Kenya is on the verge of a retirement crisis despite having legislation that has improved the governance and operations of pension funds, according to a new study by Zamara Group, which says it has done little to improve the coverage and adequacy of benefits in the country.

For many years coverage of retirement schemes in Kenya has remained relatively low with less than 50% of the formal sector covered and coverage of the much larger informal sector virtually non-existent.

While announcing the survey, Zamara Group Chief Executive Officer Sundeep Raichura said that even those who are saving under the retirement schemes, their investments were grossly insufficient to provide an adequate income during sunset years.

The study which covered 65,000 retirement scheme members spread across more than 200 retirement funds in the country showed that the retirement savings of Kenyans are able to support a replacement of only 34% of their last earnings in retirement compared to the desired target of 75% to enable individuals to maintain the same standard of living in retirement.

Raichura said that the findings were quite significant and worrying in that even the few Kenyans lucky enough to belong to a retirement scheme were sleepwalking to disaster and not even aware of it. He called for urgent intervention by Government, regulators, employers and the pension industry to take stock of the situation and come up with policy reforms and measures that improves the outcomes of members of retirement funds. “Simply put, we need to see more money into retirement savings, get better value out of those savings and have a collective financial literacy drive” he added.

It also revealed that 93% of Kenyans were opting to access the maximum portion of their retirement savings that they can access when changing jobs or leaving employment and this premature encashment of retirement savings was severely impacting the retirement saving journey. “It’s like going on a long distance journey and emptying the fuel tank at every stop” said Raichura.

The study showed that the level of contributions for 40% of the retirement schemes in the sample were below the level required to generate a reasonable retirement benefit and when coupled with the lack of preservation of retirement savings meant Kenyans were wholly unprepared for retirement.

Zamara also analysed the options exercised by members of retirement funds when they retire. 100% of members of provident funds opted to access their benefits as a lump sum and used up the amount within less than three years of retirement. Members of pension funds also opted to access a third of their pensions as cash. For those purchasing annuities from their retirement savings, a negligible percentage made a provision for their spouse’s or children and invariably all members opted for non-increasing pensions.

With inflation averaging 7% per annum, this meant that the real value or pensions was halved in ten years. The study showed that most Kenyans did not appreciate the impact of inflation on their savings and pension incomes. Overall, members of retirement funds appeared to have a limited understanding of their benefit options and the impact of their decisions on their financial security. Members were struggling to identify products that were appropriate to their needs.

The Zamara study shows that only 4% of the retirement fund members analysed made voluntary contributions over and above the stipulated levels. Further the level of engagement of members with their retirement savings was very low principally because of a low level of financial understanding and individuals having more pressing immediate priorities such as housing, education and emergencies that competed head on with saving for retirement.

Raichura advised that providing members with financial targets and helping them understand whether they are achieving them over time was an important catalyst to getting them to take action to improve their retirement readiness.

On the role of the pension system in the country, Raichura said: “I firmly believe as that pension industry we need to play a bigger role in socio-economical development of our country, and that unless we do so, we will have missed a critical opportunity as an industry to address and solve many barriers of the nation’s economical development.”

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He said if the industry was supported with more incentives and importantly pro-activity by pension funds themselves then, then the pensions sector in Kenya could play a much more meaningful role, particularly in the area of financing the country’s developmental needs, including infrastructure and provide much needed financing to industry and businesses through the capital markets and private equity investment.