January - June 2018 Edition 4. The Devolution. Edition. The Fund January - June 2018 Edition 4 1

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1 January - June 2018 Edition 4 The Devolution Edition The Fund January - June 2018 Edition 4 1

2 We receive, prudently invest and manage members savings for prompt payments of benefits for secured retirement. 2 The Fund January - June 2018 Edition 4

3 Contents 04 Editor s Note In this issue, we look at the success stories of counties that have taken upon interesting projects. 08 Devolution is a success story despite snags County Governments have implemented numerous public projects that have improved livelihoods. 11 LAPFUND Amal unveiled LAPFUND launches the first fully Shar iah compliant product in East and Central Africa, LAPFUND Amal. 15 Navigating the investment maze after retirement Investing for retirement is one of the major aspects of financial health that is key for all Kenyans. 18 Leveraging on technology, reaching the counties The Retirement Benefits Authority sets the total retirements benefit industry in Kenya at a trillion shillings. 19 State of the Nation Goodwill from counties key if Kenya is to attain her environmental conservation goals. 26 The future of retirement benefits industry and devolution Currently, the pension schemes have invested 27.8 per cent of their monies in government bills. 29 Lessons from across the globe Global benchmarks on managing pension funds in a devolved system of government. The Fund January - June 2018 Edition 4 3

4 Editors desk Editor: Galm Jaldesa Welcome to the fourth edition of The Fund! In 2010, Kenyans endorsed a new constitution, which established a devolved system of government with 47 new units of governance. The Fourth Schedule of the Constitution spells out 14 functions to be devolved to county governments. These are: Agriculture; County health services; Pollution control; Cultural activities; County transport; Animal control and welfare; Trade development and regulation; County planning and development; Preprimary education, village polytechnics and child care facilities; Implementation of specific national government policies; County public works and services; Fire lighting and disaster management; Control of drugs and pornography and; Ensuring and coordinating community participation in governance. In this issue, we look at the success stories of various projects in the counties, which have had direct and indirect impacts on the operations of retirement benefits schemes. Naturally, we also talk about the future of the retirement benefits industry in the face of devolution. There is also the question of what the future holds with the prospect of government tapping into the Kshs 1 trillion pension industry to finance infrastructure Kenya s pension industry is valued at 1 trillion Kenyan Shillings projects as it seeks to stop dependence on foreign debt. We offer you some insight into this in the Future section. We have plenty more in this issue, including a revisit of LAPFUND s performance in the last year, and an informative interview with Mr. Hassan A. Ibrahim, the marketing officer in charge of Mandera County. Of course, we cannot fail to give you some tips on how to make sure you retire comfortably, so look out for that too! I thank all our partners for their immense support in making this edition a success. Happy reading! Flevian Kubasu Golda Akolo Mbuiyu Kaiganaine Valentine Shanyisa 4 The Fund January - June 2018 Edition 4

5 We are committed to consistently provide and facilitate the provision of value added and timely retirement benefits The Fund January - June 2018 Edition 4 5

6 Perspective Implication of devolution on the pension industry Hiccups associated with the establishment of county governments seem to have passed for the retirement benefits industry as the number of new members joining LAPFUND increases. LAPFUND Chief Executive Officer Mr. David Koross said the new members were newly employed county staff and those absorbed from the national government departments whose functions were devolved to the counties. LAPFUND now boasts of membership comprising of employees of county governments, county assemblies, county Saccos, water and sewerage companies, and other associated organizations. Mr. Koross added that retirement benefits schemes were not out of the woods yet since the government was yet to remit the workers contributions. He expressed optimism that the Intergovernmental Relations Technical Committee and the National Treasury would soon come up with a mode of payment for the unremitted funds. We strongly believe that once we receive the remittance, the contributions will enable us to invest and enhance our members returns. In the meantime, our assets continue to be spread across real estate, government securities, private equity and stocks, said Mr. Koross. In order to ensure that workers funds are safe and secure, LAPFUND has streamlined its operations and products to reduce duplication and wastage of resources. Mr. Koross has maintained that all funds belonging to LAPFUND members would continue to be invested in line with legal requirements as outlined in the Retirement Benefits Authority regulations. We prudently manage member funds and have never delayed benefits payments in our 57 years of existence, he added. Since devolution came into place, LAPFUND has set up a number of regional offices in a bid to serve members better. Currently, LAPFUND has presence in Mandera, Isiolo, Nyeri, Kisumu, Mombasa, Nakuru, Migori, Kakamega, Garissa, Wajir, Marsabit, Uasin Gishu, West Pokot and Nairobi. 6 The Fund January - June 2018 Edition 4

