Business Daily (Nairobi)
Mwaura Kimani
11 November 2009
A new rule requiring employers, regardless of the number of people in their payroll, to make monthly social security contributions for their workers has come into force, offering millions of Kenyans in micro enterprises and households security in retirement.
The legislation, effected through a Kenya Gazette notice last week, also promises to shore up the National Social Security Fund (NSSF's) revenue base, bringing on board additional money for investment in the economy.
It represents a significant departure from the existing pension rules that limited social security contributions to employers with more than five workers in their payrolls.
The move is expected to improve pension coverage in the informal sector where only a tiny fraction of employees are contributing.
Employers are expected to start contributing to the pension money beginning this month.
Analysts said the move offers the country the best opportunity to improve its lackluster pension coverage estimated to stand at only 15 per cent of the population and offer millions of workers a safety net in retirement.
Policy makers have been warning that the low pension coverage was exposing millions of citizens to poverty in old age -- a development that would leave the State with millions of elderly destitute to care for as the social systems that have traditionally taken care of them breaks down.
"Old age poverty is becoming rampant, especially for informal sector employees forcing us to rethink the approach," Labour minister John Munyes told the Business Daily in an interview. "We hope to offer every Kenyan some form of retirement savings in the next couple of years to secure their future."
But some analysts warned that the mandatory pension contributions for all cadre of workers also bears the risk of increasing labour costs in the informal sector at a time when many are struggling to stay afloat, raising the prospect of retrenchment or a slowdown in new recruitment in an economy where unemployment remains one of the biggest challenges.
Matatu touts
The gazette notice published by Mr Munyes brings into force Sections 10 and 13 of the NSSF Act that requires small-scale employers to part with Sh200 per month for each worker.
The employees are expected to fork out a similar amount of money for the scheme.
The new law should rope in millions of casual workers such as house-helps, watchmen, matatu touts, gardeners, cooks and building and construction workers into the social security platform and offer them some form of security in retirement.
It is estimated that at least 5.4 million informal sector workers have no formal pension arrangement.
If fully covered, this segment of the economy could add into NSSF's kitty at least Sh2 billion per month, analysts said.
That would give the Fund the financial muscle it needs to immediately meet its obligations to retirees as payments fall due and as its membership increases.
People familiar with the NSSF's finances say that should its financial base remain at the current level estimated at Sh80 billion, it may soon revert to the old days when it took more than three years to pay retirees.
Recent improvements in the fund's finances have seen it cut down the waiting period to less than one month for retirees with all the necessary documents.
"The change in the threshold will definitely increase pension coverage that is still very low," said Edward Odundo, the chief executive officer at Retirement Benefits Authority (RBA).
"There is however need to develop more pension products that are attractive to informal sector workers to increase the coverage, " said Mr Odundo adding that the informal sector, commonly referred to as jua kali, is the most vulnerable group to old age poverty that has only been recently aggravated by the HIV/Aids pandemic.
"We are talking of doubling the membership of NSSF by bringing in the uncovered informal sector workers," Mr Charles Mang'ee, the assistant divisional director, Life and Pensions at Eagle Africa Insurance Brokers Limited said.
The push for wider retirements benefit coverage comes at a time when Kenya is bracing for a pension crisis as life expectancy of the population improves.
The extended lifespan is coming with one big problem for companies that sponsor defined benefits pension plans--how to manage the assets invested to cover future liabilities and match the estimated lifespan of every worker.
The Government, which guarantees pension payments from the taxes it collects every year, is especially exposed to this phenomenon.
Research indicates that 1.6 million--or 84 per cent of Kenya's working population in the formal sector -- remains uncovered while 5.4 million individuals in the informal sector do not have access to a formal pension arrangement.
This represents a mere 15 per cent coverage, a poor comparison to the global average of 30 per cent.
It's only in 2006, that the Government opened the state run NSSF to informal sector workers.
Kenya's pension industry, which has few products targeted at the informal sector that accounts for about 75 per cent of the labour force, has only helped lock out a large number of potential informal sector contributors from accessing pension schemes.
Private pension schemes do not have products targeted at the informal sector on the belief that it's not a fertile ground for growth.
The Government's renewed focus on the informal sector is driven by the reality that it is the fastest growing employment platform unlike the formal sector where growth has nearly flattened out.
According to the 2009 Economic Survey, formal sector employment shrunk from 75 per cent in 1988 to 28 per cent in 2007 and is projected to continue dropping.
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.
Financial position
Analysts have attributed the low pension coverage to the concentration on formal sector workers, a bracket that has been shrinking over the past decade.
There is also a lack of awareness of the benefits of signing up to a retirement scheme early in one's career and the fact that pensions are thought not to meet the workers immediate.
"Since everyone retires at some point, we must ensure all have access to some pension arrangement," said Mr Mang'ee.
"There is need to increase awareness among workers, most of who feel less need for pensions since old age appears remote and the idea of retirement unreal," The development comes at a time when more than a million contributors to the NSSF are facing the danger of poverty in retirement as the fund's financial position weakens in a turbulent investment market.
Reports indicate that the public pension's manager has lost a large chunk of the money it invested in shares at the Nairobi Stock Exchange (NSE), whose performance over the last one year has dipped.
An audit report by the Inspectorate of State Corporation shows the NSSF had Sh44 billion or (50 per cent of its portfolio) in shares by the end of June 2008, up from Sh16 billion in 2004.
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