How pension regulator's new proposals could boost retirees' take home

Restricting the movement of retirement schemes from different funds is one of the proposals fronted by the Retirement Benefits Authority (RBA) that may see retirees pocket more savings if approved.

The regulator, in its new proposals that seek to amend the RBA Act and its subsequent regulations, also wants umbrella schemes and individual benefit schemes to concentrate their investments in tradable assets.

This proposal is meant to make the schemes more liquid as noted by the Business Development Manager, SME – Britam Life Assurance Jane Loise, whose role involves handling pensions for small and medium enterprises.

“We have seen a scenario in the industry where funds for umbrella schemes and even pensions are put in immovable assets,” she noted during a session with journalists on the said proposals.

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RBA says the regulations for umbrella schemes and individual retirement benefits schemes should be amended to only allow investments in tradable assets.

“Where a scheme has invested in immovable assets, the schemes will be given a time limit to exit the asset class,” the regulator says.

“The Umbrella and Individual Personal Plans regulations should be amended to reflect new investment guidelines. This will ease the accessibility of the members of umbrella schemes and Individual Personal plans.”

In addition to these changes, RBA also seeks to lock pension contributions up to 50 years, revoking the current tradition where one can access half of their pension when they resign from work. Ms Loise says this is a welcome move as it will ensure individuals have more money when they finally retire.

“As it stands, very few people will retire with Sh1 million because every time someone resigns for another job, they get to access half of their contributions. By the time you retire, you would have depleted your benefits,” she explained.

RBA, in the proposed changes that are set to undergo public participation this month, wants an amendment to the Occupational Regulations 19(5), which allows a member to access up to 50 per cent of their contribution when they leave employment.

In place, RBA suggests that where a member leaves employment before attaining the specified early retirement age, that member may opt for up to 100 per cent of their additional voluntary contribution and the investment income that has accrued thereof. This proposal aims to promote adequacy of retirement savings for members, argues RBA. “Given increasing life expectancy and low savings rate, early access to benefits further reduces the income replacement ratio for members. Accessing 50 per cent of all benefits, including the additional voluntary contributions, can be a determent from savings in a scheme,” the regulator adds.

RBA also seek an amendment to the Insurance Act to exempt retirement benefits funds in deposit administration policies from paying commissions to brokers or agents.

The proposed clause says no insurer shall, in respect of Kenya business, pay to a broker or agent a commission in respect of funds acquired by the insurer from a registered retirement benefit scheme under a deposit administration contract.

RBA says it has noted increased movement of funds between segregated arrangements and guaranteed funds. “One of the key factors attributable to these transfers is commissions payable by insurance companies to brokers. The commissions are passed to schemes through investment returns declared by the companies,” says RBA.

Ms Loise lauded the move, saying it will have a positive effect on how much retirees take home. “These transfers, sometimes when they happen, may not be because they are seeking better returns for the members,” she said.

RBA says in the proposals that commissions are paid to an agent or broker as compensation for executing a transaction or providing specialised services to the investor. In the case of a retirement benefits scheme, the authority argues, an agent or broker is not needed because Trustees are required to appoint an adviser to offer professional investment advice through an Investment Policy Statement (IPS).

“Therefore, appointing a broker or agent for advice would be double the cost of the scheme. Transfers between providers will be informed by other fundamental factors such as the financial soundness of the provider, as opposed to commissions,” the proposals read in part.

Segregated funds are a mix of insurance and investment products which offer a guarantee of some of the initial investment. They focus on high-risk, high-return types of assets. Guaranteed funds are usually invested in low-risk assets such as money market and government paper. For such reason, schemes oscillate between these funds, seeking a better deal depending on the macros and micros of the economy.

Ms Loise noted that one of the things that the industry has ignored for a long time is whether members should have a say in what asset classes their money should be invested in.

“When they bring the fund to us, it is the fund managers of the insurance companies that decide,” she said.

This has been corrected in the proposed changes, giving members a say in this critical decision. In the proposed amendments, RBA wants a provision made to allow individual members to choose investment options.

How this will change how pension funds are invested will be a wait-and-see as for long, according to data from RBA, government paper is the most preferred asset class for fund managers.

As it stands, out of the more than Sh2 trillion pension assets, government securities take more than 51 per cent, followed by guaranteed funds at 20 per cent and immovable property at 12 per cent.

“The practice has not given members the option to choose. Amend the regulations to allow for amendment of Trust Deeds and Rules (TDRs) for members to be provided with investment choices,” says RBA.

Further to these changes, RBA also seeks an amendment to Section 53B of the RBA Act, which will provide guidelines on how the Kenya Revenue Authority (KRA) will collect contributions from schemes.

Particularly, RBA seems to tap into the effectiveness of KRA due to the challenge with unremitted pension funds employers have already deducted from employees but have not sent to their respective schemes.

This has been a pain point in the sector, which the RBA Board chair noted is notorious, especially among public institutions.

Mr Havi, while launching the authority’s 2024-2029 strategic plan, said as of June 30, 2024, the total outstanding contributions by Defined Contributions schemes stood at over Sh96 billion, while the deficit owed due to underfunded DB schemes was in excess of Sh37 billion.

“Over 95 per cent of these funds are owed by public sector schemes. It is important to have candid discussion around this challenge before it engulfs us and erases all the benefits realised within the retirement benefits sector,” he said.

The latest proposal by RBA may offer pensioners relief owing to the numerous cases of employees not being able to access their benefits on time once they retire. “The proposal seeks to provide a procedure for KRA to collect on behalf of the schemes where there are cases of unremitted contributions,” reads the proposal.