Plans by East African governments to tap into the pensions sector to fund infrastructure projects have come unstuck because of sluggish reforms in the sector.
The World Bank is therefore calling on the governments to change their laws to allow pension funds more flexibility in investment and to scrap pre-retirement access to savings by workers.
“The private sector could be incentivised to participate in the provision of infrastructural development through pension industry reforms to create greater flexibility in their investment process, limit the ability of members to withdraw and reduce trustee rotation,” said World Bank’s Kenya Economic Update.
In response, retirement benefits bodies in Kenya and Uganda are seeking to curtail early withdrawals and ensure compulsory commuting of benefits when contributors change jobs. This they hope will help minimise old-age poverty while releasing the funds for government projects.
“We are developing a national pensions policy whose focus is on value addition for pension products to reduce attraction of withdrawals,” said Nzomo Mutuku acting chief executive of Kenya’s Retirement Benefits Authority (RBA).
In Uganda, the liberalisation Bill that has been in the works for five years seeks to achieve a similar goal but through legislative changes.
The Bill proposes breaking up the National Social Security Fund (NSSF)’s monopoly over collection of mandatory workers’ savings in the private sector, provides for portability among pension schemes (ability to transfer an employee’s savings from one scheme to another in Uganda and within the EAC) and also gives guidelines on sound corporate governance standards to be adopted by local pension schemes.
Passage of the Bill is seen as key to addressing the low penetration of retirement savings. Presently employees who have worked for more than seven years are allowed to receive a sizeable chunk of their savings.
Kenya’s pensions sector has been pushing for changes especially on tax incentives to attract more contributors but has registered little success.
As at 2015 Kenya’s pension savings stood at Ksh814 billion ($8.14 billion) of which 30 per cent, Ksh242 billion ($2.42 billion), was invested in government securities.
In Uganda the investment in government securities is higher at 68.7 per cent of total savings which stood at Ush7.6 trillion ($2.12 billion).
Most of the investment is for less than five years as fund managers fear being faced by liquidity challenges in case of withdrawals.
Kenya allows up to 75 per cent early withdrawal of pension savings when workers become unemployed before retirement.
Most Kenyans have, however, turned to withdrawing the funds when changing jobs instead of shifting them to the new employer’s scheme. This is also the common practice in Uganda where employees can withdraw all their funds on change of employment.
The RBA is seeking to curb early withdrawals by making the returns on delayed pensions more attractive rather than relying on legal changes.
The RBA has previously complained that early withdrawals make it difficult for fund managers to invest in high-yielding long-term investments, such as infrastructure bonds.
Portability of pension savings
Uganda’s Liberalisation Bill seeks a similar goal by ensuring portability of pension savings from one employer to the next.
Early withdrawals also result in old age poverty as some of those who take the cash do not invest it in productive ventures.
Some of the value additions that have been floated in Kenya include use of the savings as security for construction loans.
Most retirees use pension savings to build homes leaving them with little cash for upkeep.
Coverage of pension industry has remained low in the region with Uganda at 10 per cent and Kenya, 15 per cent. Inclusion of more contributors would increase the total country savings and give the respective government financing options for their projects.
In Uganda only employers with more than five employees are mandated to contribute to the NSSF limiting the pension coverage. The regulation was to be scrapped by the Liberalisation Bill.
Mandatory tax-free contributions
The Bill also contains tax incentives, which Kenya also hopes to ride on to grow membership. The tax model proposed in the Liberalisation Bill will enable mandatory tax-free contributions to a pension scheme and up to 30 per cent of voluntary contributions in occupational schemes.
Kenya’s Association of Retirement Benefit Schemes has asked for pension contributions to be exempted from tax as is the case in countries with a high savings culture such as Japan.
In a letter to the National Treasury, the association had asked that if the tax exemption was not agreeable then the ministry should recognise the impact of inflation on the industry’s saving culture.
The Treasury has also been asked to review the age of pensioners who are tax exempt from the current 65 years given that most people now retire at 55. Pension payments to people over the age of 65 is tax-exempt.
Not so for those who exit early.