Economic policies are the foundation on which pension funds thrive or falter. When the economic environment is conducive, with sustained growth and inflation under control, pension funds can meet their obligations to retirees. Otherwise, the financial security of retirees is threatened.
The National Social Security Fund Act of 2013, which imposed an increase in National Social Security Fund contributions, was one of the new pieces of legislation that had a positive impact on pension contributions in Kenya. This happened in February last year when the Labour and Labour Relations Court overturned an earlier ruling that had suspended the implementation of the National Social Security Fund Act after finding it unlawful, in a Court of Appeal ruling. Contribution rates increased from Sh200 to Sh600, capped at 12 per cent of a worker’s monthly salary, with the employer matching six per cent of the worker’s deductions.
But this law did not achieve a “happy ending.” One year later, in February of this year, the Supreme Court overturned the Court of Appeal’s decision that declared the National Social Security Fund Act 2013 constitutional. The court ruled that the Labour and Labour Relations Court has the jurisdiction to determine the constitutionality of any law in matters relating to labour and employment as provided for in the Constitution.
Recently, in what appeared to be part of a solution to the national debt service, the government recently attempted to introduce wide-ranging reforms in fiscal policy, through the Finance Bill 2024. The bill would have directly affected taxation, public spending, government operations, and public debt management. However, this was met with strong public backlash.
These changes were designed to address a growing budget deficit exacerbated by insufficient tax revenues, mounting debt obligations, and rising spending needs. However, the economy was grappling with issues such as low productivity, high unemployment, and a cost-of-living crisis, driven by a combination of geopolitical tensions, tight financial markets, environmental challenges, global inflation, and domestic fiscal mismanagement.
These economic constraints are bound to lead to a continued decline in the savings culture among Kenyans, who no longer have anything to save after deducting various taxes from their salaries, let alone their daily living expenses.
Kenya has historically had a very poor savings culture – the poorest in East Africa.
A 2022 report by Enwealth Financial Services found that only 12% of Kenyans have a solid savings culture. Despite slight improvement, as evidenced by the 9.8% increase in charitable deposits, according to the 2024 KNBS Economic Survey, we are not there yet. Inflation is creeping in and sapping people’s efforts towards this goal.
As of June 2024, the inflation rate was 6.22% according to the Central Bank of Kenya. This rise in the prices of goods and services means less money left to save.
But some policies are a double-edged sword. While higher interest rates have challenged companies’ ability to borrow from commercial banks, they have also provided opportunities for lenders, including pension funds, to earn higher returns with lower risk through government securities. This highlights the complex interplay between economic policies and their multifaceted effects.
The RBA has given pension funds the green light to allocate their investments to alternative assets such as infrastructure, real estate and private equity. However, government securities remain the sector’s preferred category with a portfolio share of 47.5 per cent as of December 2023, according to data from the RBA.
Despite noteworthy efforts to improve the pension sector, savers in the country face serious obstacles such as high unemployment, inflation, growing public debt, higher taxes, and other fiscal policies that threaten their retirement planning and their pockets in general. Finding a way to balance these issues is key to preserving or increasing savings potential, ensuring the health of the pension sector, and ensuring a decent lifestyle for retirees in this country after retirement.