7 News around town LAPFUND recognized for excellence LAPFUND was declared the Best Managed Public Sector Scheme and Best Internal Administrator of the Year during the inaugural Pension Awards for its excellence in service provision to its members through improved retirement outcomes. We are thrilled to be recognized for our prudent investment and management of members contributions, which is exemplified by the prompt payment of the secured retirement benefits, said LAPFUND Chief Executive Officer Mr. David Koross. Organised by the Institute of Pension Management, the Awards recognise and award excellence in innovation and service provision that improves the outcomes of both pension funds and members. The Awards draw participants from industry players including fund managers, custodians, internal and external administrators, actuaries, law firms, and auditors to individual schemes, umbrella schemes, trustees and approved issuers. During the gala night, the Institute of Pension Management Chief Executive Officer Mr. Anthony Odhiambo noted that the pension industry is worth over Kshs 1 trillion, representing 20% of the country s Gross Domestic Product. With an average growth rate of 15.6 percent, the pension industry should be tapped into, and that is why it is important to recognize the stakeholders who are doing outstanding work to drive excellence and innovation in this sector, Mr. Odhiambo said. In the past years, the Kenya Institute of Management, through the Company of the Year Award (COYA), has recognized LAPFUND as the Best Human Resource Focused Company. The Fund January - June 2018 Edition 4 7

8 Special Report Devolution is a success story Despite a number of teething problems, county governments have successfully implemented numerous public projects that have significantly improved the livelihoods of residents. In the last four years, budgetary allocations to county governments have been well-utilised thanks to expeditious decision-making processes where prioritised projects are implemented under the keen watch of the governors. On infrastructure, Wajir County Government invested heavily in tarmacking county roads, while Isiolo and Mandera county governments funded the construction of the Isiolo International Airport. The Nandi County Government has invested in the Koitalel Samoei University while the Machakos County Government has initiated ambitious infrastructure development by setting up a modern people s park, a stadium and upgrading several roads. The county governments also executed targeted projects that improved incomes for farmers of key agricultural produce, such as a mango-processing unit in Makueni County, a banana processing plant in Kisii County and milk factories in Uasin Gishu and Murang a counties. To boost milk production, the Nyandarua County Government is running an artificial insemination programme and extension services that are highly subsidised. These services have helped to reduce livestock deaths and improve yields as well as enabled more farmers to venture into commercial dairy farming. In the area of health services provision, various county governments have set aside funds for acquisition of dialysis and chemotherapy equipment to ease the burden that terminally ill patients bear while travelling long distances to access the costly services. When it comes to the supply of drugs, county governments have engaged the Kenya Medical Supplies Agency (KEMSA) to ensure prompt delivery of drugs to individual hospitals as requisitioned. 8 The Fund January - June 2018 Edition 4

9 Special Report Another devolved function in which the county governments have had success is education. More classrooms have been built across the country easing congestion in early childhood education schools, and improving access to education for poor children. Bright children from humble backgrounds have received bursaries and scholarships to continue with their education in secondary, college and university level. Last year, for example, Mombasa County set aside bursaries for all children who were admitted to university and tertiary institutions, promising full scholarships to them. Security has a direct effect on a county s socio-economic wellbeing, which is why security lights have been installed across villages and major highways to boost security and therefore encourage commerce round the clock. With increased funding, county governments are poised to implement more projects that touch the lives of their residents by helping them generate income and take care of their social needs such as health care and education. The Fund January - June 2018 Edition 4 9

