The retirement benefits industry in Kenya is composed of the civil service scheme, the National Social Security Fund (NSSF), occupational schemes and the individual pension schemes. The main features of the types of schemes in the country are outlined in the table below:-

The coverage of the pension schemes is currently estimated at less than 15% of the total labour force. The distribution of membership in the schemes as a proportion of the total membership in retirement benefits schemes in the country is shown in the table below: The NSSF has the highest proportion of membership at 67% with estimated membership of 800,000 followed by the civil service pension scheme at 22%. The occupational retirement benefits schemes and individual retirement benefits schemes, which are currently about 1350, account for about 11% of total scheme membership in the country.

Prior to 1997, the retirement benefits industry was largely unregulated. The only regulations governing the sector was those inscribed in the Income Tax Act and Trust Laws and these tended to be broad regulations which did not encompass developmental objectives.

Some of the problems that the pension industry faced before a clear regulatory framework were put in place and which led to the enactment of the Retirement Benefits Act in 1997 include:
• Mismanagement of schemes’ funds.
• Schemes were not adequately funded.
• Arbitrary investment of funds without independent professional advice.
• Records and books were not well kept.

In the absence of a regulatory framework the industry was characterized by lack of protection of the interests of members and dominance of sponsors (employers) in scheme affairs. In addition, many schemes were run through insurance companies that tended to operate in a non-transparent manner. As a result investment decisions were in many cases made in the best interest of vested parties and not in the interest of members or of the economy as a whole.

The Retirement
Benefits Act
The Retirement Benefit Act was enacted to provide a regulatory framework for the retirement benefits industry. This regulatory framework was needed to streamline the industry and gain the required confidence from stakeholders and employees to enable them save more for retirement and contribute towards the national effort of raising the domestic savings rate.

The Act created the Retirement Benefits Authority to oversee the industry’s management and development in a prudent and appropriate manner. The Authority’s operations are vested in an independent Board of Directors with a majority private sector representation and the autonomy to run the industry with-out undue state interference.

Some of the key requirements introduced in the Kenyan pension reforms that are currently being enforced by the Retirement Benefits Authority include the following:

• Retirement benefits schemes are required to be adequately funded and have separate assets independent of the sponsor.
• Trustees are responsible for the running of the scheme addairs and are held responsible for any action taken.
• All schemes are required by law to appoint an independent fund manager registered by the Retirement Benefits Authority to invest the scheme funds.
• It is now mandatory for schemes to appoint an independent custodian registered by the Retirement Benefits Authority to hold financial assets of the scheme and effect all transactions.
• Investment of scheme funds is supposed to be carried out as per investment guidelines which prescribe maximum proportions as to the proportion of the scheme funds that can be invested in any particular broad asset class.

Since the enactment of the Retirement Benefits Growth, the industry has experienced remarkable growth, with fund managers holding shs 120 billion in retirement benefit assets by September 2005 compared to shs 63 billion in September 2002.

Reason for Growth
in the Retirement Benefits Industry
Cases of abuse of scheme assets by trustees or other parties have declined markedly, if not ceased completely, in the recent past as a result of the oversight role which the Authority play, and the “whistle-blowing” role of the various statutory service providers. There is also an increased awareness and direct participation of Members in the affairs of the scheme.

The growth in the retirement benefits industry is attributed to:

• Increased confidence in saving for retirement due to the oversight obligation of the Retirement Benefits Authority;
• Increased member aware-ness through mandatory annual statements, mandatory annual general meetings and public education;
• Increased member participation as schemes required to have 1/3 (in defined benefits scheme) or fifty percent (in defined contribution schemes) member nominated trustees in their Boards;
• Improved investment port-folio returns and diversification as a result of the use of independent investment managers;
• Security of scheme assets following the separation of asset custody from the sponsor to independent custodians; and
• Greater transparency and accountability through annual audited financial statements and other statutory returns.

Recent Changes in Legislative framework
for Retirement Benefits Industry
In order to further protect the interest of the members of retirement benefits schemes and strengthen the development of the industry, the Minister for Finance, introduced a number of changes during the fiscal year 2005/06. These include:

• Members whose benefits are not paid within 90 days after they fall due will earn an interest on their benefits not less than the interest earnings declared by the scheme in the year the payment was due.
• The vesting period for employer contributions for employees in individual pension schemes has been harmonized with other occupational schemes at three years.
• In cases where a schemes provide for the purchase of annuity on retirement, members will have the opportunity to select their preferred annuity provider.
• Pensioners will be entitled to an annual pension increases as advised and determined by the scheme actuary.

