Transcript The Law Society of Kenya CLE Program

The Challenges of Being a
Regulator of Retirement
Benefits Schemes
Edward Odundo
Chief Executive
Retirement Benefits Authority
ISSA Conference for English Speaking Africa, Mombasa
28th Nov – 2nd Dec, 2006
CONTENTS

Introduction: Role of Retirement Benefits Authority

Kenya’s Retirement Sector

Challenges

Overcoming the Challenges
GENESIS OF RBA

1997: Enactment of the Retirement Benefits Act

1997: Subsequent formation of the Retirement Benefits Authority

2000: Gazettement of Regulations

2001: Full Commencement of the Act and Regulations and Operations of the
Authority

Reasons for formation:
x
Members were denied benefits – lacked protection
x
Scanty, scattered and disharmonized benefits legislation
x
Imprudent investments of scheme funds
x
Poor management of schemes- no required accountability
x
Scheme funds formed part of sponsors capital funds
Role of the Authority

Regulate and supervise the establishment
management of retirement benefits schemes;
and

Protect the interest of members and sponsors of
retirement benefits schemes;

Promote the development of the retirement benefits
sector;

Advise the Minister for Finance on the national policy to
be followed with regard to the retirement benefits
sector;

Implement all government policies relating thereto.
The Authority’s Achievements

Schemes’
management
structures
are
now
standardised and scheme assets separate from sponsor

Investments of scheme funds professionally done by
fund/ asset managers has seen exponential growth in
managed funds – total assets over shs 200 billion.

Scheme’s accountable to Authority

Restored confidence among members and general
public

More knowledgeable public and trustees on retirement
benefits

Deepening of Capital Markets – Schemes hold 20 pecent
of NSE market cap and 20 percent of outstanding
government securities
Growth in Assets Under Fund Management
160
1200
140
1000
120
80
600
60
400
40
200
20
0
0
Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06
Assets Shs Bn
Schemes under Management
Number of Schemes
Assets Shs Billion
800
100
Retirement Benefits Industry Asset holdings
140,000.00
Amount in Millions
120,000.00
100,000.00
80,000.00
60,000.00
40,000.00
20,000.00
Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04
cash
Quoted Equity
Guaranteed Funds
Fixed Deposits
Unquoted Equity
Other
Fixed Income
Offshore
Dec-04 Jun-05
Dec-05
Govt Securities
Immovable property
Growth in Assets of Registered Schemes - I
Thousands
1,800.00
1,339.38
1,664.52
Bottom 10 Registered Schemes by Fund Value
1,600.00
1,400.00
233.93
230.79
350.66
169.93
167.65
334.86
128.53
62.79
145.51
200.00
119.06
400.00
100.18
240.51
600.00
44.78
86.26
47.17
265.91
800.00
625.70
1,000.00
735.55
1,200.00
A
B
C
D
E
F
G
H
I
J
Scheme
2001- proxy for period before Reform
2004- Period after Reform
Growth in Assets of Registered Schemes - II
e
2001- proxy for period before Reform
f
g
h
1,582.18
2,493.97
1,652.36
2,658.10
2,108.38
2,570.00
4,455.60
4,792.08
3,879.60
7,153.26
d
i
1,094.67
2,061.78
c
4,140.02
4,405.08
5,760.77
8,183.67
b
1,512.63
2,138.33
a
6,293.74
6,628.97
10,000.00
9,000.00
8,000.00
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
-
9,283.73
Millions
5,589.77
Top 10 Registered Schemes by Fund Value
k
l
2004- Period after Reform
Kenya’s Retirement Benefits Structure
The Civil Service Pension Scheme
•Non contributory & Unfunded
•Covers all service employees
•Exempted from Retirement Benefits
Authority Supervision
•Legislated by Act of Parliament
National Social Security Fund (NSSF)
•Contributory & funded (both employee
and employer)
Accounts for 28% of total industry assets
•Covers all employer with 5+ employees
•Regulated & Supervised by RBA
Private Occupational Schemes
•contributory & funded
•Accounts for 70% of Industry Assets
•Covers employees of the employer
•Regulated & Supervised by RBA
•Legally formed under trust deed
Individual Retirement Benefits Schemes
•Contributory & funded
•Open to all - formal & informal workers
Regulated & Supervised by Retirement
Benefits Authority
•Legally formed under trust deed
Challenges – Slow Compliance

Primary role of the Authority is to bring schemes to full
compliance with the law.