10 Service to All 10 things you need to know about gratuity 1. What is gratuity? Gratuity is a social security benefit provided to the employees by the employer in appreciation for their service after their exit. The terms of the gratuity are negotiated and documented in the employees contract. 2. Is gratuity a retirement plan? Yes. Gratuity is a benefit for contract employees for their contribution to an organisation. 3. When and how is gratuity paid? Gratuity is payable at the end of the term of service as a one-off lump sum payment. 4. After how many years of working do I become eligible for gratuity? This is dependent on the contract between an employer and employee. 5. How is gratuity calculated? Gratuity is calculated as a percentage of the basic salary multiplied by the number of years of service. 6. How do I become eligible for gratuity as an employee? Gratuity is at the discretion of the employer and is determined by the contractual agreement signed between an employer and an employee. 7. Can gratuity be converted to provident/pension? Yes. The finance bill of 2015 allows for the conversion of gratuity to provident/pension. 8. So what are the advantages of converting your gratuity to provident/pension? Members contribution are invested hence increasing the final amount to be paid Contributions are tax deductible up to a maximum of Kshs. 20,000 per month. Contributions and their growth over time will determine the final amount to be paid. Benefits are guaranteed by law under the Retirement Benefits Act, thus the member pension is protected at all times. Funds are held in trust separate from employer s influence. 10 The Fund January - June 2018 Edition 4

11 Service to All LAPFUND Amal unveiled In keeping with its core value of continuous improvement, LAPFUND recently launched the first fully Shar iah compliant product in East and Central Africa, LAPFUND Amal. Through this product, LAPFUND will offer its members services that are in compliance with the Retirement Benefits Act and Shar iah principles. Speaking during the launch, LAPFUND Chief Executive Officer Mr. David Koross said that the innovative product seeks to bridge the gap in Shar iah savings for its members. In the last three years, the market has seen a growing demand for Shari ah compliant products and we saw it fit to provide our customers with a choice. LAPFUND Amal will allow our customers to save for their retirement in line with Islamic principles, said Mr. Koross. Mr. Koross added that the product, which will be available to both Muslims and non-muslims, aims to widen LAPFUND s pool of customers as it seeks to grow its market base. LAPFUND Amal draws its membership from county governments and associated institutions, the informal sector, parastatals, private sector and the diaspora. All of LAPFUND Amal s operations from conceptualization, to the on-boarding of members, to the investments, are guided by the Shar iah Supervisory Board of LAPFUND. LAPFUND will receive members contributions and ensure that they are invested in a prudent manner. As an agent, LAPFUND will receive a fee as compensation for its services while any returns realized from the investment of the funds remain the property of its members. Key stakeholders present during the launch were Supreme Council of Kenyan Muslims chairman Ambassador Dr. Yussuf Nzibo, Shari ah Supervisory Board chairman Mr. Sukyan Hassan, LAPFUND Board member Mr. Yunis Mohammed and LAPFUND Amal Shar iah Unit manager Mr. Mohamednur Wario. Mr. Yunis Mohammed said, LAPFUND Amal will be administered under the guidance of and conformity to Shar iah principles. LAPFUND including the board has provided immense support throughout this journey which has guided the development of this product. I thank the staff for the diligent work towards this product. The Fund January - June 2018 Edition 4 11

12 LAPFUND is the 1stShari ah compliant retirement benefits provier in the region offering services in compliance with Retirement Benefit Act and in accorance with Shari ah principles. Do you want to Work/Save /Retire, in accordance with Shari'ah principles, then simply join LAPFUND AMAL today. 12 The Fund January - June 2018 Edition 4

13 Your Money An overview of LAPFUND performance over the years 1960 Year LAPFUND was established under the law of Kenya, The Local Authorities Provident Fund Act, CAP County governments LAPFUND has collaborated with to co-sponsoring investment conferences. 4,500 new members that have joined LAPFUND as voluntary contributors towards saving for retirement 5000 indigenous trees LAPFUND has planted and is maintaining as part of its commitment to conserve Lake Kenyatta water catchment area in Lamu county 30 County Government and water companies that LAPFUND has sponsored with sports teams uniforms during annual intercounties games Distribution of over 4,000 sanitary towels LAPFUND has distributed to all girls who are candidates in both primary and secondary schools in Lamu County The Fund January - June 2018 Edition 4 13

