Why Policies Limiting Early Access to Retirement Savings are Misguided
Category: Retirement Savings
By: Kwame Owino,
Among the most concerning things in Kenya today is the relentless march of the state through laws and regulations and into areas that result in reduced autonomy of citizens. This march of the nanny state is predicated on the view that state agencies care for and know better than the citizen. In other words, citizens are considered unable to make independent economic decisions without guidance by the state agencies on how best to live life. This patronizing behaviour and truncation of individual freedom is the concerning advance of the ‘Nanny State’ in Kenya.
Recent forms of this infantilization of the citizen are evident in policies placing limitations on the healthcare choices, forced recruitment of families into the Social Health Insurance Fund (SHIF), and reduction in income through taxes for services such as the Affordable Housing Levy Fund that people do not choose.
This article in the Business Daily (gated), explains that Kenya’s Retirement Benefits Authority (RBA) is seeking to change regulations that apply to pensions and retirement savings in Kenya whose effect is to forbid early access to retirement savings. As they exist now, regulations allow a person who is saving for pensions or retirement to unlock savings before attainment of the age of 50 years. The reasoning behind this is that retirement savings should be exclusively utilized in retirement and enabling early access to it would undermine the intention to lock in savings for an extended period and thereby enhance returns.
The sensible reasoning that informs this intended reform is that the access to retirement savings should be delayed to a date as close as possible to the retirement of 60 years in Kenya. As such, the RBA contends that this ought to be the primary interest of any saver, to safeguard economic security in old age. The compounding effect of savings imply that it is always preferable to postpone the access to those savings for as long as is possible.
Yet, to deny a saver access to her savings under the pretext that early access undermines the final retirement income is not always a good argument.
The first reason is that a citizen’s savings represent her private property, both recognized and protected by article 40 (1) of the constitution. In addition, article 40 (2) (a) expressly forbids parliament from enacting legislation that deprives a person of that property, while article 40 (2) (b) reaffirms that enjoyment of all rights under this article protects from discrimination. Impliedly therefore, a person’s savings represent private property and the person is further protected from administrative or other regulations that would deny him or her access to that legitimate property. And since parliament as one arm of government is restrained from interference with the right to property, it behoves regulatory authorities to be even more cautious in restricting the enjoyment of property rights.
In spite of the intentions of the regulations being reformed, these clauses on property protection do not take the discretion from the citizen in terms of when to retire or to have access to the savings. Notwithstanding the belief by a regulators and fund managers who support the view that access should be delayed as much as possible, the constitution correctly reserves the discretion to access to property with the citizen.
The Retirement Benefits Act permits RBA to regulate the pensions and retirement savings industry and also to protect the interests of the members and sponsors in the industry. Figure 1 below highlights the section of the statute on where the functions are laid out. The RBA’s quest to limit the discretion of a citizen who saves with the regulated schemes may be informed by the justification that it is protecting that member’s interest under section 5 (b) of the statute. Regardless of this statutory power, it is an extension of paternalistic interpretation that the owner of the property is making the early withdrawal against her own interest.
In its public communication, the RBA has argued that the restrictions on early access to retirement savings are intended to ensure that working people accumulate sufficient savings to protect them against old age poverty. In particular, the article cited that a survey undertaken by the Kenya National Bureau of Statistics showed that 81.5% of citizens above the retirement age were in active employment. That a large proportion of people who are above retirement age continue to work is neither a manifestation of hardship for those in this age cohort as the RBA infers, nor confirmation that they do this because of having made early withdrawal of savings.
Savings for retirement are dependent on the existence of an income from employment. And therefore, the adequacy of savings is constrained by the availability of income source, the disposable income available for saving, the annualized return for savings and the total period of the saving. Thus, the prevalence of old age poverty in Kenya is not primarily attributable to the period of saving which is the factor affected by the quest to delay exit from a retirement savings plan. This argument to delay individual access to the savings is merely an assertion of power of the regulator and hardly about raising the returns to savings.
The RBA undertakes a biennial pensions survey assessing pensions reach, adequacy and sustainability for retired citizens living in Kenya. The latest iteration of the survey, available here, is the ninth of the series. Its findings show that the despite long periods of saving, 57% of retired citizens considered those savings as inadequate. Most of these retired citizens worked in the formal sector with a majority having retained one employer throughout their professional lives. This suggests that the typical saver in retirement benefits schemes has a strong incentive to save. It is therefore highly presumptuous to hold the position that such an individual would withdraw from savings for frivolous reasons and should therefore be stopped from exit before the age of 50 years.
