Is there a Pension Puzzle that needs our attention?

Posted on December 21, 2021

MONEY is a word that resonates well with you (unless you are living under a cave). SAVING is a word that your parents, teachers or relatives always (probably) talk to you about. PENSION, RETIREMENT is a word that you probably don’t take seriously (or you do, if you are ready to retire). Hi there, this is a 25-year-old millennial writing to you about pensions and retirement. Did you know (through a survey we have undertaken of the retirement benefits industry in Kenya): Around 20% of the employed population is covered by a retirement benefits scheme. This is equivalent to around a 3.2 million people in Kenya.  However, the vast majority of these simply participate in the NSSF to which a very low level of statutory contributions currently apply and too low to support an adequate retirement benefit.  There are around 20million people who are excluded entirely from any form of retirement benefit coverage. One may ask why we should care about these 20million people, it is because they have no means of living a dignified life after they stop working (Now this could easily be you or your parents). This may mean that poverty among the future elderly will soon emerge as the driver for global poverty and an increase in dependency on the working population and youth in the future. Assets in the retirement benefits industry have risen at an average rate of around 12% per year over the past 10 years to approximately K Shs 1.2 Trillion in December 2018. Most of the monies are put in traditional asset classes like fixed income assets (like government securities, fixed deposits, corporate bonds, etc) and equities. On average 95% of individuals who leave employment opt not to preserve their benefits and take the maximum available under the legislation as cash. This cash is fully utilized in less than 3 years (after leaving employment) on businesses that end up closing-down or on emergencies like children’s school fees or re-paying a loan. Retirees are making sub-optimal decisions and are able to replace only 34% (on average) of their earnings before retirement as a pension per month, when the should ideally replace 75%. It is quite clear that our retirement benefits industry is growing and has its challenges. When comparing our retirement benefits industry with those around the world, there are similar challenges. Even though global pension assets crossed the USD 40 Trillion mark last year, global coverage and adequacy of pensions even in the developed world is a challenge. In Bangladesh, only 9.2% of working age population are covered and in places like Nigeria, South Africa and Indonesia, the figures are 5.2%, 3.7% and 8% respectively. This is mostly due to illiteracy in areas to do with Finance and Retirement, which is a universal challenge. Around the world, the concept of saving for one’s retirement does not resonate with the person and this is especially true with the youth. In the USA, the American College of Financial Services conducted a survey for those nearing retirement and in retirement, on retirement income planning and it was revealed that 75% of the respondents failed a 38-question retirement planning quiz. A UK Adult Financial Literacy Capability Survey found that 22% of people in the UK are unable to read a bank statement and 40% do not understand the impact of inflation on the real value of money. The current situation of the retirement benefits industry in Kenya is puzzling. In every puzzle, it is expected that the pieces are put 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. We believe the pieces touch upon each of the following categories:
  • The adequacy challenge
  • The role of investment strategy
  • Improving at retirement decisions
  • Delivering value to members and effective member engagement
  • Rethinking pensions
In this series, my colleague and I will be taking you through each of these pieces in detail to outline the problem and how we can solve this pension puzzle. By Arth Shah –Lead, Research and Development – Zamara Kenya