The recent legislative change that allows for direct drawing out of cash by members from retirement benefit schemes to buy residential houses is undoubtedly causing widespread concern as well as excitement across the country.
There is, however, doubt even among the most optimistic pundits on the timing and appropriateness of this amendment given the devastating impact of Covid-19 on the retirement benefit sector as well as the capacity of the sector to implement it successfully.
Retirement benefit schemes, as we speak, are coming to terms with the dismal investment performance for this year’s first quarter, with most recording negative performance ranging between minus 3 per cent and minus 5 per cent.
HUGE BENEFIT PAYOUTS
Moreover, schemes are expecting to settle huge benefit payouts to exiting members arising from restructuring by companies, redundancies and job losses caused by Covid-19 on the economy, which is expected to continue in the foreseeable future.
Many employers and sponsors of schemes are experiencing severe financial strain and are either struggling or unable to pay monthly contributions into schemes.
Considering the aforementioned factors, the introduction of the provision to draw out cash for buying residential houses could not have come at a more challenging time for the sector.
Direct drawing out of cash from schemes for housing is a fundamental shift in policy. Retirement benefit schemes in Kenya, accessing trust assets in schemes, ought to be strictly regulated to ensure that the primary objective of providing adequate retirement income to members is safeguarded.
This new policy of permitting early access to benefits to buy homes raises fundamental questions that may not have been adequately addressed before it was legislated.
POLICY MAKERS
How do policymakers hope to balance genuine pre-retirement financial needs of scheme members, such as acquiring homes and providing adequate post retirement income to the same members?
If this balance is not properly determined, the likelihood of this amendment compromising the core objective of pension systems in Kenya is real. I say so because currently, the system already allows for early access to benefits upon loss or change of employment, ill-health leading to cessation of employment or emigration out of Kenya.
A further widening of permissible opportunities for access will negatively affect the retirement outcomes of members
Globally, countries have adopted different strategies to regulate early access of retirement benefits. In some countries such as the USA, Australia and New Zealand, early access is permanent under cases of extreme financial constraints.
In Switzerland and Australia, a member may directly borrow from the scheme, but will be required to pay the loan before the retirement date. In most countries in South East Asia, such as Singapore and Malaysia, the social security package involves members saving in different accounts for different products such as retirement savings, housing and medical. Members thus make high contributions of up to 40 per cent in order to provide funding for housing, medical and retirement benefits.
The saving rate in Kenya’s retirement benefit sector is too low to sustain a myriad pre-retirement social security needs, leave alone adequate post-retirement benefits.
A framework that allows for direct draw down of cash from retirement scheme for purchasing houses would be best implemented where savings in retirement benefit schemes are at levels of over 30 per cent of earnings.
CREATE AWARENESS
For this to happen, Kenya needs to do more to create awareness and increase the level of discretionary savings within retirement benefit schemes.
There’s need for government to give incentives for more savings and perhaps make a certain minimum limit of savings mandatory across the formal and informal working population. Precious little has been done in this space.
Policymakers, who in recent years introduced the pension-backed mortgage arrangement and the post-retirement medical arrangement need to explore practical possibilities of enabling these products to effectively work before introducing others such as early access of benefits to buy homes.
For instance, the pension-backed mortgage introduced in 2009 provides that up to 60 per cent of a members’ accumulated retirement savings can be applied as collateral to soften the lending terms under which a financier would grant a mortgage loan to a member who wishes to buy a residential house.
Under this arrangement the primary security, which is the house, would be sold by the financier to recover the unpaid part of the loan and any amounts not recovered from the sale would be settled from the scheme in that order and therefore the chance that a member would lose their accumulated savings is minimised.
Under pension backed mortgage, a member’s savings continue to be invested without disruption while the member enjoys a cheaper loan towards home-buying. The product uptake has not succeeded because financiers have been reluctant to lower or give preferential lending rates to scheme members. A lot more needs to be done to resolve the impasse.
LEAST DISRUPTION
It is important that the changes we have made in the past and those we are now making become part of an overall integrated National Retirement Benefits Policy, whose various parts are integrated and made to function harmoniously to achieve desired outcomes with least disruption.
It’s also important that amendments are cognisant of the core principles of a National Retirement Benefits Policy; One would expect that such a policy would espouse compulsory preservation of retirement benefits.
We should then not see roll-out of amendments that run counter to and undermine preservation of benefits unless and until adequate mechanisms and time-tested safeguards are put in place and the requisite levels of savings in the policy for scheme members who qualify to draw out cash for housing are achieved.
That way, we would protect what members have accumulated in retirement savings over the years to achieve retirement security even as we endeavour to help them to own homes.
As a country we have no shortage of innovative ideas, but we often shy away from taking firm and sometimes painful decisions that would enable our innovations to unlock benefits for us.
We shy away from policies that would encourage increased level of savings and where possible make it an obligation.
AFFORDABLE HOUSE
Even as the debate rages about the merits and demerits of the amendment of drawing out cash from retirement benefit schemes, we must remember that in Kenya, it’s not a must for employers to set up retirement benefit schemes, meaning, a great number of workers, who would benefit from owning an affordable house by deploying a properly formulated policy of amendment, are not even able to do so because they are simply not members of retirement schemes.
As an observer put it, “we are trying to enjoy a Singapore-like infrastructure of housing, roads, medical care and retirement income without bothering to sweat, save and plan for it.”
It’s crucial to create a sound policy framework around it to enable the draw-out mechanism to work smoothly and unlock benefits to members without undermining the long term financial well-being of members.
Gains made towards owing a house should not result in regression and wiping out of retirement savings. That would be counterproductive.
It’s imperative that more time be allowed to discuss and generate ideas on how best to structure and execute the drawout mechanism in schemes before it is implemented.
A National Retirement Benefits Policy needs to be put in place defining clearly where we want to go as a country in matters retirement.
Mr Kilavi is head of consulting and advisory at Zamara Actuaries, Administrators & Consultants
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