There is a clear correlation in the fact that 81.5% of citizens who had attained the age of retirement were still at work and the expression of inadequate savings by a majority of them. And this connection is that incomes in Kenya are not only low but have grown at a very low rate over the working period of these retired citizens. Inadequate pensions savings and high prevalence of work by citizens who have attained retirement age is a reflection of a low income which would create inadequate resources for retirement. It is unlikely that the mere extension of savings period would resolve the old age deprivation in a macroeconomic context of low growth, high poverty and high dependency ratios.
Looking at Kenya’s growth and economic management record for the last thirty years which coincided with the peak income of today’s retiree, it is clear that these citizens were victims of poor macroeconomic management which limited their productivity, employment prospects and income growth. The combination of these factors affected the returns and quantum of savings.
In conclusion, the tightening of regulations to deter withdrawal of savings before the age of 50 years is bound to be an ineffective solution for the problem of inadequate resources to replace working income. This policy restricts a citizen’s choice to access to her private property, fails to account for the fact that a person may resort to the savings to re-establish their lives after loss of employment. Low replacement ratios and poor economic outcomes in retirement are the product of poor macroeconomic conditions in Kenya and not what the RBA considers as premature access to savings. Stooping savers from early access to retirement savings is power play and not a policy that will resolve the problem as framed.
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Why Policies Limiting Early Access to Retirement Savings are Misguided
| Post date: Fri, Mar 14, 2025 |
| Category: Retirement Savings |
| By: Kwame Owino, |
Among the most concerning things in Kenya today is the relentless march of the state through laws and regulations and into areas that result in reduced autonomy of citizens. This march of the nanny state is predicated on the view that state agencies care for and know better than the citizen. In other words, citizens are considered unable to make independent economic decisions without guidance by the state agencies on how best to live life. This patronizing behaviour and truncation of individual freedom is the concerning advance of the ‘Nanny State’ in Kenya.
Recent forms of this infantilization of the citizen are evident in policies placing limitations on the healthcare choices, forced recruitment of families into the Social Health Insurance Fund (SHIF), and reduction in income through taxes for services such as the Affordable Housing Levy Fund that people do not choose.
This article in the Business Daily (gated), explains that Kenya’s Retirement Benefits Authority (RBA) is seeking to change regulations that apply to pensions and retirement savings in Kenya whose effect is to forbid early access to retirement savings. As they exist now, regulations allow a person who is saving for pensions or retirement to unlock savings before attainment of the age of 50 years. The reasoning behind this is that retirement savings should be exclusively utilized in retirement and enabling early access to it would undermine the intention to lock in savings for an extended period and thereby enhance returns.
The sensible reasoning that informs this intended reform is that the access to retirement savings should be delayed to a date as close as possible to the retirement of 60 years in Kenya. As such, the RBA contends that this ought to be the primary interest of any saver, to safeguard economic security in old age. The compounding effect of savings imply that it is always preferable to postpone the access to those savings for as long as is possible.
Yet, to deny a saver access to her savings under the pretext that early access undermines the final retirement income is not always a good argument.
The first reason is that a citizen’s savings represent her private property, both recognized and protected by article 40 (1) of the constitution. In addition, article 40 (2) (a) expressly forbids parliament from enacting legislation that deprives a person of that property, while article 40 (2) (b) reaffirms that enjoyment of all rights under this article protects from discrimination. Impliedly therefore, a person’s savings represent private property and the person is further protected from administrative or other regulations that would deny him or her access to that legitimate property. And since parliament as one arm of government is restrained from interference with the right to property, it behoves regulatory authorities to be even more cautious in restricting the enjoyment of property rights.
In spite of the intentions of the regulations being reformed, these clauses on property protection do not take the discretion from the citizen in terms of when to retire or to have access to the savings. Notwithstanding the belief by a regulators and fund managers who support the view that access should be delayed as much as possible, the constitution correctly reserves the discretion to access to property with the citizen.
The Retirement Benefits Act permits RBA to regulate the pensions and retirement savings industry and also to protect the interests of the members and sponsors in the industry. Figure 1 below highlights the section of the statute on where the functions are laid out. The RBA’s quest to limit the discretion of a citizen who saves with the regulated schemes may be informed by the justification that it is protecting that member’s interest under section 5 (b) of the statute. Regardless of this statutory power, it is an extension of paternalistic interpretation that the owner of the property is making the early withdrawal against her own interest.