However, the most important and far reaching change was the introduction of new rules aimed at preservation of retirement benefits. With effect from June 2005, the law was amended to provide that members of retirement benefits schemes who with-draw from a scheme before attaining retirement age would not be allowed to access the portion of retirement benefits accruing from employer contributions. This portion would be retained in the scheme and invested on behalf of the member and then paid out to the member on attainment of retirement age in accordance with the rules of the scheme.

Rationale for Preservation of Benefits
The objective of retirement benefits schemes is to enable the scheme members to accumulate adequate savings which can be drawn in retirement to enable them maintain fairly same standards of living when they retire from active working. Retirement benefits schemes are neat institutionalized tax incentive based vehicles through which members can save some proportion of their income to ensure they have adequate income after the paid employment periods of their lives are completed.

Much as the retirement benefits are a form of savings, in this case the longest term individual savings, they are not ordinary savings accounts for members to spend when financial obligation arises. The savings are founded on solid objectives which should be honoured and maintained. In a country with poor savings culture and financial myopia, it is important that retirement benefits be secured and preserved for survival during old age to avoid poverty during this time in life.

Preservation of retirement benefits means members’ accrued retirement benefits cannot be refunded upon leaving employment even though the benefits are vested in the member. Whereas vesting endows entitlement of benefits rights to the members, the rights to possess or receive the benefits are earned upon attaining the retirement age stipulated in the scheme rules and not any earlier. The preserved benefits are retained in the scheme and continue to be invested together with other members’ contributions in order to grow. Membership to the scheme is not undermined in any way. Owners of preserved benefits retain and are entitled to similar rights as other members. They can elect trustees, be appointed to serve as trustees, and attend to other scheme duties.

Preservation of benefits,
inter alia:

• Ensures that the original intent of the employer, to provide retirement benefits, is achieved even if members transfer the money to another scheme;
• Ensures retirement benefits remain protected from creditors;
• Ensures a larger benefit at retirement due to the power of compounding over a longer period;
• Reduces old age poverty and reduces cost pressures on government programs for old age income;
• Allows schemes to invest in longer term assets due to the reduced demand for liquidity; and,
• Enhances mobilization of long term domestic savings in the economy.

Findings from the three consecutive pensioners’ surveys administered by the Retirement Benefits Authority, show that many retirees who were members of retirement schemes, are not earning adequate benefits in retirement. This was despite these retirees having worked in the formal sector and been members of retirement schemes for over twenty to thirty years.

One of the primary causes of low benefits at retirement was frequent access to and consumption of saved retirement benefits during working life following change of employers. That is, whenever the workers changed jobs they would obtain their accumulated retirement savings and consume them instead of taking the wiser option of deferring the benefits or transferring them to their new employer’s scheme or to individual retirement schemes. The impact of constant access to benefits when changing jobs is that on retirement the worker only earns benefits from the last employer which may only reflect a few years of savings.

The 2004 Pensioners’ Survey carried out by the Retirement Benefits Authority reveals that:

• About 41 per cent of retirees changed jobs during working life but only 24.4 per cent of these transferred their benefits to the new employers’ scheme and 7.1 per cent deferred their benefits in the original scheme.
• The retirees had on average a 20 percent income replacement ratio from pensions which is much lower than the recommended target of 66 per cent despite the 21 years of saving for retirement.
• Changing jobs and opting to withdraw lump sum benefits has negative impact on eventual pension level one gets in retirement.

It was also observed that the primary cause of low pension income is the predominance of withdrawals of benefits at time of changing jobs as opposed to transfers or deferrals.

Preservation of benefits is thus aimed at addressing this problem, Many workers, however, strongly resisted the move of having their benefits locked-in on the grounds that they require them immediately for survival especially in cases of redundancies and retrenchments. Moreover, in the past workers had no confidence that they would eventually obtain their benefits if the benefits were locked in a scheme for several years. The issue of confidence has been adequately addressed by the establishment of a supervisory agency, the Retirement Benefits Authority therefore, members can be assured that their benefits are protected and will be invested in an optimal manner. In case of any difficulties they can lodge a formal complaint with the Authority, which will inter-cede on their behalf.

With regard to retrenchment, it is unfortunate that many employers have equated retirement benefits packages to terminal benefits particularly in the events of redundancies or retrenchments. As a result, retrenched employees rarely get appropriately and adequately compensated. In many cases employers claim to be paying redundancy payments when they are actually giving to the workers their retirement benefits which already belonged to the worker anyway. Upon retrenchment, employees are supposed to be paid their terminal benefits and golden hand shakes. The pressure and temptation of accessing accumulated retirement benefits will therefore be reduced if terminal dues are differentiated from retirement benefits and duly paid.

Members are still entitled to access their own contributions at the time of retirement and therefore still do receive some of the retirement benefit as a further cushion when they lose their job.