14 Health Accessing healthcare in a devolved government Until the new constitution came into force, Kenya s health care had been a national government function, managed centrally. The 2010 Constitution of Kenya, however, introduced the concept of devolution and health service delivery was among the key functions that were devolved to the county governments. This single act of devolving health has created unprecedented opportunities and challenges to Kenya s health sector that have truly tested the overall effectiveness of service delivery. On the one hand, decentralisation of the health system has been praised for promoting community participation, accountability, technical efficiency, and equity in the management of resources within the sector. On the other, this same concept has been challenged for making the drastic shift before appropriate county-level structures and adequate capacity to undertake these functions were in place. The result of this has been major disruptions in staff salary payments characterized by health workers strikes and mass resignations, lack of clarity over specific roles and responsibilities at county and national level, and political interference in the activities of the health sector value chain. Turning the tide Following the examples set by other African countries that have devolved their health systems like Ghana and Ethiopia, great progress is being made despite the teething problems. For instance, in North Eastern Kenya, accessing quality care had been a luxury since independence. The nearest health centre was, in many cases, 100 kilometres away. That is slowly changing, with tremendous progress being made especially in the last three years. In Wajir County for instance, heavy investment from the county budget has been made in this crucial sector. From recruiting over 200 new healthcare workers, to enabling the district and sub-district hospitals in Wajir town to operate 24 hours, such changes have positively impacted the communities as counties address their specific heath needs. In addition, in a region where an estimated 581 women die annually from pregnancyrelated complications (Kenya Demographic and Health Survey), 32 new maternity wing extensions have been constructed. Mothers are now delivering in better-equipped hospitals and health centres thus helping to significantly reduce maternal deaths. More is achievable Devolution of healthcare services allows county governments to, among other things, design innovative models and interventions that suit the unique needs in their contexts, and make autonomous and quick decisions on resource mobilisation, resource allocation and spending, and management of arising issues. With such sufficient scope to determine their health systems and citizen priorities, a lot more can be attained with proper resource allocation and excellent service delivery. Challenges still abound Devolving the health function has presented institutional and resource allocation and utilisation challenges that must be dealt with to assure effective and sustainable healthcare service delivery at the county level. For instance, health facilities must be physically available for the population to access healthcare services. Just 63% of Kenyans have access to government health services located within an hour of their homes. This must be addressed if demand for health care is to increase in the counties. In addition, counties should work on increasing the efficiency of service delivery and adopting inclusiveness in managing their health systems by giving space for citizen participation in prioritization, planning, resource allocation, and monitoring. Counties must also invest in capacity building, especially in the marginalized counties. The East African Development Bank has partnered with several counties in Kenya to offer a mentorship and training programme for county physicians in the areas of oncology and neurology. Such initiatives must be lauded, scaled and cascaded into even more counties. At the same time, there has to be a thorough understanding of the roles played by the national and county governments to avoid the push and pull witnessed between governors and the Ministry of Health. This also calls for sensitization among the various actors and civic education for members of the public. The fact that decentralising health care in Kenya has greatly benefitted the public cannot be refuted. However, county governments and the national government must do more to ensure this model of healthcare service provision is efficient, sustainable and positively impactful to the public. 14 The Fund January - June 2018 Edition 4

