Going by current research, it is correct to note, rather with melancholy, that we will lead much lower quality lives in our retirement days if we do not change our pension and retirement plans today.
In a recent report published by the Daily Nation, experts observe that Kenyans are saving much less due to a number of reasons including daily basic needs, and other saving and investment opportunities.
Subsequently, with minimal cash set aside over the years, pensioners are finding themselves leading a more substandard life than they did during their active years.
According to several studies, pension income is way too low compared to what the pensioners used to earn before retirement. In their study in 2019, Zamara Group, a financial services firm concluded that pensioners receive about a third of their last wages. The study covered 65,000 members from 200 pension schemes. Enwealth Financial Services Limited’s survey indicated that the rate was much higher at 55 per cent of last wages. A smaller group of 515 pension scheme members was surveyed in the study.
The conclusion from the two surveys indicate that the figures are much below “the 75-80 percent replacement rate recommended by pension and personal investment experts to enable individuals to maintain the same standard of living in retirement,” the article read in part.
What this implies is that if we donot revise how we are currently planning for our retirement, poverty will lurk for us as soon as we hand in the office key and hang up our hats.
What is happening?
In an interview with Retirement Benefits Authority (RBA) CEO Nzomo Mutuku revealed in May 2019 to the Kenyan Wall Street that despite the huge collection that the pension industry rakes in (1.2 trillion), in terms of assets under management, only 20 per cent of Kenyan workers are enrolled in the scheme.
This according to Mr.Mutuku is because pension schemes are designed for workers in the formal employment who constitute just about 20 percent of the working force. The remaining 80 per cent are the ones working in the informal sector where proper channels to contribute to retirement schemes are inadequate.
What not to do
- Delaying saving into a pension plan
The best time to enroll for a pension plan is early (as soon as possible). Although when you are young retirement feels like several decades away, it pays to start now rather than later.
If you are still debating whether you should start now or later, pick the former;you will be glad you did as you will have a decent pension ‘pot’ for the future.
It is notable that the later you start, the larger the contributions you will have to make to get sound retirement returns.
- Failing to consolidate workplace pensions
Have you changed jobs in the past? Did you contribute towards a pension fund in these companies? If yes, it is time you consolidated these pension funds into one place. This will save you from future hustle of sifting through paper. In some cases, you might end up losing such reserves if for example; you were working with a poorly-performing fund.
- Having your financial eggs in one basket
It is always not advisable to keep all your funds in one basket. Opt for a pension plan that allows you to diversify your assets across a range of funds. These could range from shares, bonds, property as well as cash. Putting all your assets in the property market, for example, could be affected by other unforeseeable costs including maintenance, among other overheads.
Additionally, keep in mind that inflation is an aspect that could affect your overall kitty. As such, when planning for your ‘pot’, consider the depreciating value of money in the coming years.
Getting more from pension
- Diversify Pension Assets
Most pension schemes lack flexibility to diversify on other asset options.
According to Zamara Group Chief Executive Officer Sundeep Raichura, Private Equity is one asset class that pension schemes should look into.
Speaking at Zamara’s annual report on pension performance 2019 in Kenya, Mr.Raichura noted that Private Equity has started to pick up. He observed that although regulations allow schemes to “invest up to 10 per cent of the portfolios in Private Equity”, less than one percent has been located in that area thus far.
The report said that people in urban areas are less prepared for pension (27 percent) compared to those living in rural areas (32 per cent). Additionally, females reported higher percentage (31 per cent) as being more prepared than males at 27 per cent.
Some of the reasons for the low preparedness include inadequate income, high cost of living, lack of saving discipline, lack of financial information and advice and lack of investment ideas or options.
As a future pensioner, ask your scheme to support you to diversify your portfolio so that you can invest in more profitable options over time. Diversification also means opting to have more than one fund if you only enjoy the public service pension scheme offered by the government or a pension fund through your company; but keep such schemes to a manageable minimum.
- Consider quality health coverage
As we grow older, our medical expenses tend to rise. To avoid spending your hard earned savings on medical bills, get adequate health insurance cover. Look out for clauses that restrict certain cases i.e. age, or other illnesses that might not be covered by your insurer and plan accordingly. Ask about the limitations of your plan and work around it to ensure you get the best out of it.
In conclusion retirement is for bettering your future. Take the time to identify, and lay out an investment plan that ensures you are comfortable today as well as in the future. Most importantly, before investing the funds, consult widely and only work with credible schemes. Otherwise, you will have no one to blame should you lose your retirement security to substandard schemes.