Financial planning is not for when you retire

Understand the inevitability of retirement, the importance of retirement planning and what power of choice you have as an investor, and make a sound decision that ensures you enjoy the sunset years of your life.


The pensions industry refers to the economic sector comprising of retirement benefits schemes, the assets these schemes control and relevant regulations affecting the schemes’ operations. 

The industry has witnessed significant growth with the number of registered members increasing from 0.7m and assets under management worth Sh0.42tn in 2010 to 3m members and assets worth Sh1.32tn as of December 2019, according to the Kenya National Bureau of Statistics (KNBS) FinAccess Report 2019.

The Retirement Benefits Authority (RBA) is the governing body established under the Retirement Benefits Act 1997 and is tasked with regulating and supervising the establishment, management and promotion of retirement benefits schemes. The Authority’s mandate also includes protecting the interest of members and sponsors of retirement benefits schemes; promoting the development of the retirement benefits sector; implementing all government policies relating to the sector and; advising the Cabinet Secretary, National Treasury on the national policy to be followed with regard to the retirement benefits industry.

The RBA’s mandate covers all private and government parastatal pension schemes. The pensions department under the Ministry of National Treasury governs the civil service pension scheme and the Teachers Service Commission pension scheme.

Despite the aforementioned development and growth in the pensions sector, about 80% of the working population in Kenya are not members of any pension scheme. 


Retirement savings ensure that your income stream does not stop even when you stop working. After retirement, many experience a decline in the amount and stability of income relative to their productive years. The savings ensure that this decline is manageable or is non-existent and enables you to be able to live the lifestyle you desire even after retirement.

Savings in a pension scheme earns compounded interest which means that your money grows faster as even the interest earned is reinvested and grows. Additionally, retirement schemes are tax-exempt meaning that the schemes have more to reinvest.

Pension contributions enjoy a monthly tax relief of up to Sh20, 000 or 30% of your salary whichever is less – this lessens the total PAYE deducted from your earnings.

By providing an income in retirement, pension schemes ensure that members do not experience old age poverty where they have to rely on their family, relatives and friends for survival.

Lastly, savings in a pension scheme can help you achieve your dream of owning a home. This can be done through a mortgage or a direct residential house purchase using your pension savings. A member may assign up to 60% of their pension benefits or the market value of the property, whichever is less, to provide a mortgage guarantee. The guarantee may enable the member to acquire immovable property on which a house has been erected, erect a house, add, or carry out repairs to a house, secure financing or waiver, as the case may be, for deposits, stamp duty, valuation fees and legal fees and any other transaction costs required. 

On the other hand, a pension scheme member may utilize up to 40% of their benefits to purchase a residential house directly subject to a maximum allowable amount of Sh7m and the amount they use should not exceed the buying price of the house. 

A retirement benefits scheme is a savings avenue that allows contributing individuals to make regular contributions during their productive years into the scheme and thereafter get income from the scheme upon retirement.

Sources:  (a). Segregated Schemes Performances – ACTSERV and Zamara Z-CASS Surveys

In Kenya, the benefits scheme has three pillars. Zero pillar refers to the state-funded pension for citizens over the age of 65 and provides a basic income. It is managed by the Ministry in charge of social protection. Through the Older Persons Cash Transfer program, the amount paid is Sh2, 000 per household per month delivered every two months through appointed payment agent to poor and vulnerable persons over the age of 65 years. As at the end of the financial year 2015/2016, the program had covered 203,111 households.

First pillar is mandatory to all workers and contribution is by both employer and employee. It targets workers in both the formal and informal sectors. It is here that the National Social Security Fund (NSSF) comes in.

Then there is the second pillar, categorized by the voluntary nature of all schemes that fall under it. It includes both individual and employer-based pension schemes. 

Other than the NSSF, the rest of the pension schemes in the country fall under the second pillar. It is important that before joining any pension scheme you learn how they operate so that you make a more informed decision. The schemes here can be categorized in four different ways depending on contributions, mode of payment at retirement, type of membership and mode of investment.


Under this category, there are two types of pension schemes; defined contributions schemes and defined benefits schemes. These can be differentiated as below:

Changes in demographics, volatile interest rates, lower expected returns and the greater mobility in today’s workforce has in some way made DC schemes more attractive to employers and employees.

Mode of payment at retirement

The aim of a retirement benefits scheme is to provide an income in retirement; however, upon retiring, not all schemes are the same. 

On one hand, there are pension schemes where at retirement, a member of a pension scheme may access up to a third of their contributions plus accrued interest as a lump sum. The remainder is used to purchase an annuity (pension) that pays a periodic income to the pensioner in their retirement years, usually, monthly.

On the other hand, there are provident funds. At retirement, a member of a provident fund receives their contributions plus accrued interest as a lump sum. 

It is key to also note the existence of Income drawdown funds which provide individuals and members of retirement benefits schemes with an option to access their benefits as a regular income through an investment fund upon retirement rather than taking up an annuity or a lump sum. In an income drawdown a retiree or any scheme member over the age of 50 years, may transfer their benefits from their current scheme to the income drawdown fund. The benefits are locked in the fund for a minimum period of 10 years while giving the member the ability to withdraw up to a maximum of 15% per annum of their fund balance every year. The remaining balance in the fund is invested and grows in the period of the 10 years.

Type of membership

Under this categorization, we have three main types of pension schemes; Occupational Retirement Benefits Schemes that are set up by an employer where only members of staff of the organization are eligible to join; Umbrella Retirement Benefits Schemes that pool the retirement contributions of multiple employers on behalf of their employees thereby reducing the average cost per member and enhancing the overall returns of both the employer and the employees’ contributions and; Individual/Personal Retirement Benefits Schemes where individuals contribute directly into the scheme towards saving for their retirement. The contributions may be flexible to accommodate an individual’s financial circumstances.

