time, how inflation will impact savings,
and how holding a broad selection of
assets can be beneficial and diversify
risk means that many individuals are ill-
equipped to manage their own pension
savings. Some groups are particularly
vulnerable, including those with little or
no formal education, the young and those
who cannot afford or choose not to seek
financial advice.
While saving 10 -15% of an average
annual salary is required to support a
reasonable level of retirement income,
individual savings rates in most countries,
such as our own, are far lower. This is
presenting challenges where Defined
Benefit (DB) scheme structures (which
uses a formula that includes years
employed and salary history to calculate
fixed payouts) would traditionally
have provided a guaranteed pension
benefit. Such schemes are therefore no
longer sustainable and many have been
converted to a Defined Contribution
arrangement; where benefits computation
is straightforward, based on contributions
made and the income it earns over the
years.
Given the current long-term low-growth
environment, it is unrealistic for workers
to expect that saving around 5% of their
pay each year of their working life will
provide a retirement income comparable
to their level of income while working.
Unless drastic measures are taken to
address the low savings culture, a majority
of Kenyan workers will retire into abject
poverty - which will make it even more
difficult to implement the Economic
and social Rights pillar of the Kenya
Constitution 2010 which prescribes that
‘Every person has a right to social security
… and that The State shall provide
appropriate social security to persons who
are unable to support themselves and their
dependants.’ The goal of social protection
is not mere survival, but social inclusion
and preservation of human dignity.
Policies to promote saving for retirement
and old age should ideally use both tax
incentives and compulsion to promote
social protection. It is time for the
Government of Kenya to consider
implementing automatic enrolment to
boost retirement savings in the country.
The case for compulsory provision is based
on the need to overcome the blinkered
behavior of some workers – especially in
the middle income tier - and to protect
society from those who make inadequate
provision for their old age.
Evidence from countries that have
implemented
such
programmes
indicates that automatic enrolment
encourages people to save for retirement,
subconsciously. In Chile, for example, the
pension reform of 2008 made mandatory
the adhesion of independent workers in
order to close the coverage gap within
the voluntary pension system. In Hong
Kong, China, public and private-sector
employees and self-employed persons
aged between 18 and 65 must become
members of a retirement benefits scheme.
Where the workforce can be easily reached,
such as the gigantic public transport
sector, the Government should consider
a gradual approach that will phase-in
automatic enrolment programmes to
allow for employers/self-employed to
understand the implications for their
business and be prepared to make the
necessary arrangements to comply with
automatic enrolment duties.
For the hard to reach groups, automatic
enrolment using an efficient Information
Technology system will ensure all Kenyans
can be netted. Auto-enrolment into a
pension scheme and paying the advance
on contributions using mobile phone can
be the most effective and efficient way to
boost the coverage rate in the Kenya.
Contribution rates in pension scheme
could be applied automatically on every
airtime charged in mobile phone. The
mandatory SIM registration means that
every mobile phone number is linked to
a National Identification (ID) number of
the user. The ID could be linked to a social
security number; which everyone above
the age of 18 is expected to have.
With the assumption that 30% of the
country’s 40 million subscribers are people
who spend more than Kshs 1,000 of
airtime per month - charging 10% of this
amount as pension, and matching shilling
for every shilling contributed through
this mode, the Government could collect
a minimum of Ksh.