When comes to social security in retirement, more attention is on formal employees who contribute through an employer that has enrolled them in a registered pension scheme. That however only covers a small part of the workforce who stand at only 20 per cent.
Kenya’s fragmented informal sector has led to sluggish economic growth despite its potential as a key contributor. The 2017 Economic Survey by the Kenya National Bureau of Statistics (KNBS) shows that the Jua Kali Sector accounted for 83.4 per cent of country’s total labour force and created over 787 thousand new jobs in the period.
The Jua kali sector however remains excluded, unregulated or underestimated. Majority of aging workers have been left out of structured pension plans leaving them with few options for safeguarding their health and well-being in the long term once they can no longer work.
Currently, it is mandatory for all categories of workers to contribute to NSSF but pension stakeholders have faced extreme difficulty is in collecting contributions from both employees and employers within the informal sector.
Despite this, stakeholders have made concerted efforts by availing a platform on which informal sector workers can either join one of the 35 individual pension plans registered by the Retirement Benefits Authority (RBA), or the Mbao Pension Plan sponsored by the authority in collaboration with the Jua Kali Association.
However, pension coverage is still low thus exposing millions of citizens, particularly informal sector employees to poverty in old age. This points to an acute shortfall in existing social protection policies.
A renewed focus is therefore necessary to understand and address essential factors behind the underlying barriers hindering pension coverage for the informal sector.
Lack of knowledge on pension’s importance stands at the apex of existing challenges. Financial literacy is needed to raise public awareness of the benefits available to those eligible which will potentially lead to increased pension coverage.
Informal sector workers have no desire to participate in voluntary pension systems or even to comply with mandatory schemes because they find the terms involved in contributions and withdrawal too strict. Given that their earnings tend to be minimal and fluctuate unlike their opposite counterparts, it is necessary to avail flexible terms for withdrawals in specific circumstances to encourage them to participate in retirement plans.
Providing monetary incentives is another way to encourage pension participation by the informal sector.Current tax brackets, for instance, have remained a big burden to majority of Kenyans going into retirement. While the government has been designing various regulations to safeguard retirees’ benefits, exemptions are still low and the set 65 years of tax-free for pensioners is in most cases unattainable.
Many of these workers are especially unwilling to do so when these benefits do not meet their immediate or priority needs. Their most immediate prioritization leans towards health care, in particular where structural adjustments measures have reduced access to free medical services. Old age therefore appears very remote and the idea of retirement remains unreal.
Existing social protection policies are quite inappropriate for the local conditions and insufficient efforts have been put to implement them. Further, policy makers examine the problem of poor pension coverage too narrowly and as a result, their chances of arriving at feasible solutions may be greatly reduced.
With a majority of the country’s working population not saving for their retirement, we are looking at a potential crisis in caring for an aging population in the next few years. Securing income in retirement will become imperative as cost of living increases and people live longer due to better health care and living conditions.
It is also important for the relevant informal sector umbrella bodies to begin sharing statistics of their members that will enable pension service providers to target new members.
Advanced solutions such as mobile pension products could also address the needs of informal workers through catering for their present financial situation and allow members to plan for a comfortable retirement.
To curb the growing issue of urban poverty, a lot more needs to be done to lessen this burden on pensioners from the informal sector stream.
Author: Ruth Njuguna; Manager, Pensions Admin and Consulting at Enwealth Financial Services Ltd.