Crisis looms in future pension as recession strangles retirement savings

Across the economy, employers have suspended a total of Sh2.1b in contributions to pension schemes since March as companies took advantage of the authorized payment holiday to maintain their cash flows


State pensioner National Social Security Fund (NSSF), which is smarting from a series of historic financial scandals, faces a dicey future as the COVID-19 pandemic pulls millions of Kenyans out of income, denying them a chance to save for their retirement.

Over one million Kenyans have reportedly been laid off, suspended from work or left with no gainful employment as the healthcare crisis snowballs into one of the worst economic downturns since independence.

The pandemic has hit so hard that data by the Kenya National Bureau of Statistics shows that at least 30.5% of Kenyan households are for example unable to pay rent on agreed dates due to tough economic times.

The report also showed that at least 43.2% of the active labour force is not contributing to economic activities due to the coronavirus pandemic.

Late August, the Retirement Benefits Authority (RBA) warned the pandemic had significantly weighed down the pension sector’s long-term assets and cash deposits that stand at Sh1.3tn. NSSF is one of the biggest players in the sector.

Nzomo Mutuku, the RBA chief executive officer said late August that across the economy, employers have suspended a total of Sh2.1b in contributions to pension schemes since March as companies took advantage of the authorized payment holiday to maintain their cash flows.

The agency in April announced temporary relief measures that allowed cash-strapped companies to apply for discontinuation of employer-retirement contributions to pension schemes until the Coronavirus crisis thaws.

“The retirement benefit business has been adversely affected. Employers have taken a holiday from payment while members have withdrawn money provided by the law,” Mr Mutuku said.

Economic pundits said the corporate actions highlight the substantial hit which workers are facing due to layoffs and slowed economic activity. Pension industry experts have warned that if the crisis worsens into next year, the industry will record massive withdrawal from pension schemes as members seek to conserve cash to meet their basic needs.

But it is not a Kenyan problem.  A June 2020 report by the Organisation for Economic Co-operation and Development (OECD), a global economic think-tank said that the outbreak of the COVID19 pandemic, the associated lockdowns and the related economic downturn are impacting retirement savings, retirement savings schemes, providers, regulators and supervisors, potentially leading to future lower incomes in retirement and important dysfunctions in the market.

The report warns that globally; the impact will be a decrease in the value of assets in retirement savings accounts from falling financial markets and an increase in liabilities from falling interest rates in retirement savings arrangements with retirement income commitments.

“There is likely to be a lower capability to contribute to retirement savings plans by individuals, as they see their wages reduced or lose their jobs, and by employers suffering financial distress,” said the report. “A reduction in savings and compound interest earned as a result of measures intended to provide relief in the short-term that can have a large negative impact in the long-term, especially on retirement income adequacy (e.g. contribution holidays, early access to retirement savings)” added the report.

Industry experts said during such a downturn, there is a possibility of workers and other savers raiding their pension pots to find money for survival.

 “The Covid-19 crisis is exposing the deep cracks in the social fabric of our country and exacerbating the sharp divide between the haves and the have-nots in Kenya. Although employers, and hence salaried workers have been impacted by the pandemic, the extent and scale of the stress this has caused our 15 million non-salaried workers has been disproportionately larger,” said Sundeep Raichura, Group CEO, Zamara Group.

“Informal sector workers, who form nearly 85%of our workforce, are not eligible for a pension or any other social security safety net. If their current behaviour and attitude towards savings remains unchanged, Kenya will witness an exponentially larger and more sustained social and fiscal crisis in the near future – once our informal workers are forced to permanently drop out of the workforce in their old age. At that point, unless they have saved enough for at least 20 years, they will face a long and terribly harsh retirement. If we can’t afford the fiscal cost of supporting them for even a few weeks today, we certainly won’t be able to afford to pay them a tax-funded social pension over two decades,” he added.

And this is where things get worse for NSSF.  Contributions have not been growing well enough in the recent past. NSSF said its contributions receivable increased by 5% from Sh13.6b in 2017 to Sh14.04b in 2018. Comparatively, benefits paid out rose to Sh3.78b in 2017/18 compared to Sh3.661b the previous financial year. The balance sheet increased in size to Sh224b at the close of financial year ended June 2018. This is compared to Sh198.5b the previous period. Its developed property investment portfolio also grew to Sh21.8b in 2018 compared to Sh20.8b the previous year. As a result, the fund had a net surplus of Sh25.76b, up 7.8% from Sh23.89b in the 2017.

