Crisis in Kenya's pension sector as Sh95 billion contributions remain unremitted

Kenya's pension subsector is facing a crisis as it grapples with unremitted contributions, especially by state agencies, amounting to Sh94.6 billion as of March 2024.

The situation poses a serious risk to thousands of workers in cash-strapped parastatals and county governments, many of whom may retire without adequate funds due to failure by their employers to remit monthly deductions to pension schemes.

The Central Bank of Kenya's Financial Sector Stability Report highlights this issue as a major pain point for the sector, particularly affecting defined contribution schemes.

The government and quasi-government pension schemes are the most impacted, leading to an average funding level of 98.5 per cent for the 55 defined benefits schemes regulated by the Retirement Benefits Authority (RBA).

"The risk manifests through underfunding in defined benefits schemes and unremitted contributions in defined contribution schemes," reads the Central Bank report.

As of March 2024, 31 schemes reported funding levels above 100 per cent, while 24 fell below that threshold, exacerbating the situation.

Unremitted employer pension contributions have emerged as the second-largest pending bill for parastatals, following arrears owed to suppliers and contractors.

Late remittance is penalised at a rate of five per cent of the outstanding amount every month, further complicating the financial landscape for these schemes.

This crisis coincides with projections from the National Treasury, estimating that approximately 85,400 public service workers will retire between 2024 and June 2026.

Of these, about 30,155 were expected to leave in the financial year ending June 2024, with numbers gradually decreasing in subsequent years.

The pension schemes are also contending with high volatility in the stock market and rising interest rates, which have negatively affected pension investments.

According to the CBK report, the sector's exposure to market fluctuations has worsened due to instability in equity and bond prices.

Major declines in capital markets were reported, with quoted equities dropping by 32.6 per cent and corporate bonds by 15.4 per cent.

"Capital markets were characterised by declines in equity and bond prices, with significant scale-downs by foreign investors and inactive corporate bond markets. This negatively impacted the returns on investment for the pension sector," the report indicated.

Despite these challenges, the pension sector's total assets under management increased by 9.5 per cent to Sh1.73 trillion in December 2023, up from Sh1.58 trillion a year earlier.

This growth was primarily driven by a more than 100 per cent increase in investments in government securities, guaranteed funds, and offshore assets.