Kenya pension sector growth on an upward trend

Kenya’s pension assets have grown to over Kshs. 1.7 trillion as at December 2023 from below Ksh100 billion in 2000 with Kenya pension coverage hitting 26 per cent of the labour force from a paltry 12 per cent in 2000.

Also read: RBA CEO Charles Machira on Pension Funds Investment

The sector is regulated by the Retirement Benefits Authority (RBA) whose mission is to promote saving for retirement by supervising and supporting the development of the retirement benefits sector.

Since its inception in 2000, RBA has continued to play a key role in the retirement benefits sector, and has realized several achievements:

A key achievement includes the roll out of the Public Service Superannuation Scheme beginning January 2021. This scheme is meant to ease the pension burden on the exchequer and eradicate suffering of retirees due to delayed retirement benefits pay-outs.

Kenya has also developed a National Retirement Benefits Policy that shall be instrumental in strengthening the legal and regulatory framework to achieve a comprehensive pension coverage across the formal and informal sectors and better protect the interests of beneficiaries and rights of pension contributors.

The ‘Allianz Global Pension Report 2023’ placed Kenya at position 60 globally and third in Africa (Behind Egypt and South Africa) among countries with progressive pension systems in terms of sustainability and adequacy, a testament of the country’s strides towards an enhanced social security system.

See full report HERE:

The ranking is based on an ‘Allianz Pension Index (API)’ based on three sub-indices and takes into account 40 parameters that are rated on a scale of 1 to 7, with 1 being the best grade. The 2023 edition of the Allianz Pension Index covers 75 countries and is based on the latest available data as of March 2023.

The first sub-index of the API assesses the pace of demographic change,

public indebtedness and general living standards; it therefore reflects the

structural preconditions that any pension reform has to take into account. The second sub-index is the sustainability index, which assesses how well a pension system is prepared to cushion the impact of demographic change. The third sub-index of the API rates the adequacy of pension systems, questioning whether they provide an adequate living standard in old age.

Combining all three sub-indices, the overall results range from 2.2 in Denmark to 4.7 in Sri Lanka with Kenya scoring 4.2. The unweighted average score for all 75 countries is 3.6.

According to the report, in most countries, including Kenya, the coverage of the pension system is however still very low and limited access to financial services hampers the build-up of sufficient private old-age savings to cushion the lack of the public pension pillar.

However, the ‘Allianz Global Pension Report 2023′ shows Kenya scores poorly at position one globally where labor income is often the main source of income in old age (65 years and above). Kenya leads in this ranking, with close to 70%of its male population and 64% of the female population in this age group still active on the labor market.  Kenya is followed by Nigeria, where this holds true for 63% and 50% of workers in these age groups, respectively.  (See fig 1 below)

This means more efforts are clearly required to adapt labor markets to the needs of an aging workforce population hence the ASSA collaboration will remain key to make this a reality.

The Allianz Global report indicates that the protests following the increase of the retirement age in France and Uruguay were fueled by older workers’ fears of not being able to find decent employment as they age.

“…in many countries, pension reforms have to start with labor-market reforms: Without increasing the share of people in the formal labor market in emerging economies and fostering the integration of older workers in the labor market in industrialized economies, even well-intended pension reforms will yield only meagre results…” reads the report in part.

This calls for continued collaboration to enhance pension coverage and assure workers of social security in retirement.

Kenya scores poorly on pension coverage and adequacy of Retirement Benefits

According to ILO standards, the benefit ratio of a first- pillar pension should range between 40% and 60% of an average wage since public pensions are often the only source of income in old age. The latest available OECD statistics indicate that Brazil has one of the most generous pension systems worldwide, with a benefit ratio of 89%. Bahrain, Denmark, the UAE, the Philippines, Luxembourg, Argentina, Qatar, Portugal, Colombia, Italy and Austria complete the list, with the gross benefit level of a male employee who earned 100% of the average wage ranging between 70% and 80%. The “poorest” pensioners can still be found in Kenya, Lebanon and South Africa. In these countries, the gross benefit level is merely 15%. Germany, the US and Japan can also be found in the bottom third of this list, with benefit levels ranging between 30% and just above 40%

Sources: OECD, National social security administrations, ministries of social affairs, EU Commission, OECD and Axco.

Many private sector employees and retirees in emerging markets still lack adequate pension coverage

Efforts to increase coverage in emerging markets are often hampered by

the high share of informal labor in sectors dominated by small companies that are not covered by the social insurance system or where wages are often even below the contribution assessment limit. As a result, at the time of entering retirement, many of these workers have not collected the necessary number of contribution years that are required to receive a lifelong pension and receive instead – in the best case – a lump-sum payment that does not provide a decent living standard in old age. In contrast, the coverage in most industrialized countries is 100% or close to it.