Private Sector Braces to Manage Pension Funds

Published on 19th December 2006

Pension fund managers want the government to leave pension funds management to the private sector, as part of the wider recommendations to the proposed amendment of the Pension Act. They also want the age at which one can access pension raised by five years to 60. They want a scenario whereby civil servants will also contribute to a pension fund from their salaries instead of the government being the only contributor. The result will be a funded pension scheme that will be managed by a private fund manager.

"This means that the government will not need to withdraw money from the Consolidated Fund to pay off the pension. Withdrawing from this fund always means a bigger burden for the tax payer," says Mr. Evans Osano of the AIG investment group. The managers want a policy shift to increase the industry's penetration rate within the informal and formal sectors.

Pension's penetration in Kenya stands at 15 per cent of the average 7 million formal employed Kenyans. The penetration rate within the informal sector is negligible, according to the National Social Security Fund (NSSF) statistics. Pension managers say that education on the gains from pension schemes is the most viable way of ensuring that more Kenyans get into the pension bracket. 

Mr. Raymond Orori of Mwara Investment, a Mombasa-based pension fund trustee says that suggestions that tax incentives be extended to Kenyans to motivate them pay pension premiums will not work because a significant number of those in informal sector do not pay taxes in the first place. He suggests that to tap into the informal sector, the government could advance loans to small business on the condition that they pay pension with some of the profits accrued from their business.

Ms Priscilla Macharia, a communications officer of the Retirements Benefit Authority (RBA) says that the authority's immediate goal is to increase the pension penetration rate by 5 per cent every year through a massive public education. The authority in consultation with the other stakeholders is advising the relevant minister on the way forward regarding the amendment of the Pension Act.

The Act in use today was formulated by the colonial government way back in 1902 and was adopted into the constitution after independence. The Act has been blamed for red tape bureaucracy that makes it hard for retirees to quickly access their benefits after leaving service, among other shortcomings. The Public Service minister; Mr Moses Akaranga recently promised that the government is keen to review the Act.

NSSF has already started a public campaign that targets the informal sector where pension premium offering starts at Ksh100 per month. Mr. Caleb Atemi, NSSF's public relations officer said the fund's priority is to see that the NSSF Bill that is before the parliament becomes law. The Bill will turn the institution from a provident fund into a pension scheme, essentially empower it to pay a monthly sum to pensioners instead of the
current lump-sum.

NSSF suggests that the age at which a pensioner can start accessing the funds should remain at the current 55 or be increased to 60 years. “This is for the benefit of Kenyans," says Atemi.

According to medical evidence, if a person passes a 50 year mark without any health complications, such a person is guaranteed to live at least the next 20 years. Pension fund therefore becomes important to enable such a person lead a better retirement life. 

Treasury Permanent Secretary Mr. Joseph Kinyua said the policy to preserve retirement funds until retirement age has already had a positive impact. In the first half of 2006, this pension kitty grew by Ksh.18 billion. 

"Even though live expectancy has dropped in Kenya, life expectancy at retirement continues to increase. Retirement for many will last for more than 20 years hence the increasing need for the adequate provision of retirement during the working age," says Kinyua. He says that reforms within the Ksh.200 billion pension industry should aim at enabling pensioners to achieve maximum possible level of benefits like higher monthly payments and promises more tax incentives to pooled funds like pension to increase new products aimed at increasing coverage. 

The Association of Retirement Benefit Schemes recommends that the minimum tax exempt monthly contribution to be increased from the current Ksh.20,000 and the minimum tax exempt lump sum payment to be increased from the current Ksh.400,000. Pension managers also want the new law to regulate administrators of the retirement benefit schemes.

Joseph Rono of Kingland Court, a company offering administration services says that the debate towards that end has started by the figure of Ksh.10 million being proposed as minimum capital for prospective administrators could wipe out small companies. The administrators propose Ksh.1 million and an additional professional indemnity cover. They are not at present required to have any minimum capital base and lack of regulation is creating concerns that incompetence management could lead to loss of pensioners' funds.

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