The Fund’s investment is spread across various sectors of the economy. Ordinarily, an objective evaluation is done on fund managers on a regular basis to ensure quality investment. The activities of the fund managers are monitored by the Board of Trustees through the management, custodians and the Actuary.

As per the 2018 report, the current investment mix is made up of 43% in Government securities, 32% stocks in the Nairobi Securities Exchange (NSE), 3% in deposits and 22% in other investment options.

The Central Bank of Kenya (CBK) May 2020 data shows that pension funds including NSSF now account for 29.46% of government domestic debt, which at the end of May stood at Sh3.155tn. This translates to holdings worth Sh929.7b for the pension funds.

At the beginning of the year, they held Sh837.9b worth of debt, equivalent to 28.6% of the total of Sh2.935 trillion.

While NSSF has been posting a surplus, the Office of the Auditor General recently raised queries over the operations of the fund and its financial sustainability.

Among other things, the auditor in a report tabled in Parliament said the fund was sagging under the heavy weight of unremitted members’ contributions, contributions in transit, long outstanding payments to creditors, unreconciled cash and bank balances and illegal transfer of NSSF land.

But not everything has been negative for NSSF. In June, the National Treasury had proposed a tax of up to 25% on the monthly payment of pensioners and NSSF’s annual earnings. The tax, contained in the Finance Bill 2020, which Parliament rejected, would have lowered the interest that the fund pays on pension savings, effectively hurting retirees.

Taxing NSSF earnings would have seen the Fund remit nearly Sh.3.5 billion to the Treasury this year.

Experts have over time queried the future sustainability of NSSF model, saying it risks not being able to meet its financial obligations, especially in the event of a long-term crisis.

“In terms of ability to provide adequate old-age income, the NSSF which is a mandatory scheme performs very poorly. The lump sums it pays to retiring workers can hardly replace pre-retirement income. Why is this so? Low ceilings on monthly contributions is a big factor,” said Jaindi Kisero, a renowned economic journalist in a June 19 commentary in the Business Daily. 

“The high cost of administration of the fund is also a major contributing factor. The dismally low returns the fund earns on its investment portfolio causes a situation whereby very little is apportioned to members’ accounts. What a worker gets from the NSSF as retirement income is a lump sum that can hardly last 12 months if one is to retain their pre-retirement standard of living. Clearly, the majority of Kenyan retirees are doomed to poverty. That the government would want to saddle them with more taxes is indeed baffling,” he added.

NSSF is facing scrutiny from Parliament over a Sh243 million claim by a Chinese contractor who was building the incomplete Hazina Trade Centre in Nairobi. Early this year, the Public Investments Committee (PIC) said China Jiangxi International had slapped the NSSF with the compensation claim for delayed payments to the firm for the stalled construction of the city centre office block, exposing the fund to a loss, should the contractor claim interest on delayed payments.

In 2018, an audit report by E&Y, an audit firm had revealed that expected returns from the NSSF’s Sh6.7b Hazina Towers and Sh1.6b Milimani executive apartments were hiked during feasibility studies to make the projects appear viable. Cotu, the workers union had contracted the audit firm in 2016.

The report says China Jiangxi, which was contracted for the Hazina Towers project, was allowed to submit two bids during the procurement process.

The fund has also been cited by Parliament over unremitted member contributions amounting to Sh5.6b and its contributions balance of Sh14b.

In 2018, the then Auditor-General Edward Ouko was pushing for NSSF to kick out four of the five fund managers it has contracted to oversee retirees’ savings for making risky investment decisions that led to loss of nearly Sh1 billion. Mr Ouko, in the NSSF’s financial statement for the year ended June 2017 published Thursday, wants GenAfrica, Britam, Old Mutual and Stanlib locked out for exposing workers to possible loss of Sh969.72m in collapsed Imperial and Chase banks, media reports show. The four fund managers have been accused of recklessly investing a cumulative Sh996.4m – comprised of Sh666.90m in corporate bonds and Sh329.5m in fixed deposits – in the two lenders. 

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