A challenge of pension adequacy

Posted on December 21, 2021

Hi there, this is 25-year-old millennial writing to you about pensions and retirement.

In a previous article, I took us through how the retirement benefits industry is doing in Kenya, and sadly, the current situation of the retirement benefits industry in Kenya is a puzzle.

And like every puzzle, the pieces are supposed to be laid out in a logical manner to successfully complete the challenge. In the case of the pension puzzle, we have identified pieces of the puzzle that are already fitting well, pieces of the puzzle that need re-ordering or re-fitting, pieces of the puzzle that are missing and pieces of the puzzle that need to be hit (by a hammer) on to the puzzle.

The first piece of the puzzle focuses on the challenges of pension adequacy.

A Pension is a monthly income that the retiree would receive from their retirement savings.

Adequacy in simple terms is the state of sufficiency.
Therefore, pension adequacy is when a retiree has sufficient monthly income to live a good retired life.
Experts of the retirement benefits industry around the world say that a sufficient pension is between 60-80% of the retirees last salary i.e. if the retiree last earned Ksh 100k per month then a monthly pension of between Ksh 60-80k is sufficient to live a good retired life.

From a survey done by Zamara that comprised of over 60,000 members of retirement benefits schemes, it was found that only 7% will have adequate pensions when they retire. (Dramatic Pause to allow that stat to soak in) The other 93% will be struggling to make ends meet during their retired life if they don’t have other retirement savings. You could be among the 93%. Below I outline a simple thing you need to do now to change the situation or bridge the pension adequacy gap.

Set a retirement goal

At the beginning of every year, we set ourselves a few goals for the year and these may range from something that gets your adrenaline rushing like bungee-jumping off a cliff to something that is relaxing to the mind, body and soul like sitting at a beach and reading 3 books.

There is a rule of thumb that says if you want to succeed, you need to set goals. Setting goals gives you the focus and direction to succeed. This rule of thumb is applicable to everyone and for any purpose. Imagine trying to open-up a business and you have no goal set. You will not be sure on whether having profits of a few thousands or a few millions is successful.

There is merit in setting a goal. The goal should be designed to be SMART i.e. Specific, Measurable, Attainable, Relevant and Time bound.

For a recently graduated 25-year-old like me, who also started working, thinking about retirement is nowhere near my list of accomplishments. But subconsciously I have already set a retirement goal. This is to lie down on a beach bed in my beach house sipping a martini with my wife next to me as we listen to the tides hit the shore.

To ensure that I meet this goal, I need to save for my retirement so that I can afford to buy that martini and the beach house.

As you think of your retirement goal, think of how you are going to achieve it and the answer will be start saving or investing. Here’s a simple tip on saving for retirement if you are in your mid-20s, save between 11% and 15% of the salary you earn. The magic number on how much to save for a mid-20 year old lies anywhere between 11% and 15% of your salary to get you to your sufficient pension at retirement.

It’s always better to consult a financial adviser/pension expert to get more personalized recommendations, but if you are not able to or don’t want to then ensure you are setting aside at least 10%.

By Arth Shah –Lead, Research and Development – Zamara Kenya