15 How to Navigating the investment maze after retirement While the intention to have a solid retirement plan is more often than not present, a section of Kenyans tend not to intentionally plan their retirement investment journey. However, regardless of your age, setting aside funds for your sunset years in an absolute must. 1. Get rid of debt Being in debt during your working years may prevent you from saving for retirement. While navigating through these prime years with debt is possible, it is risky to move into retirement with tonnes of debt to repay. It is for this reason that you must pay off your debt before leaving the workforce, even if that means more sacrifice or working extra hard at the tail end of your career. The main types of debt that can hurt you as a retiree are mortgage debt, credit card debt and unsecured loans. High levels of debt will be bad for your finances but as a retiree, they can also be bad for your health. You would not want undue anxiety and pressure during your retirement because your debt level is stressing you out. 2. Turn a hobby into a money-making venture We are not talking about your favourite pass time of sports betting. Supplementing your retirement income is one of the key investment options that are both financially and emotionally rewarding. Hobbies are the things you would gladly do and that in most cases happily do for free. Since you would have the skills, expertise and personal connections needed for success, starting a hobby-related business can make for a relatively smooth transition. In addition, with the advancement of technology, you can now easily make money from your hobby both offline and online. For instance, you could sell your products and services online, teach, run a consultancy business, or become a writer and so much more. Whichever the option, you must remember that even a part-time hobby business is still a business so the tenets and principles of business planning must be adhered to. 3. Start as soon as possible Since there are so many retirement investing options available, don t wait until you re much older to begin actively saving for retirement. While younger, one is able to take on more risk that could yield better returns then reduce risk as you grow older. While at it, start with finding out what retirement investment options your employer recommends followed up by what is offered in Kenya. Key to remember is that when investing, start small and ensure that you fully understand the investment solutions, their offerings, returns, fees, etc. Whether they are stocks, real estate, mutual funds or insurance options, do not invest a lump sum amount. Start small and remember that you need to have short-term investments that are less volatile and long-term investments. However, do not be too conservative when you choose your retirement investment. 4. Get professional help Whenever you encounter anything you are uncertain about or cannot quite figure out in the world of retirement investment, consider enlisting the help of a financial professional with retirement planning experience. Kenya has many such professionals working in banks, stock brokerage firms, insurance companies, Saccos and microfinance institutions. Even though they often charge a fee, this can be money very well spent. However, some professionals and funds have a lot of fees built into their products, ensure that you are not paying too much in commissions and fees that water down your investment. While at it, try not to wander into things that you are not very sure about. Stick to your original plan based on the professional advice and plan since most retirement investment plans are long term. Without a doubt, investing for your retirement is one of the major decisions you will make in life and it must be one that is made after careful consideration of these and other variables. As you invest, ensure that you are keeping a prudent and watchful eye over your portfolio. An evaluation of your portfolio once or twice a year is advisable. If you are already retired or almost getting there, in the words of Danielle Duckery, Stay young at heart, kind in spirit, and enjoy retirement living. The Fund January - June 2018 Edition 4 15

16 Over 150 LAPFUND employees gathered in Nairobi for the annual end of year departmental meetings to review 2017 achievement and forge the strategies for It was a session where the team looked at the important things around us - a time when we can look back on the year that has passed and prepare for the year ahead. Simon Njuguna, Risk Officer 16 The Fund January - June 2018 Edition 4

17 Coworkers are the reason that we are able to get through the busy season and the end of year party is a special time of year to remember those who are close to our hearts! Lynette Lukale Administration Officer Mombasa It was definitely a happy end of 2017 as LAPFUND employees congregated to mark the end of yet another fruitful year. The Fund January - June 2018 Edition 4 17

18 State of the Nation Leveraging on technology, reaching the counties The Retirement Benefits Authority estimates the total retirements benefit industry in Kenya to be around Ksh 1 trillion, which is about a third of the country s GDP. With this figure set to grow in the coming years, it poses both opportunities and challenges to those running retirement benefit schemes. It is now common knowledge that the first step of a good retirement plan is access to information. Fund managers must appreciate that we are currently living in an Information age and as such, it is imperative to leverage the existing tools to build efficiencies in our operations and systems whilst remaining focused on improving service delivery to our members. Big data analytics is undoubtedly the anchor of the fourth industrial revolution, and Kenya leads her East African peers in marching forward into the technological era through the devolved units of administration fashioned into the 47 county governments. We must now adopt a new culture in our decision-making, one that is evidence based, using available data. The concerns of managing pension funds anywhere in the continent remain the same: low coverage, longevity risk, liabilities, and imprudent asset management, among many others. These challenges are further compounded by transitional challenges in the convergence and/or assimilation of former local authorities into the county system. The challenges are however, not insurmountable. Accurate data sets and trends, for example, can be very instructive in impact mapping, effectively affording the retirement benefits industry diversified investment avenues that offer guidance on what are the high growth areas to target, whether it is for increased coverage, enforcement of pension laws or even asset growth. The mobile phone and numerous hand-held devices that are established on the internet of things have been key drivers of financial inclusion in Kenya, uplifting many rural poor. It is well documented that the adoption of technology can and has a proven trend of improving pension saving. As we seek to better manage pension funds for our members across the counties, we must embrace the use of technology to help us better manage the fund with speedy payments and service to members being at the top of our agenda. Anecdotally speaking, cost might pose an obstacle, but it is the adoption of technological tools and analytics, willingness to adopt the new normal by management, board, staff, trustees and members that will ensure that the industry moves into a more efficient way of doing things. Finally, the Information Age is upon us and is inevitable, and while it is scary, it presents a huge potential for our fledging retirement benefits industry. Its incorporation into our member training drives, back office management, asset management, strategic planning and vision casting sessions as well as general communication within the organization is the first step. Making databased decision-making a culture in the industry is the holy grail we must seek to attain. This article is a contribution by Mr. David Koross the Chief Executive Officer, LAPFUND 18 The Fund January - June 2018 Edition 4

