Performance Of Segregated Retirement Benefits Schemes And The Benefits

A retirement benefits scheme is a savings platform that allows individuals to make regular contributions during their working years allowing the contributed funds to be invested to generate returns.

Upon retirement, members access their total contributions and net returns accrued during their time in the scheme.

The contribution amounts vary based on the types of schemes but for individual pension schemes, the monthly contribution may be as low as 1,000 shillings.

Retirement Benefits Schemes can be classified by mode of governance into two types namely; Segregated Funds and Guaranteed Funds.

Segregated funds refer to schemes where members’ contributions are invested by the Trustees via an appointed Fund Manager. Guaranteed funds, on the other hand, are offered by insurance companies who are referred to as the approved issuers and carry out similar functions to a fund manager.

Returns for segregated retirement benefits schemes have been fluctuating over the years. As such, fund managers need to have a well-balanced portfolio on a risk-return basis to ensure that they offer their members high returns and at the same time protect their contributions. In 2021, retirement benefits schemes were on a recovery path having gained by 11.6 percent in comparison to the 7.0 percent gain recorded in 2020.

The retirement benefits industry has grown significantly over the years has grown at 8.9 percent to 1.5 trillion shillings in H1’2021, from 1.0 trillion shillings in H1’2017. The main factors that have contributed to the growth include:

1. Legislation – RBA has been keen on promoting good governance by continuously updating the regulations and enforcing the same. The numerous reforms in the industry include tax reliefs on contributions to a maximum of 20,000 shillings per month or 30.0percent of one’s salary, and house ownership structures
2. Trustees Certification programs, that help to improve the management of the schemes and better equip the Trustees in carrying out their roles.
3. Demographic factors – Demographic factors include the statistical factors that influence population growth in one way or another and include parameters such as population size and the birth rate of a particular place.
4. Social Change – Over time, individuals are becoming less dependent on relatives and friends after retirement, as they understand better the importance of saving for retirement. Additionally, globalization has resulted in a more interconnected financial world, which has reduced geographical inequality and ensured that wealth is more evenly distributed
5. Technology Advancements and Increased Financial inclusion – Increase in technology advancements, mobile penetration rate, and internet connectivity in Kenya has provided an important platform for the delivery of a wide range of financial services.

Performance of the Segregated Retirement Benefits Schemes

According to the ACTSERV 2021 Retirement Benefits Schemes Investments Performance Survey, segregated retirement benefits schemes recorded an 11.6 percent return in 2021, up from the 7.0 percent it recorded in 2020. The increase was largely supported by the performance of equities investments made by the schemes which recorded a 16.9 percent gain, up from a 10.4 percent decline recorded in 2020 on the back of the gradual economic recovery.

Additionally, the retirement benefits schemes’ Assets under Management increased by 11.8 percent to 1.5 trillion shillings in June 2021, from 1.3 trillion shillings in June 2020.

The growth of the assets can be attributed to the economic recovery that saw people resume contribution to the retirement benefits schemes.

Despite the continued growth, however, the Kenya National Bureau of Statistics (KNBS) in the FinAccess Household Survey Report 2021, highlights that only 12.0 percent of the adult population in the labor force save for their retirement in retirement benefits schemes, pointing towards the low uptake of retirement benefits schemes’ services in Kenya.

Why should you save for your retirement?

1. Compounded and Tax-free interest – Savings in retirement benefits schemes earn compounded interest. This means that your money grows faster as even the interest earned is reinvested and grows. Additionally, the investment income of retirement schemes is tax exempt meaning that the schemes have more to reinvest,
2. Tax-exempt contributions – Retirement Benefits Scheme members enjoy monthly tax relief on their contributions of up to 20,000.0 shillings per month or 30.0 percent of their monthly salary, whichever is less.
3. Home Ownership – Savings in a Retirement Benefits Scheme also helps members to own a home through the utilization of a portion of their retirement benefits to secure a mortgage facility or to purchase a residential house. A member may assign up to 60.0 percent of their accrued benefits to provide a mortgage guarantee or utilize up to 40.0 percent or a maximum of 7.0 million shillings of their accrued retirement benefits to purchase a residential house.
4. Post-Retirement Financial Independence – By providing an income in retirement, Retirement Benefits Schemes ensure that the scheme members do not experience old-age poverty and do not rely on their family, relatives, and friends for survival.
5. Income Security – Retirement benefits schemes allow people to access some of their savings in the event of a job loss or income disruption. Furthermore, the savings ensure that your income stream continues even if you stop working, a period when one has reduced or no income at all.

Despite the fluctuating returns witnessed over the years, segregated retirement schemes have delivered a 5-year average return of 11.7 percent p.a. for their members, which is above the 2021 average inflation rate of 6.1 percent and returns from other savings platforms like bank deposits of 7.7 percent during the same period. As such, more people in their working years should save for retirement in retirement benefits schemes to secure their income post-retirement and enjoy the real positive returns.