Kenya: Future of pensions sector

Kenya is gearing up for a groundbreaking transformation in its pensions sector as President William Ruto spearheads initiatives to tap into pension funds for investment in local venture funds and infrastructure projects. In a bid to reduce expensive debt and bolster retirement savings for citizens, the government is seeking to revolutionize the pension industry and unlock the sector's trillion-dollar potential. CNBC Africa engaged in a detailed conversation with Joseph Rono, the Group Executive Director of CPF Financial Services, to delve into the future landscape of Kenya's pension sector. President Ruto has emphasized the urgency of addressing the inadequacies in the current pension system. With contributions to the national social security fund amounting to a mere 400 Kenyan shillings per month from both employees and employers, the retirement benefits provided are woefully insufficient to support retirees through their golden years. President Ruto's call to action aims to increase pension contributions significantly, ensuring that retirees receive adequate benefits to sustain them post-retirement. Despite Kenya's pension sector's substantial worth of 1.54 trillion shillings, the penetration of pension schemes remains low, with less than 1.5 million Kenyans actively saving for retirement. Many companies have instituted occupational schemes for their employees, where contributions are made monthly as a percentage of the employee's salary. However, the bulk of the working population in the informal sector does not have access to pension schemes, highlighting the need for mandatory pension contributions for all employers. To enhance penetration and drive policy changes, the government is considering making pension contributions compulsory for all employers. By broadening the base of contributors, the aim is to double the current contribution rates and engage the informal sector through matching contribution programs. Additionally, efforts are underway to establish micro pension schemes across African countries to harmonize pension operations and drive increased participation. The prospect of utilizing pension funds for national infrastructure projects and pension-backed mortgages presents a significant opportunity for both the government and pension schemes. Currently, the limited investment opportunities in the market and overdependence on government securities pose challenges for pension funds. By aligning with global best practices, Kenya aims to leverage pension savings for essential development projects, emulating successful models observed in developed economies. Joseph Rono highlighted various potentially bankable projects that pension schemes could tap into, including road infrastructure, the LAPSET project, and the development of key institutions like fintech companies. With long-term funding capabilities, pension funds are seeking investment-grade projects to diversify their portfolios and drive sustainable growth within the sector. Looking ahead, the future of pension sector investments appears promising, with the emergence of fintech firms offering new avenues for pension funds to explore equity investments. Robust governance structures and safeguards, such as those implemented by the Retirement Benefits Authority in Kenya, ensure the security and integrity of pension funds. The East African region has witnessed remarkable progress in the regulation and growth of the pension industry, setting the stage for continued expansion and innovation in the sector. In conclusion, Kenya's pensions sector is on the cusp of a transformative journey, with the government's concerted efforts to revamp the industry and harness pension funds for sustainable investments. As the country moves towards greater inclusivity, mandatory contributions, and strategic partnerships, the trillion-dollar potential of the pensions sector is poised to be fully realized.