PENSION REFORM FOR KENYA

GROUP PRESENTATION AT THE WORLD BANK INSTITUTE ON 17TH NOVEMBER 2006

GROUP MEMBERS
1. KARANJA KABAGE 2. MARIS WANYERA 3. CHARLES MUHOOZI 4. RACHEL LUMBASYO 5. SAMUEL MPIIMA 6. ZIA-UR-RAHMAN 7. REGINAL THOMAS 8. DAVID DONDE 9. ANNE MUGO UGANDA UGANDA KENYA UGANDA

KENYA CHAIRMAN

AFGHANISTAN - ST VINCENT & THE GRENADINES - KENYA - KENYA

CONTENT
1. INTRODUCTION 2. KENYA RETIREMENT BENEFITS SYSTEM (KRB)

- CURRENT STATUS
STRUCTURE FUNDS CSPS INVESTMENTS

EXPENDITURE

3. PROPOSED REFORM
CIVIL

SERVICE PENSION SCHEME (CSPS NATIONAL SOCIAL SECURITY FUND (NSSF) VOLUNTARY SCHEMES - OCCUPATIONAL - INDIVIDUAL 4TH PILLAR FAMILY SUPPORT 4. WAY FORWARD

INTRODUCTION
1. 2. 3. 4. 5. 6. 7. POPULATION GDP GDP GROWTH = 35 MILLION = $17.9 BILLION = 5.8% (2005) PROJ 6% (2006)

21% COVERAGE - Formal Sector employees NORMAL RETIREMENT AGE: 55 years ASSETS MANAGED - 23% GDP [WBI] REGULATION - Retirement Benefits Authority (RBA)

KRB SYSTEM STRUCTURE

Civil Service Scheme Legal Structure Membership
Act of Parliament (1946)

National Social Security Fund

Act of Parliament (1965)

Occupational Schemes Voluntary

Trust Deed & Rules

Individual Schemes Voluntary

Trust Deed & Rules

All civil servants, teachers, armed forces etc.

formal sector workers in companies with 5+ employees

formal private sector workers in companies that have schemes

individuals formal/informal sector join voluntarily

Funding

Non-funded DB

Funded Provident Fund (DC)

Funded (DB, DC & Provident Funds)

Funded (DC)

Regulation
(RBA ACT 1997)

Exempt from RBA

Subject to RBA; Partially compliant

Subject to RBA

Subject to RBA

KRB SYSTEM

COVERAGE & FUND DISTBN

KRB COVERAGE
OCCUP 24% INDIV 1% NSSF 48% NSSF CSPS OCCUP INDIV CSPS 27%
Civil Service Pension Scheme 0% National Social Security Fund 38%

Individual Retirement Benefits Schemes 1%

Occupational Retirement Benefits Schemes 61%

KRB INVESTMENTS
NSSF INVESTMENT PORTFOLIO
120 100

100

80 70 60 40 30 20 7 5
Cash

70

72

30 9 15
Quoted Equities Unquoted Equities

30 15 0
Offshore Immovable Property

6 0
Fixed Deposit

0
Guaranteed Funds

0
Fixed Income Governemnt Sec Other

as % of total

Maximum %

KRB INVESTMENTS OCCUPATIOAL & INDIV.

120 100 100

80 70 60 48 40 30 20 45 0
Cash Fixed Deposit Fixed Income Governemnt Sec Quoted Equities Unquoted Equities Offshore Immovable Property Guaranteed Funds

70

30 15

30 14 5 0
Other

5 1

as % of total

Maximum %

KRB SYSTEM
PENSION EXPENDITURE TREND
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 /20 00

CSPS EXPENDITURE TREND

Appendix I

Kenya Shs. Billion

20 00 /01

20 02 /03

20 04 /05

19 95 /96

19 97 /98

19 94 /95

19 96 /97

19 98 /99

19

99

Year

20 01 /02

20 03 /04

20 05 /06

1st PILLAR
CIVIL SERVICE PENSION SCHEME
o CURRENT SCHEME:
DB 2.5% accrual rate Non contributory Current Expenditure $260m (2006/07) Retirement Age: 55 Female & Male Vesting 10 years and age 50+ Minimum Guaranteed Pension $27 p.m.