19 State of the Nation Devolution and the Environment As a quickly developing and industrializing country, Kenya faces the ever growing challenge of environmental conservation. The government has rightly recognized and appreciated the important function that the environment plays in underpinning development. Furthermore, the right to a clean and healthy environment is recognized in article 42 of the Constitution of Kenya. Every citizen has a right to have the environment utilized in a manner that benefits the current generation, as well as the future generations. However, five years since the devolved system of government came into force, the full integration of environmental activities in development planning at all levels of decision-making remains a challenge to the country. The Constitution vests the role of protection of the environment with the national government. The same Constitution however, gives the responsibility of execution of some national government policies on environmental conservation on county governments. To this end, there has been a lack of coordination, cooperation and clarity as to the roles of the county and national levels of government in environmental conservation. Despite the national government having greater responsibility in relation to the environment than the county government, the sovereign power of the people of Kenya is exercised both at the national level and the county level. As such, it is important for leaders, stakeholders and non-governmental and civil society organizations at the county level to work together in developing and executing legislation on the environmental issues in their jurisdiction. Stakeholders must prioritize meeting their constitutional obligations to the environment rather than focusing on political control. For instance, all county governments in Kenya have the responsibility of controlling air and noise pollution. The counties also have the responsibility of implementing national government policies on soil and water conservation. However, many counties are still grappling with issues of air pollution and improper waste disposal, which are quickly becoming the greatest contributors to environmental degradation. This notwithstanding, some counties like the County Government of Machakos have managed to transform their streets and environs from garbage disposal sites to clean business havens. Forest cover Kenya s forest cover now stands at 7% as a result of runaway illegal logging activities at the county level. While the national government is expected to formulate regulations to govern logging, county governments have been lax in enforcing policies that would curb illegal logging. This is despite the devolving of forestry functions in 2014 through the Forestry Transition Programme that sought to empower counties to support and participate in forestry development in the country. The programme, launched by former Cabinet Secretary for Environment Professor Judi Wakhungu, seeks to see the central government assuming the roles of provision of technical support, policy leadership and capacity building as the counties take charge of managing their respective forestry resources. In 2016, Taita Taveta became the first county in the country to complete the Forestry Transition Programme since it started, and has received 44 out of 68 forests that were previously managed by the Kenya Forest Service. For the country to achieve the desired 10% forest cover, both the national and county governments must collaborate through deliberate setting aside of land, human capital and finances to support investment in the sector. The national government has since banned all logging activities in Kenya for a period of 90 days in a bid to audit the state of Kenya s forests and re-strategize on how best to approach the conservation of this most prized possession that impacts millions. The Ministry of Environment, together with the Kenya Forest Service and all county governments, driven by passion for the conservation of environment, should take serious action in regards to environmental degradation and logging. Personal responsibility It is easy to imagine that the responsibility to provide a clean and healthy environment falls on the national and county governments only. However, the constitution makes it clear that every citizen has a duty to ensure that the environment is safe. If private citizens are irresponsible with the environment and neglect their obligations to the environment, the national and county governments will be unable to fulfil their constitutional obligations regarding the environment. This article is a contribution by Mr. Simon Njuguna, Risk Officer, LAPFUND The Fund January - June 2018 Edition 4 19