Mode of investment and governance

Under categorization by mode of investment, pension schemes may be said to be either segregated or guaranteed. In Segregated Funds, members’ contributions are invested directly by the Trustees via an appointed Fund Manager. The Trustees establish an appropriate Investment Policy, which is then implemented by the Fund Manager. The scheme directly holds the investments and the returns are fully accrued to the scheme for the benefit of members.

Guaranteed Funds is a scheme offered by insurance companies where the members’ contributions are pooled together. The insurance company guarantees a minimum rate of return that should not exceed 4% p.a. by law and should the actual return surpass the minimum guaranteed rate, the insurance company tops up the minimum rate with a bonus rate of return.

Guaranteed Schemes – Cytonn Research with data collected from 18 Approved Issuers since 2001

Historical asset allocation

Every retirement benefits scheme must formulate an Investments Policy Statement (IPS), which guides how investments are to be done. The IPS outlines the process for a retirement benefits schemes’ investment-related decision making as well as the investment limits per each asset class and even the securities that the fund can invest in. The IPS should however not conflict with the limits dictated by the RBA Investment Guidelines. The IPS of the various schemes varies as the characteristics of members differ. For example, a pension scheme with relatively many members nearing the retirement age will not invest too much in long-term and illiquid asset classes such as immovable property, and the scheme’s IPS will reflect this.

The chart below indicates how the industry assets have been invested over time:

It is good to note that the bulk of the investments are in Government securities, Equities and immovable properties in that order. The schemes are yet to take advantage of the new asset classes like Real Estate Investment Trusts (REITs) and Derivatives.

Historical performances

Some of the different factors that determine the performance of pension schemes include asset allocation – the proportion of the assets that are invested in a certain asset class; security selection – the ability to select the best performing security within a specific asset class; size of scheme and; risk appetite.

Performance of retirement schemes over the last seven years, focusing on the performances of guaranteed and segregated funds

From the above chart, it is evident that segregated funds have outperformed guaranteed funds – with the average performance of the guaranteed funds over the last seven years at 9.7% p.a. whereas segregated schemes have enjoyed a higher return of 12.2% p.a.

It is important to note that on average members and pension trustees should aim to gain returns that are above inflation at all times. Also, the aim for fund managers should be to perform better than the various benchmarks set out in the Investment Policy Statements.

Access to savings

Withdrawing from a pension scheme is highly discouraged as it foils the retirement plan one has and may end up reducing their income replacement ratio at retirement. The target is that one should have an income replacement ratio of about 75% if they are to lead the same quality of life they had before retirement. However, it remains an allowable provision, should the need arise and a member has no alternative source of fund. There are two ways one can access their pension benefits; early leaving or retirement.

For a member that opt to leave a scheme early before attaining the retirement age, they have the following four options; transfer their savings to another registered retirement benefits scheme; leave their savings in the scheme as a deferred member’s account which the member may access on or after the age of fifty; withdraw from the scheme in lump sum an amount not exceeding their portion of savings plus 50% of the employer’s portion with the remaining 50% retained in the scheme until the member retires, opts to transfer the benefits to another registered retirement benefits scheme or emigrates to another country with no present intentions of returning and, lastly; a member who has emigrated from Kenya and has no intentions of returning to reside in Kenya can access all of their savings including the whole of the employer portion.

Covid-19 pandemic

This has had a significant impact on capital and financial markets performances. Pension schemes have also been affected as they invest their members’ savings in the same economic environment. Some of the key impacts that the pandemic has had on retirement schemes include a decrease in the value of assets in retirement savings accounts from falling financial markets; an increase in liabilities for guaranteed and defined benefits schemes; a lower capability to contribute to retirement savings plans by individuals, and by both employers and employees; operational disruptions as a result of working remotely and; low to negative returns, which impacts the overall retirement income adequacy.

Members should however stick to their pension savings plan and keep contributing as long as they are in a position to. If you do not have a pension plan, you better start one and make contributions.

Some pension scheme members may want to withdraw their pension because they are afraid their money is losing value. However, by doing this, the member helps in crystallizing the decline in value. To prevent this they should delay taking their pension if they can. It is key for members to have a long-term view and to allow the income planning and generation course to run its course. Dips in the market are a common occurrence and the market will eventually recover.

What to consider before joining a pension scheme

Starting early also means that you will be able to take full advantage of the compounded growth of your savings and have a larger retirement pot when you retire.

There are several key factors to consider including returns – the return rate of your pension provider should be high enough to ensure a sizeable growth for pension savings. Basically, choose where you get the highest returns.

Affordability and flexibility are also key. Choose a plan that you can contribute to without too much strain.

Choose a plan you understand how your money will be handled, the access options and how it will be paid out to you at retirement. Your scheme’s features should match your goals. 

Retirement planning is a long-term affair and it is best you have a pension provider that you can trust. Good governance structures and management experience are two of many aspects you can use to evaluate your pension plan provider.

Lastly, find out what the other benefits that come with the fund are, such as insurance covers and purpose to take advantage of the same.

People’s behavior toward retirement planning is intrinsically influenced by their attitude, knowledge, and information. By understanding the inevitability of retirement, the importance of retirement planning and what power of choice you have as an investor, you can be able to make a sound decision that ensures you enjoy the sunset years of your life. 

From a report by Cytonn Investment

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