Private Occupational and Individual Retirement schemes
were given one year to comply with Act from 2000- 2001

NSSF was given additional extension upto June 2006

By 2003 only 128 out of 1340 schemes were compliant

And by 2005, 70% of schemes were compliant

NSSF not compliant to date
Challenges – Unremitted Contributions

An inherited problem: Sponsors failed to remit and insure
members benefits - Scheme funds were ploughed back into
business

Public institutions suffer more than private companies

Though remedial plans are in place to recover un-remitted
contributions

Sponsors have suffered liquidity problems and failed to honour
plans

Even with the Authority’s intervention by use of interim
administrators, there have been unsuccessful cases

Members may suffer the double jeopardy of losing both jobs and
benefits
Various Problem Cases of Scheme
Schemes under interim administration
Reasons for placing Schemes under interim
administration
Frequency
Percentage
Failure to comply with registration requirements
5
24%
Failure to recover non remitted contributions (Scheme
closed down)
3
14%
Failure to pay retrenched employees
1
5%
Non Remittance of contributions
4
19%
Misallocation of scheme assets
2
10%
Sponsor under Receivership
1
5%
Funding level unclear
1
5%
Trustees failure to act
1
5%
Resolved Cases
3
14%
Total
21
100%
Challenges – Under-funding

The Act requires schemes to maintain 80% funding level
especially DB schemes

47% and 9% of public and private DB schemes are under
funded.

Historical cases exist
• Schemes did not carry periodic actuarial
reviews/valuations
• Schemes failed to implement actuarial recommendations
• No adjustments on parameters (pension factor,
contributions rates, investment policy) were carried out

Overtime scheme liabilities became greater than assets
Public Versus Private DB Schemes Funding Level
Funding Level of DB Schemes
30
Number
25
20
15
10
5
0
less than 50% 50-80%
80%-100%
Funding Level
Public
Private
more than
100%
Challenges – External Scheme Administrators

Schemes have the option to appoint external scheme
administrators

External scheme administrators are not fully liable for
scheme failures

External scheme administrators
regulated by Authority

This afforded external scheme administrators
complacent and slow to achieve compliance
were
previously
to
not
be
Challenges – Sponsor Interference

Sponsor interest in scheme strong even though
schemes are recognised as separate legal entity

Sponsor interference intimidates trustees from
performing their roles effectively

Sponsors threaten trustees of loss of jobs

Trustees
cannot
follow
on
un-remitted
contributions from sponsor/employer
Challenges - Scheme Investments

Lack of long term investments

Imprudent selection of assets and sub assets

Investments
securities

The problem of un-diversification of investments

Recent Initial Public Offers – Schemes unable to purchase
desired allocation during primary issue due to high
demand
heavily
skewed
towards
government
Other Challenges – Coverage

Coverage is low in Kenya – be;ow 15% of active workforce
covered

Coverage is mostly in the formal sector

The uncovered are in the informal and agricultural sectors

Low coverage challenged by:

Optional for Employers to sponsor a scheme

Individual Retirement Benefits scheme still in infancy stage

Fast growing informal sector than the formal

Poverty- retirement savings not a priority

Lowering life expectancy- Kenyan’s perceive that they will live only
up to 47 years

Lack of sustainable funds to sponsor universal pillar
Other Challenges – Adequacy of Benefits

The average income replacement ratio from schemes in
Kenya stands at 20%

Much below the minimum 40% stipulated by the World
Bank and the ILO

Caused by earlier easy access to benefits while in
employment and upon changing jobs
Overcoming The Challenges - I
1) Compliance

Introduced regulation of External AdministratorsRegulations should be in place by January, 2007

Non- compliant schemes required to develop remedial
plans for achieving compliance

Application of sanctions to schemes that are non
compliant or renege on plan

Changed law to criminalise non-remittance of employee
contributions
Overcoming The Challenges - II
2)
Pension Education Campaigns

The Authority has embarked on pension education and
sensitisation programmes on importance of saving for
retirement to increase coverage

Authority targets to increase coverage by 5% by 2009
3)
Research

The Authority has an established
development department

Resources are dedicated for research

Research findings informs policy advice to Government

Three retiree
conducted
surveys
and
One
research and
member
survey
Overcoming The Challenges - III
4)
Ongoing Trustee Training - Monthly

Trustees play central in scheme compliance

From the onset the Authority put in place a serialised training
seminars for trustees

Training aims at educating Trustees on legal requirements

Trustee training ongoing to cater for newly elected trustees
5)
Pre –Retirement Training - Quarterly

Concept borne from Retiree surveys

Scheme members 5 years and below

Training aims at all round education of members about to
retire

Especially on benefits spending to increase adequacy
Overcoming The Challenges - IV
6)
Preservation Rule

Introduced and enforceable in 2005

Access to benefits before retirement is greatly limited

Portability allowed between occupational schemes and
even to individual schemes

To ensure preserved benefits for retirement

Increase adequacy
7)
Consultative approach

From the on set Authority has maintained open door policy
with stakeholders, is sensitive to stakeholders interests and
carries out consultations with stakeholders
Overcoming The Challenges – V
8)
Introduction of Risk Based Supervision

Shift from compliance focus to risk focus

Identify key risks facing schemes

Calculate risk index for all schemes

Apply resources to those scheme were the risks are highest
THE END
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