The Challenges of Being a Regulator of Retirement Benefits Schemes

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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

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CONTENTS

• Introduction Role of Retirement Benefits
  Authority
• Kenyas Retirement Sector
• Challenges
• Overcoming the Challenges

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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
• Members were denied benefits lacked protection
• Scanty, scattered and disharmonized benefits
  legislation
• Imprudent investments of scheme funds
• Poor management of schemes- no required
  accountability
• Scheme funds formed part of sponsors capital
  funds
• 00

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Role of the Authority

• Regulate and supervise the establishment and
  management of retirement benefits schemes
• 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.

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The Authoritys 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.
• Schemes 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

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Growth in Assets Under Fund Management
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Retirement Benefits Industry Asset holdings
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Growth in Assets of Registered Schemes - I
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Growth in Assets of Registered Schemes - II
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Kenyas 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

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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

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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 Authoritys intervention by use of
  interim administrators, there have been
  unsuccessful cases
• Members may suffer the double jeopardy of losing
  both jobs and benefits

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Various Problem Cases of Scheme
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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

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Public Versus Private DB Schemes Funding Level
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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 were previously
  not regulated by Authority
• This afforded external scheme administrators to
  be complacent and slow to achieve compliance

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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

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Challenges - Scheme Investments

• Lack of long term investments
• Imprudent selection of assets and sub assets
• Investments heavily skewed towards government
  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

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Other Challenges Coverage

• Coverage is low in Kenya beow 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- Kenyans perceive that
  they will live only up to 47 years
• Lack of sustainable funds to sponsor universal
  pillar

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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

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Overcoming The Challenges - I

• 1) Compliance
• Introduced regulation of External Administrators-
  Regulations 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

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Overcoming The Challenges - II

• 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
• Research
• The Authority has an established research and
  development department
• Resources are dedicated for research
• Research findings informs policy advice to
  Government
• Three retiree surveys and One member survey
  conducted

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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

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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
• Authority has a service charter to its customers

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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

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THE END
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