RBA targets informal sector as it expects 3.2 trillion shillings in pension assets under new plan

The Retirements Benefits Authority (RBA) has set itself an ambitious target of accumulating 3.2 trillion shillings in informal sector pension assets by 2029.

In its latest strategic plan for 2024-2029, the office paid attention to the informal sector, planning to expand pension coverage from the current 26% to 34%.

During this period, the RBA will be targeting young people, small and medium-sized enterprises (SMEs), housing associations and mutuals.

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The authorities organised outreach activities and forums to engage these actors, as well as awareness-raising forums for employers and employees.

While the RBA sees an opportunity in this segment, it views changing consumer expectations and the evolving structure of the labour market as expected challenges.

The RBA says in its plan that it will lead on regulation that is friendly and takes into account the challenges faced by the informal sector, with the aim of widening the retirement bracket.

Authorities say that given the particular challenges faced by informal sector workers, it is necessary to develop a regulatory framework that takes into account their specific requirements.

The Blueprint identifies that properly articulating the needs of the informal sector will be crucial to establishing a comprehensive regulatory framework that effectively addresses the diverse workforce operating in the sector.

“However, the voluntary nature of the launch of the programme has created challenges in smoothly reaching out to a broad range of workers, including informal sector workers. This needs to be addressed through a more effective and inclusive approach in targeted outreach programmes,” the RBA says.

Government securities, worth 1 trillion shillings (51 percent), are the leading pension asset in the investment portfolio. They are held in government securities, followed by guaranteed funds at 20 percent and real estate at 12 percent.

Confidence that the informal sector is a target has been underpinned by the successes of the 2019-2024 strategic plan, which the body noted in its latest plan. The plan documents the central role of the informal sector in increasing pension coverage by eight per cent over four years.

During this period, the authorities focused on expanding the coverage of pension benefits in the informal sector, implementing programmes aimed at encouraging these groups to take them up.

“As a result, we have seen an improvement in the asset base from 1.2 trillion shillings to 1.7 trillion shillings in 2023 and an increase in pension coverage from 18 per cent to 26 per cent over the same period,” the RBA’s strategic plan reads.

He adds that during this period there was also broader education about pensions and information programmes aimed at the informal sector.

“The Authority also conducted improved research and market analysis, as evidenced by more than 20 research papers produced during this period, which were used to inform policy formulation and developments in the sector,” the RBA says. In implementing the plan, the RBA cites policy and regulatory challenges, citing unpredictable taxation, weak regulation and oversight of service providers, and low coverage as some of the challenges observed.

These are some of the issues that influence the authorities’ intention to formulate policies and regulations friendly to the informal sector.

RBA data from June 2024 shows pension assets under management stood at 1.9 trillion shillings, up from 40 billion shillings in 2000.

The RBA notes that the retirement benefits sector plays an important socio-economic role in alleviating poverty among older people, as well as mobilising long-term savings to promote economic growth and development. “The sector has achieved significant milestones in terms of growth, sustainability and governance. However, the sector continues to face challenges in terms of coverage and inclusion, benefit adequacy and fragmented legal and regulatory frameworks,” it says.

During the launch of the RBA’s strategic plan, it also introduced the National Retirement Benefits Policy, a key document that had been missing from the sector and which had been cited as one of the challenges in implementing the previous strategic plan 2019-2024.

“The national retirement benefits policy is focused on expanding coverage to a broader spectrum of the population, including those working in the informal sector who have historically been marginalised in terms of retirement benefits,” noted RBA Governor Nelson Havi.

Of the six strategic themes set out in the strategic plan, the RBA intends to prioritise innovation in pension coverage and benefit adequacy.

“The authority will focus on expanding outreach to disadvantaged segments of the population, strengthening strategic financial education partnerships, developing retirement education programs, supporting innovation and creativity, and promoting responsible and sustainable investment of retirement benefit funds,” the agency notes. The RBA’s goal in the informal sector aligns with several strategies used by industry players that aggressively target this underserved and underserved population.

Britam Asset Managers is one such service provider that has recently launched a pension product for small and medium-sized enterprises called the Ngao Umbrella Pension Scheme.

The scheme is a multi-employer pension product designed to help SME owners who are largely informal bypass the challenges of setting up a scheme. Instead, they can opt to join an umbrella scheme.

Edward Karani, Director of Infrastructure Development, Technology and Innovation at the Micro and Small Enterprises Authority (MSEA), noted during the launch of the Ngao Umbrella Pension Scheme that one of the reasons for the lower share of the informal sector in pension contributions is the broad and general definition of a formal enterprise used by financial services companies.

“What is a formal business? Simple question. Is it simply an entity that is registered solely through the Business Registration Service (BRS)? Is it a cooperative or an association? Can an entity that brings people together to achieve certain interests be considered for a formal pension scheme?” he asked.