In its public communication, the RBA has argued that the restrictions on early access to retirement savings are intended to ensure that working people accumulate sufficient savings to protect them against old age poverty. In particular, the article cited that a survey undertaken by the Kenya National Bureau of Statistics showed that 81.5% of citizens above the retirement age were in active employment. That a large proportion of people who are above retirement age continue to work is neither a manifestation of hardship for those in this age cohort as the RBA infers, nor confirmation that they do this because of having made early withdrawal of savings.
Savings for retirement are dependent on the existence of an income from employment. And therefore, the adequacy of savings is constrained by the availability of income source, the disposable income available for saving, the annualized return for savings and the total period of the saving. Thus, the prevalence of old age poverty in Kenya is not primarily attributable to the period of saving which is the factor affected by the quest to delay exit from a retirement savings plan. This argument to delay individual access to the savings is merely an assertion of power of the regulator and hardly about raising the returns to savings.
The RBA undertakes a biennial pensions survey assessing pensions reach, adequacy and sustainability for retired citizens living in Kenya. The latest iteration of the survey, available here, is the ninth of the series. Its findings show that the despite long periods of saving, 57% of retired citizens considered those savings as inadequate. Most of these retired citizens worked in the formal sector with a majority having retained one employer throughout their professional lives. This suggests that the typical saver in retirement benefits schemes has a strong incentive to save. It is therefore highly presumptuous to hold the position that such an individual would withdraw from savings for frivolous reasons and should therefore be stopped from exit before the age of 50 years.
There is a clear correlation in the fact that 81.5% of citizens who had attained the age of retirement were still at work and the expression of inadequate savings by a majority of them. And this connection is that incomes in Kenya are not only low but have grown at a very low rate over the working period of these retired citizens. Inadequate pensions savings and high prevalence of work by citizens who have attained retirement age is a reflection of a low income which would create inadequate resources for retirement. It is unlikely that the mere extension of savings period would resolve the old age deprivation in a macroeconomic context of low growth, high poverty and high dependency ratios.
Looking at Kenya’s growth and economic management record for the last thirty years which coincided with the peak income of today’s retiree, it is clear that these citizens were victims of poor macroeconomic management which limited their productivity, employment prospects and income growth. The combination of these factors affected the returns and quantum of savings.
In conclusion, the tightening of regulations to deter withdrawal of savings before the age of 50 years is bound to be an ineffective solution for the problem of inadequate resources to replace working income. This policy restricts a citizen’s choice to access to her private property, fails to account for the fact that a person may resort to the savings to re-establish their lives after loss of employment. Low replacement ratios and poor economic outcomes in retirement are the product of poor macroeconomic conditions in Kenya and not what the RBA considers as premature access to savings. Stooping savers from early access to retirement savings is power play and not a policy that will resolve the problem as framed.
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Tracking Maisha Namba – Digital UPI: What is changing, and what are the key issues?
Maisha Namba refers to the unique personal identification number assigned to every Kenyan citizen upon registration, usually at birth. This number serves as a lifelong personal identity number. In this study by the IEA Kenya, the author examined the proposed implementation of a unique personal identifier system in Kenya and compared that to India’s Aadhar […]
Newly Proposed State Corporation Reforms: A Necessary Fix or another False Start?
The 2025 Cabinet-approved State Corporation Reforms Plan has detailed comprehensive changes in the structure and governance of state-owned enterprises (SOEs) in Kenya. The plan, which involves mergers, dissolutions, restructuring, and declassification of various entities, is framed as a necessary intervention to enhance efficiency and alleviate fiscal pressures. However, beyond the technicalities, it raises significant legal […]
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There is a big global debate on tariffs, their effects, and who pays for them, creating misconceptions. The broader trade strategy premised on Tariffs reflects a worldview rooted in 19th-century mercantilism, emphasizing protectionism and an aggressive use of tariffs.[1] The misconception that tariffs aren’t taxes stems from several factors. Framing plays a significant role. Tariffs […]
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Occupational licensing is widespread in Kenya, particularly in professions such as law and medicine, and it sparks debate in law and economics. In Kenya, occupational licensing is provided for through a set of statutes. This has implications for markets of legal service provision, which we discuss in this blog. Why is occupational licensing now a […]
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