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Kenya: Proposed Pension Regulations Laudable
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Business Daily (Nairobi)
EDITORIAL
3 July 2008
Posted to the web 3 July 2008
A common story in social circles is how retirees are considered lucky if they survive for more than five years after leaving employment.
A theory advanced for this is the level of stress that comes with the transition, a sign that key aspirations were not met during the "productive" employment life. Add to this the burden of bills to be met with a fraction of a former income, coming in the form of a regular pension.
A cause for concern is that workers get indebted with mortgages and loans too close to their retirements and the pension dues are often used to offset outstanding liabilities, leaving senior citizens with little.
As soon as they step out of employment, many find themselves depending on their children and other relatives for upkeep. With the collapse of the extended family which used to provide support, the pensioner soon resorts to alcohol and substance abuse.
While the low life expectancy after retirement have a sociological explanation, the root is purely of a financial nature.
Ours is still a community where putting a roof over the heads of loved ones and ensuring daily rations, is the basic definition of responsibility.
Retiring to a rented quarter would be frowned upon, a social expectation whose pressure grows every day as one approaches the end of employment.
This raises the demand for mortgages by most middle aged workers, who at their salary scales are forced to save for several years in order to raise the mobilisation fees, about 25 per cent of the mortgage, before signing the contract.
Had they been in a position to raise the deposit soon after employment, they would viably repay it within their working life; easing the pressure on finances after retirement.
It is in this light that the proposed regulations - allowing pension contributions to guarantee mortgages of up to Sh5 million - needs to be seen.
It will allow workers registered with pension schemes to bankroll a mortgage plan, increasing liquidity in a sector that has until recently been limited to upper levels of the employment world.
With Kenya's annual savings for mortgages in the Sh250 billion range, even allowing housing loans to be leveraged on a quarter of the contributions will help drive the country's housing goals forward.
However, leveraged loans need to be backed with watertight regulations on eligibility and disclosures in order to avoid the pitfalls that led to the financial melt-down in the US starting 2006 in the subprime crisis.
If handled poorly, the leverage can lead to a pension crisis of bigger proportions than the one in Greece, which has however been caused more by the structure of retirement benefits.
These precautions, however, should not hold back what promises to be a liberating policy at both the individual and social level.
The regulations, with the backing of actuarial advice, secondary protection for the amount leveraged and clear rules on commuting of pension benefits should achieve the intended goals.
Of importance is a comprehensive policy review to re-invigorate the mortgage market so that funds can be recouped quickly and used for new developments. This needs to be pursued in order to help bring mortgage costs down in the long run, reducing the level of leverage significantly.
This means more tax incentives for individuals to increase their contributions in pension schemes as well as to dedicate a higher proportion of their salaries to home ownership savings plans.
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While this will hurt government revenues in the short run, the overall linkages across sectors spawned by increased housing activity will ensure higher collections from a vibrant economy.
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