The level of retirement savings in Kenya is still very low, with the bulk of Kenyan workers lacking access to occupational pension schemes through which they can channel their retirement savings. According to data from the Retirement Benefits Authority (RBA), out of Kenya’s workforce of about 10 million people, less than 20 percent are saving for retirement using registered pension schemes. The bulk of these are in the formal sector.
With the majority of Kenyans not saving for their sunset years, the country is facing a potential crisis in caring for its aged population. First, it is imperative to note that Kenya has one of the highest levels of old age dependency in the world, estimated at 56 percent, while old age poverty rate stands at 55 percent. More critical however, is the low levels of retirement saving that are exerting significant pressure on the economy. Already, thousands of Kenyans who were born before the country’s independence in 1963 have hit the mandatory retirement age of 60, which the government increased in 2009 from 55.
This means that taxpayers are set to bear a whopping KES 62bn ($590m) public pension burden as the government offsets KES 45.9bn ($438m) provision for direct payment to retirees, and KES 16.9bn ($162m) that will be paid to the defined contributory pension scheme for civil servants. Since the establishment of the RBA to regulate and supervise the establishment and management of retirement benefits schemes in the country, tremendous growth has been registered in this key industry. As the regulator strives to achieve its mandate, increasing the retirement benefits coverage among the working population in the formal and informal sectors still remains a major challenge. To overcome this hurdle, RBA has rolled out awareness campaigns together with other players in the industry on the need to save for retirement, besides developing products targeting the mass market.
Finding the right ratio
The industry is also gearing towards significant growth due to the enactment of the new National Social Security Fund (NSSF) act, which has already been assented into law. The act seeks to transform NSSF from a provident to a pension fund, a move that will widen pension coverage by making it mandatory for all Kenyan employers and employees to make mandatory contributions.
The Diversified Financial Services Group has been at the forefront of deepening penetration of retirement savings in the Kenyan market. The company is one of the major players in the retirement benefits sector in Kenya, providing retirement benefits solutions with products tailored to meet the ever-changing needs of clients in the market.
Since 1995, has been a market leader in the provision and management of pension funds for individuals, private companies, parastatals, small and medium enterprises (SMEs), schools, universities, hospital and health institutions, churches and sector institutions. With a retirement fund in excess of KES 12bn ($11.4m), the company offers a wide range of products which include occupational schemes, umbrella retirement funds, individual retirement plans, pension annuity and income drawdown that are designed for different market segments.
In a market segment characterised by cut-throat competition, Britam has created a niche for itself over the years because of developing innovative products that resonate with the clients’ needs, leveraging on a wide distribution network which comprises insurance brokers and agencies, as well as a big number of financial advisers who are trained, equipped and supported to market pension products to their prospective clients. Although competition among insurance companies for the pension market segment is extremely high, Britam has maintained leadership in the sector and has invested heavily in pension management.
The company has pension products that target various sectors. Occupational schemes are group schemes offered to medium and large sized organisations in terms of staffing. A board of trustees that appoint the crucial service providers, which include fund managers run these schemes, administrators and auditors who ensure the schemes are efficient. Britam offers fund management, as well as administration services, in respect to this product.
The umbrella retirement fund on the other hand is a scheme that allows multiple employers to participate while Britam provides a complete package of trusteeship, fund management and scheme administration. It targets the SMEs with a minimum of two employees. It also offers the individual retirement plan (IPP), targeting those who wish to save for their retirement in a tax efficient, cost efficient and flexible way. The pension annuity is a retirement income product available to individuals aged 50 years and above, especially the ones retiring from a pension scheme. This product is purchased using retirement savings – its objective is to provide an income for life to the retiring person.
The final product in this line of business is the income drawdown. It is a retirement income product that serves as an alternative to the pension annuity that enables the retiree to reinvest his or her retirement savings, while drawing an income from the fund, subject to statutory requirements. Although Britam is keen on serving all market segments, the company is concentrating on the SME sector owing to the fact that it is the largest employer in the country. It is estimated that there are 30,000 registered SMEs in the country that employ 7.5 million Kenyans.
The sector contributes over 80 percent of new jobs, yet only 10 percent, or 3,000, SMEs offer their employees any form of retirement benefits. Britam is focused on reaching the SME segment of the market which has low penetration of retirement savings by providing them with a simple and cost efficient solution that allows them to focus on their core business, while we managing their retirement funds.
Getting the highest returns
Renowned for its innovation, Britam pioneered the first umbrella retirement fund in the industry back in 2006. The decision to launch the product was informed by the need to tap into the SMEs market by providing them with a simple and cost effective solution that allows them to focus on their core business.
It not only innovatively develops products that meet market needs, but the company also invests funds prudently and professionally to guarantee highly competitive returns. Considering that retirement planning is long-term in nature and investment returns are crucial in growing the fund to ensure comfortable retirement, Britam has achieved market leadership by providing strong rates of return – hence value for savings. Last year, it posted the highest returns on pension guaranteed funds among insurance companies in Kenya. This was the third time in a row that the company has posted the highest returns in the industry.
Britam is guided by an investment philosophy that ensures the preservation of capital invested and a minimum guaranteed interest rate; the smoothing of returns to customers from market volatility; as well as providing a maximum return on their retirement savings.
The company invests in a diversified portfolio of quality fixed income, equities and property assets as stipulated by RBA investment guidelines. Besides providing for the older generation and their dependents, pension funds are also effective tools of mobilising long-term savings, which are in turn used to grow GDP (see side bar).
In this regard, the government has made it mandatory for employers in formal organisations to contribute towards their non-pensionable employees’ retirement benefits through the National Social Security Fund (NSSF), which will transform the pension industry for the better. Since the new act came into effect in 2013, every employer with a minimum of one employee will be required to enrol their employees into NSSF with an option of putting part of the savings in private Pension Schemes (Tier 2 contributions).
This will result in growth of number of individuals saving for their retirement as well as the volume of savings being made to these plans as the Act increases the contributions per person. More funds available for investments will mean an enhanced role of pension funds as an institutional way of investment in the economy, with possible attraction of new players into the industry.
The eventual increased competition among the investors would result in product and system support innovation, lower prices for services rendered and better quality of service for customers. With a pension fund size of KES 10.7bn ($307m) and annual contributions of KES 2.65bn ($83m) as at 31st December 2014, Britam was the first insurance company in East Africa to be awarded Super Brands recognition in 2009 and 2011, and subsequently awarded the same recognition together with other insurance companies in 2012 and 2014.
It was also named the Best Insurance Company in Kenya 2014 and awarded the QUDAL Quality Medal, an international recognition only awarded to products and companies, which offer consumers the greatest level of quality.