Kenya’s Pension System Ranks Second in Africa, 55th Globally: Allianz

Why Saving for Retirement is a Non-negotiable

A past Retirement Benefits Authority Mashinani sensitization tour

Kenya’s Pension Systems are ranked the second-best in Africa and 55th globally according to the Allianz Global Pension Report 2020.

In the African rankings, Kenya comes second to South Africa which is ranked 41 globally while Morocco and Nigeria are Africa’s third and forthwith a global ranking of 60 and 64 respectively.

For Kenya, this was attributed to its young population with a total score of 4.3 out of 7 in the Allianz Pension Index (API).

“Not surprisingly, many emerging countries in Africa or Asia score rather well as the population is still young and public deficits and debts are rather low. On the other hand, many European countries such as Italy or Portugal are among the worst performers: old populations meet high debts,” the report by Allianz notes.

Sweden and Belgium had the highest scores of 2.9 globally and Denmark followed with a score of 3.0. 1.0 is the highest score a country could get.

In terms of starting conditions for the pension systems, Kenya was ranked fourth out of all the 70 analyzed countries.

However, Kenya is having a challenge of pension systems attributed to low coverage and benefit ratio of the public pension system which makes it rank lower at 61 in the sub-index.

“Furthermore, limited access to financial services hampers the build-up of sufficient private old-age savings to cushion the lack of the public pension pillar,” said Allianz’s Chief Economist Ludovic Subran.

Most countries are likely to have an increased age population in the near future and this could negatively affect the performance of the pension systems if elaborate measures are not put in place.

Kenya’s retirement population is projected to increase to 6.2 million in 2050 up from 1.3 million. 

The report notes that inclusivity in all age brackets would be key in improving the Pension Systems, for instance, it proposes the retirement age to be adjusted to the development of life expectancy to ensure that the ratio of working life to time spent in retirement remains at least stable in the long-run.

“Most important is the coverage of the pension system: all people in retirement age and at least 75 percent of the working-age population would be covered by the pension system.”

“In order to incentivize the postponement of retirement, early retirement deductions would be introduced, as well as incentives to remain in the labor market after reaching retirement age. The minimum contribution rate would be at least 15 years in order to make sure that people in working-age do not drop out from the formal labor market after a short period of time.”

COVID-19 demands pension policy urgency

The report says the coronavirus pandemic has now pushed up the need for pension reform several notches, said Holzhausen.

“COVID-19 is a game-changer. Before, pension reform complacency could at least partially be explained by benign economic and fiscal conditions. Those times are gone for good, thanks to the devastating effect of COVID-19 on public debt. Pension policy has acquired a new urgency.”

“In this context, the drastic measures taken to recover from the Covid-19 confinement shock could embolden policymakers to finally take more courageous steps when it comes to pension reform as well.”

On the other hand, Cytonn Investments says the changing nature of work upending traditional employment and the gig economy, part-time jobs, contracts and other diverse and fluid forms of employment is growing.  As a result, there is a need to rethink its entire framework.

“Most social protection systems are based on mandatory contributions and payroll (labour) taxes on formal wage employment but as the formal employment numbers continue to decline, the state of future social insurance requires more thought in terms of its framework and execution,” Cytonn Investments says in a topical topic, ‘Retirement Benefits Schemes in Kenya’.

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Kenya’s  Retirement Benefits Authority (RBA) plans to increase pension coverage from 20 percent in 2019 to 30 percent by the year 2024.

According to RBA, 80 percent of the labour force in Kenya was not saving for retirement. The 10 percent increase is expected to come from informal sector workers who formed majority of the workforce and yet have a low pension coverage of less than one percent.