Why the capital markets are ideal for retirees

Photo credit: Shutterstock | Nation Media Group

At his inauguration on September 13, 2022, President Dr William Ruto spoke passionately about savings and the need for more people to embrace it as a culture.

He weighed in on the pension contributions by Kenyans in formal employment, noting that the statutory monthly Ksh200 individual contributions to the National Social Security Fund (NSSF) were insufficient to be of help to retirees in old age.

The Government of Kenya runs NSSF, the agency tasked with the responsibility of collecting and managing retirement funds of employed nationals in both the formal and informal sectors of the Kenyan economy.

The fund is financed through employee and employer contributions, and the proceeds are used for benefits upon retirement. The level of retirement income receivable is related to the amount of contributions made over the accumulation period, the annuity rates at retirement, and other factors.

Generally, Kenyans who are employed full-time in the private and public sectors have an employer-sponsored plan for retirement, in addition to NSSF. However, in informal industries, many workers barely save a few coins out of their daily bread for retirement purposes. They live from hand to mouth.

Nonetheless, aside from the employer and government-sponsored plans, there is the Individual Pension Plan option, which aids the self-employed or workers in theinformal sector to plan for their retirement. It is also useful to the formally employed who are looking for a scheme that can complement their occupational plans. 

Pension funds acquired from retirement schemes contribute significantly to investments, and therefore help boost the economy, giving credence to the President’s view as captured in his inauguration speech that higher savings would boost the country’s economy.

For example, NSSF is one of the largest investor pension funds to participate in the Nairobi Securities Exchange. The pension funds’ investments provide long-term financing in domestic markets. They are therefore a significant source of stable and long-term capital.

Unfortunately, out of every seven Kenyans, only one is confident about their financial well-being after retirement, and that’s because they are saving towards it. The rest risk sinking into poverty after retirement.  

Towards changing this scenario for the better, the Capital Markets Authority (CMA) and the Retirement Benefits Authority (RBA) have in recent years jointly embarked on stakeholder engagements to promote retirement savings.

The two parties are interested in helping Kenyans to secure a better financial future in retirement by facilitating their investment in the capital markets. This can only be accomplished by targeting this constituent with a robust capital markets awareness programme and advising them on the available products.

There are various regulated pension schemes in Kenya that invest in the capital markets subject to various asset limits. There are also several investment options within the capital markets, for retirees who have a good risk-return profile, especially when combined as part of a diversified portfolio.

Some of the products that are suited for retirees are stocks, bonds, collective investment schemes, and real estate investment trusts (REITS).

Retirees must be guided by professionals employed by intermediaries licensed by the CMA. Before a retiree invests, they should analyse their financial objective, their income sources, constraints, and risk tolerance.

Collective Investment Schemes apply where different individuals invest in a particular asset. It is a pool of funds from different people who have a common goal, much like the ordinary chama (savings/investment group). The money is pooled into unit trusts that are invested in various assets, such as money markets, bonds, and equities.

Another sound investment avenue is bonds. There are both corporate and government bonds. Corporate bonds are made up of the debt securities that companies issue to investors in order to raise capital. They are less risky and less volatile, compared to other asset classes. Moreover, they are liquid, offering investors easier exit and entry points. Their wide array of bonds also enables investors to build strong portfolios.

On the other hand, government bonds are offered by the Central Bank of Kenya. Treasury bonds are a secure investment that offers interest payments in specified periods throughout the bond’s maturity.

In addition to other sources of income during retirement, retirees can boost their earnings with investing in REITS. Investors pool their funds and invest in a trust with the intention of earning profits or income from real estate, as beneficiaries of the trust. The income generated is then distributed to the shareholders at the end of the year.

Compiled by the Education, Awareness and Certification Department staff of the Capital Markets Authority


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