[dropcap]P[/dropcap]ension funds not only provide social security, they play a major role in driving various economic activities that can stimulate economic growth. It is this understanding that has seen the call of unlocking pension funds to drive various economic activities including private equity and real estate development among others.
Housing is a global challenge and rapid urbanisation is pushing up demand for housing, especially affordable housing, globally and more so in Africa. As populations continue to grow, there continues to be a need to bring on board multiple agencies including Governments, non-government organisations (NGOs), private sector and individuals to address this issue.
It is estimated that Africa’s population will have reached 2.4 billion by 2050, thus exacerbating the current housing shortage and other infrastructures including access to clean water. Kenya’s housing shortage stands at about two million units, Nigeria at 17 million units and South Africa 2 million; cases that are mirrored across the continent. This is a huge gap that needs to be addressed. The solution is in providing affordable housing for this growing population, especially in urban centres.
Though various stakeholders have rolled out initiatives to address the shortage, more still needs to be done, more so as Africa’s population continues to grow. Governments need to put in place policies that make housing finance accessible and affordable.
The World Bank notes that only 3% of sub-Saharan Africa population can afford a mortgage. Part of the issue is investors focusing on higher value housing mainly due to higher margin returns and availability of supporting infrastructure. Private capital and investment funds are rarely directed towards the mass housing market and usually focus on the commercial real estate segment.
This locks out a high percentage of people. Lower income earners can barely afford this kind of housing, as the cost is prohibitive. Pension funds can play a role in addressing this situation. They have a long-term horizon, compared to depository institutions, investing a section of their assets in housing would not only help address the housing shortage, but would also help them diversify their portfolio thereby achieving favourable risk – adjusted returns.
Pension funds in the Kenya have traditionally invested in property, equities and debt instruments but there has been agitation to unlock them to drive more social and economic growth.
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One of the solutions proposed has been to allow members of retirement schemes or pension funds to use their accumulated benefits as security for their mortgages. A regulated housing finance institution would offer the mortgage at agreeable interest rates.
In Mauritius, pension schemes can allocate up to 26% of their assets for housing loans to members. The Pension Fund Act in South Africa allows a retirement fund to grant a member with a direct loan or a guarantee for a member’s loan, which should not exceed 90% of the value of the property or the accumulated benefits of the member.
Kenya made strides by amending Section 38 of the Retirement Benefit Authority to enable pension members to attach up to 60% of their accumulated benefits to secure a mortgage. This allows members to acquire property – land or a house – pay for stamp duty, valuation fees and legal fees among other transaction fees. The 60% is only a guarantee to get a mortgage.
The uptake, has however, been extremely low with Trustees wary of managing the risk due to many grey areas in implementing this and mortgage institutions failing to respond with more favourable terms. There have been calls to review the law and more so the operationalisations of it to ensure Kenyans are able to use their retirement funds to secure homes.
Two more options may be explored by both policy makers and pension funds trustees. One would be financing one of the government’s Big 4 agenda; namely, creation of 500,000 new homeowners through facilitation of affordable housing. With the Kenyan spiralling debt, it would be prudent to rally institutional investors, like pension funds, to support domestic resource mobilization hence cushion the government from the inherent currency risk in Eurobonds and any foreign currency indexed debt.
Property investments have helped pension funds achieve stable returns in past years when other conventional assets had a downturn. Although there is scanty information on how the low – cost housing project would be operationalised, trustees of the pension funds would dive right in if the investment would earn them reasonable real returns. Securitising the debt for liquidity and tax incentives would go a long way to whet the appetites of the Trustees to invest a section of the sector’s billions in the project.
The Zamara Pension Performance Watch, a survey of Schemes whose assets total to Ksh 677 billion (about 70% of country’s pension assets), indicates that just about 4% of Schemes’ assets were invested in immovable property as at December 2017. The Retirement Benefits Regulations allow Schemes to invest up to 30% of their assets in property.
Second, the policy makers may consider borrowing a leaf from the Singaporean Social Security System where retirement savings may be accessed to cater for medical, housing and education expenses. Singaporean home ownership is the highest globally at about 90%. A review of the regulations to accommodate savings for home ownership by employees, alongside their retirement savings would just hit the bull’s eye since home ownership is an inextricable part of retirement planning. Under the NSSF Act 2013, whose implementation is in abeyance, employees and employers are each required to contribute 6% towards pension savings. Augmenting this to include home ownership saving would help mortgage – shy citizens to save rather than borrow to secure their homes.
With Kenya having one of the youngest populations with a median approximated at 19, and thousands joining the workforce annually, the use of pension funds to secure housing becomes a key consideration. If people can retire with a pension and a house, we will curb old age poverty.
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The government, in consultation with financial institutions, need to sit and work on policies that allow people to be able to access affordable housing through their long-term savings.
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