20 Interview with Mr. Hassan A. Ibrahim, Mandera Marketing Officer 1. How long have you been with LAPFUND? I have been with LAPFUND for about one year and three months now. 2. How have you contributed to LAPFUND in your role? In terms of marketing and membership recruitment, I have managed to recruit new members and thus helped to grow LAPFUND s membership. I have also ensured efficiency in service delivery to members by being present on the ground and attending to the members whenever they need assistance. 3. What is the key differentiator that LAPFUND offers to members in Northern Eastern? I believe that LAPFUND Amal, which is a Shar iah compliant product is the key differentiator to our North Eastern customers as it caters to specific needs of our Muslim clients. 4. What are some of the challenges members face and how does your role offer support to them? I believe one of the challenges they face is getting information. I offer support by making sure I am available to them to offer any assistance they may need. 5. What would you term as your highlight in serving LAPFUND members? Genuinely interacting with members to ensure that they are continuously satisfied with the products and services we offer. 6. What advice would you offer to LAPFUND members in different counties? I would like to urge our customers to reach out to us and learn more about how we go about the administration of benefits so that they can have more confidence in our products and services. Secondly, our customers should give us regular feedback on our products and services so that we ensure we meet their expectations while improving them where necessary. 7. In your opinion, how has devolution enabled the growth of LAPFUND? Since the ushering in of devolution, many jobs have been created. This has widened our market and provided us with further opportunity for growth. More departments have also been created thus increasing our membership. 20 The Fund January - June 2018 Edition 4

21 We are guided by our core values: Customer Focus Teamwork Continuous Improvement Professionalism Integrity The Fund January - June 2018 Edition 4 21

22 In Contact Effects of litigation in the retirement benefits industry In September 2017, Retirement Benefits Authority Acting Chief Executive Officer Charles Nzomo announced that by June of 2017, the assets held by pension schemes had almost hit the one trillion shillings mark. Despite the low coverage of Kenyans under pension arrangements, this remarkable achievement shows how much the retirement benefits industry continues to grow. In particular, LAPFUND has a bold growth plan. The fund targets savings of 14 billion shillings per annum, while at the same time increasing customer satisfaction annually by 4%. With the current leadership at the Fund, and the Secretariat team as currently constituted, this is not impossible. This message has been visualized in rich detail, which has seen the organization change its vision to To be the preferred retirement benefits scheme in Kenya, providing Secured Retirement. Already, LAPFUND has achieved tremendous milestones in the past 10 years. The fund value has grown from under five billion shillings to over 30 billion shillings in that period. It has scooped prestigious awards including Best Human Resource Focused Company at the 2016 Company of the Year (COYA) Awards, and in December 2017, Best Internal Administrator of the Year and Best Managed Public Sector Scheme of the Year at the inaugural Institute of Pension Management (IPM) Awards. The challenge for LAPFUND though is not in getting to the top, but rather staying at the helm. It is for this reason that under the Internal Audit department, there is a team working purely on risk. Their mandate is to create a risk framework that identifies, analyses and takes appropriate action to protect the fund against risks that would otherwise reverse the gains made. This is the new frontier that all retirement funds and schemes need to invest in. An emerging risk area in the pensions industry is litigation. Events from the last 10 years show that legal tussles in the courtrooms threaten to eat into the gains and milestones achieved in the industry. In 2008, for example, after an excruciating court battle, the high court ordered a large employer to pay its employees their pensions based on salaries awarded back in Back then, the employer had agreed to a salary deal that saw increments of salaries of up to 150%. However, these were not factored in when the employees retired. The implication was that paying all the pension arrears with interest would see the employer part with amounts of over 17 billion shillings. The employer is still paying out the amounts in phases after various appeals failed. This article is a contribution by Fidel Makori, a Benefits Administration Officer, LAPFUND 22 The Fund January - June 2018 Edition 4