1st PILLAR
CIVIL SERVICE PENSION SCHEME
oPROPOSED REFORMS:
Employee Contributions 7.5% - $100m p.a. Government Contributions 12.5% ($170m - Notional) Accrual Rate 2.5% (unchanged) Retirement Age: 60 Female & Male Vesting 5 years Partial Portability Members contb only Admin/Investment As per RBA Act & Regulations
- Administration - Investment - Custody Public Private Private

2nd PILLAR - NSSF

oCURRENT SCHEME: oFund Size - Approx. $1 billion
oMembership:
Registered members 2.9 million (Only 0.8 million active) Registered Employers 59,025 (only 14,638 active)

oContributions:
Employee 5% of salary - maximum of US$ 6 pm Employer 5% of salary - maximum of US$ 6 pm

oBenefits:
Lumpsum at 55 yrs, withdrawal at 50 yrs Other - invalidity, survivors, emigration etc.

oReturns:
Last five years - 2.5%

2nd PILLAR - NSSF

oPROPOSED REFORMS
o Membership: Increase coverage by:
Including all employers remove 5 employees minimum Including the informal sector & self employed

oContributions: Increase Contributions by:

Raising threshold gradually From $53 to $133 Allow voluntary contributions above the 5% and $133 levels

oBenefits: Introduce DC pension

Minimum period for pension 15 years Those below 15 years entitled to a lumpsum Annuity or programmed withdrawal

oReturns:
Improve: as per Fund performance

3rd PILLAR VOLUNTARY SCHEMES

oCURRENT STRUCTURE:
oOccupational RB Schemes
Approx. 1344 schemes Approx. $2 billion 15% Coverage Mixed DB/DC but mostly DC Underfunded Parastatal schemes - $693m Liability Intense supervision by RBA since 2001

oIndividual RB Schemes
15 schemes informal sector/self employed 0.2% Coverage DC schemes Mainly administered by Insurance companies Intense supervision by RBA since 2001

3rd PILLAR VOLUNTARY SCHEMES

oPROPOSED REFORMS
Introduce risk-based supervision Full funding for Parastatal Schemes Improve Governance of Parastatal Schemes - comply with RBA Regulation Compulsory Occupational & Individual schemes

4th PILLAR EXTENDED FAMILY SOCIAL WELFARE PROGRAM & HOME OWNERSHIP PROGRAMS
oCURRENT STRUCTURE:
Culture Tax

of family dependency

exemption on Homeownership Programs

oPROPOSED REFORMS
Tax exemption on contributions to extended family Improve tax exemption on Homeownership Program

SUMMARY OF REFORMS PROPOSED WAY FORWARD

Civil Service Scheme
Legal Structure Parametric Reforms
New Act

National Social Security Fund

Enact Bill already before Parliament

Voluntary Schemes

4th Pillar

RBA Act require mandatory element

Tax recognition of family support

Contributions 7.5%/12.5% E/G Retm. Age: 60yr Vesting 5 yr Partial Portability Admin/Investm.
NDB; Future

Increase Increase

coverage

Compulsion

None

contributions Retm Age: 60 yr Introduce pension Min pens.15 yr DC Full Funding of Parastatal schemes Tax incentives

Funding Reform Regulation

NDC

Subject to RBA

Subject to RBA

Risk-based RBA Supervision

Tax supervision

REFORM CHALLENGES oDeepen RB System Structure by introduction of Zero Pillar

When budget available 1 to 2% GDP Cover those over 65 years Guaranteed Minimum Pension

oPolitical Constraints
Age

60 Constitutional restrictions to reform Govt. actual contributions from tax

PENSION REFORM FOR KENYA

THANK YOU ALL