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Individual Personal Pension Plans for SMEs in Kenya

This article is provided by Muriithi & Ndonye Advocates.

According to data from the Retirement Benefits Authority (RBA) as at October 2015, out of Kenya’s workforce of about 10 million people, less than 20 percent are saving for retirement using registered pension schemes. The bulk of these are in the informal sector.

Indeed, saving for retirement does not rank highly as a monthly financial obligation for many Kenyan entrepreneurs and their staff. Instead, the financial headaches, for many SMEs, usually revolve around holding the right amount of working capital to meet their day to day operations and monthly obligations.

According to an article by Winifred Ambunya, some of the reasons that hinder the uptake of pension plans by SMEs are:

(i) Some entrepreneurs hire mostly on a contract basis and pay a commission and retainer to keep costs low;

(ii) Other entrepreneurs say that they prefer benefits which have immediate impact such as medical, maternity and accident insurance over pension benefit, whose benefits are years away.

Notwithstanding reasons for shying away from pensions, pension industry experts are encouraging the entrepreneurs to sign up with IPPs, as a way of attracting talent to their companies. IPPs are defined as recognized independent legal entities established for the sole purpose of operating a retirement savings fund. IPPs are open to the general public regardless of employment or income affiliations and have a wide geographical branch network for easy accessibility.

IPPs are however most convenient for all those willing to save for their retirement and have limited access to any other scheme. These include, workers in companies where the employer fails to set up an occupational scheme; very small companies where setting up an occupational scheme is not viable; self-employed professionals including lawyers, architects, doctors and accountants; business people and the informal sector; and, anyone who needs to make additional savings for their retirement. Employers who are unable to start their own schemes are encouraged to enjoin their employees as a group to own preferred scheme and also make contributions on behalf of their employees.

There are currently about 34 IPPs in Kenya as of the end of February 2016 according to data in the RBA website (see:

What is the need for voluntary pension savings you may ask? Well, voluntary pension savings such as IPPs are important, as the National pension contribution is not sufficient to provide adequate social security at the point of retirement. IPPs therefore provide cost efficiency to employers, who would like to provide pensions for their employees but are held back due to the cost implication and impracticability of setting up a scheme composed of few persons.

In addition to IPPs that are privately set up by insurance companies and registered with the RBA, the government has also been keen on introducing some pension schemes targeting the SMEs in the informal sector. The Mbao Pension Plan was set up in 2011 and is a voluntary savings programme to help people save for retirement. It is called “mbao” to refer to the Kshs. 20, which is the minimum daily contribution that members will be making. It is registered by both the RBA and the Kenya Revenue Authority (KRA). Members commit to saving at least Kshs. 100/= a week, amounting to Kshs. 400/= a month.

 Pensions are important.

Remember, what you earn today is part of what you will earn tomorrow!

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