 2005 to 58.4 years in 2010.

While the elderly population will double, the number of people now under the pension system is extremely low, raising fears that when those people retire by 2030, they will have little or no money to support them.

Today, only about three per cent of the old population have pension. A majority are those who depend on subsistence support from their children. 

Kenya has one of the lowest pension’s coverage in the world with less than 15 per cent of its 12 million workers covered, a poor comparison to the global average of 30 per cent.

There are no projections yet from the RBA on how the pension coverage is likely to increase over the next two decades but the Vision 2030 blueprint seeks to increase coverage to above 40 per cent.

RBA is currently engaged in a major public education campaign on the importance of pension, but officials said it has already run short of funds and may discontinue the campaign.

To avoid what experts are calling a catastrophe of caring for old people, Kenya needs to make it compulsory for workers to pay pension schemes to get 100 per cent coverage.

“Unless we radically change, then the number of people under pension today will remain the same even by 2030,” said James Oyugi, the pension’s manager at CFC Life.

Mr Dominic Kiarie, the managing director of British-American Asset Managers Limited (BAAM), called on the government to make saving for retirement attractive through tax incentives. 

“The primary issue remains increasing coverage across the country today,” he said.

A large financial burden will be placed on workers of the time because they will need to finance the care for aging parents. As a result, possible pension and life insurance saving that those workers would have invested will end up being diverted to meet recurrent family expenditure.

This will in effect reduce the workers consumer purchasing power and reduce the income they could have put into savings, further perpetuating the poverty cycle.

NSSF headquarters in Nairobi
Under the Vision 2030 blueprint, Kenya aims at achieving a middle income country status around the same time the pension boil is projected to burst.

The framework itself recognises this threat and says the government “will aim at developing and executing a comprehensive model for pension reforms.” 

The plan sets goals of increasing pension contribution from 18 per cent to 40 per cent by 2012. Overall, the plan is vague on how this will be achieved.

Players in the industry have for long called for a national plan that would comprehensively address the issue of old age poverty. 

A National Policy for Older Persons that was to be developed during the National Development Plan (2002 – 2008) was not realised.

Failure to accelerate pension coverage or an alternative social safety net for the elderly in the face of changing social set ups could place the country in a delicate economic situation said Mr Edward Kamau, a sociology lecturer teaching at several universities in Nairobi

“Because of the thinning family system, and the increasing rural urban migration, most elderly people will not enjoy the close-knit family attention they receive from their children today. This means they may die early,” he said. 

In the past, outliving one’s life savings was not a big issue in Kenya because there was a large extended family, but as the social fabric breaks, it is now becoming a headache to policy makers. 

Data from BAAM shows that for retirees to live happily, pension coverage of 53 per cent of the total population is needed from the age of 35.

The old age poverty scenario is even worse for Kenya because the women who form a significant portion of workers and are increasingly heading families will be the hardest hit, according to figures from the Alexander Forbes Financial Services.

The data shows that females constitute 50.1 per cent of the total population but only about 29.4 per cent have formal employment and earn on average 33 per cent less than their male counterparts.

Kenya’s only compulsory pension scheme targets formal sector workers and is what is known as a primary pension scheme that cannot sustain one in retirement. 

Contributions to the National Social Security Fund (NSSF) are set at Sh400 per month, whose payment is shared equally by the employee and the employer. 

However the level of benefits are woefully low, said Mr Sundeep Raichura, the managing director of Alexander Forbes Financial Services. 

“Given current contribution levels, what is likely to be available to sustain one in retirement after 30 years of contributions to the NSSF is projected to be less than average earnings for just one year.”

Analysts have attributed the low pension coverage to a system that has mainly focused on formal sector workers, a bracket that has been shrinking over the past decade. The pension sector says one way out of the trap is to develop products through which informal sector workers save for pensions. 

“We want to ensure that everybody has a nest egg upon retirement,” Mr Edward Odundo, the RBA chief executive said. 

“Currently, people are retiring with nothing and becoming a problem to society.”

Last year the RBA and the World Bank presented a proposal for universal pension to the Finance ministry, whose word on the matter is yet to be made public. 

They propose that Kenyans aged 60 and above would receive monthly payment of about Sh2, 000 as subsistence allowance. The money would be allocated under a devolved fund similar to the Constituency Development Fund.

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