23 In Contact In 2013, the Retirement Benefits Appeals Tribunal ruled that a pension scheme erred in its calculation of benefits for a former employee. The member s benefits were transferred from another scheme after the employer underwent restructuring. The issue in contention was whether the actuarial cash equivalent was payable under the old scheme rules or the new scheme rules. In what is expected to set a precedent and open a floodgate of cases of similar nature, the scheme stands to lose monies in excess of 3 billion shillings if it loses the ongoing appeal. In 2017, another giant scheme was on the receiving end when a four-member bench at the Retirement Benefits Appeals Tribunal established that they had underpaid their members who left service aged less than 50 years under their defined benefits scheme. The contentious issue was whether the generally accepted practice of applying a reducing factor in determining actuarial cash equivalents for deferred members is within the law. If the ongoing appeal is lost, the industry might part with tens of billions of shillings considering most defined benefits schemes in the country apply this formula. This trend is worrying and should be addressed. Stakeholders in the industry should seek first to understand the root cause of this problem. Why are members becoming increasingly litigious? Part of the answer lies in the expected benefits. Most people feel they are underpaid when the benefit they receive is lower than what they expected. I am of the strong opinion that a happy satisfied customer will not seek legal redress in court or at the Regulator. Improved provision of services across all schemes can see the number of such lawsuits cut by more than half. Effective and Efficient Customer Service This is ultimately the best solution. A genuine, efficient, personalized service can achieve huge deposits of trust from members and ensure that areas of conflict are minimized or eliminated altogether. From small courtesies like answering the phone to making timely responses, all administrators should adhere strictly to the set code of conduct. Regular customer service surveys should be conducted to ensure the industry is in the right direction and gaps are identified and addressed. Member Education Members should be educated on all that pertains to their benefits. Each figure in their statements should be explained to the member in such a way that they fully comprehend what to expect on leaving service. The member should be advised on how to increase their returns either by adding voluntary contributions in DC schemes or by negotiating better terms in DB schemes. Strict adherence to RBA regulations Schemes should ensure they operate within the regulatory framework. This includes compliance with legal notices, avoiding conflict of interest, holding annual general meetings, submitting statutory returns in time, issuing timely individual member statements, training trustees under the Trustee Development Programme Kenya (TPDK), etc. By taking these measures, the industry can prevent this litigation problem from becoming a crisis. This article is a contribution by Fidelis Makori a Benefits Officer, LAPFUND The Fund January - June 2018 Edition 4 23

24 GOLF VIEW SERVICED AP ARTMENTS State of the art serviced apartment complex 24 The Fund July January June Edition Edition 4

25 ENSUITE ROOMS STUDIO APARTMENTS ONE & TWO BEDROOM APARTMENTS FACILITIES 24 hrs large airy reception and foyer with independent lounge areas for comfort 2 central large lifts Golfview Apartments is a state of the art serviced Apartment complex on Muchai Drive off Ngong Road. The complex comprises of studio,one bedroom and two bedroom apartments which are tastefully furnished and serviced to international standards. The facility offers a panoramic view of the city alongside the comfort, as well as a serene and stress free homely atmosphere. We pride ourselves impeccable personalized services offered to the guests by the well trained team of professionals. Every stay is guaranteed to be unique and memorable. Ramps and large spaces conscious of clientele with special needs Large gym fully equipped with life fitness machinery and stand by personal trainer Large swimming pool in our central courtyard with sunbeds, parasols and sitting areas. Luxurious and panoramic roof top restaurant and lounge. Elegant Roof Top Conference Room for 12 with instant WIFI and IT connection. Laundry area with washing machines and dryers Ample parking TALK TO US TODAY Location: 1103 Mucai Drive, Ngong Road Nairobi Kenya Tel: Mobile: info@golfviewservicedapartments.com Website: golfviewservicedapartments.com The Fund January - June 2018 Edition 4 25

26 Future The future of retirement benefits industry and devolution The planned launch of long-term domestic debt instruments portends good tidings for the Sh1 trillion pensions industry for Funds keen on investing in government papers. Currently, pension schemes have invested about 27.8% of their monies in government bills, with many lamenting the lack of lucrative investment products in the market. Treasury Cabinet Secretary Henry Rotich was quoted as saying that the government planned to tap into domestic finance to retire costly short-term debts. The move could open a new frontier for pension funds to contribute to national development. Many pension schemes have invested heavily in real estate, with most precariously approaching the the legal threshold of 30% since the sector is deemed lucrative. Nevertheless, CS Rotich s plan, which comes a year after pension rules were amended to allow pension schemes to invest in infrastructural projects, could soon be realised with pension scheme members informed of expected returns and the effect their money will have on the economy. The government-pension schemes deal is a win-win situation that could see projects fasttracked as well as allow Kenyan pensioners to reap handsome returns from their investments. A financial consultant with African Development Bank, David Ashiagbor, welcomed the planned move saying harnessing local funds for development was far much cheaper than foreign dollar, euro or yen denominated money that was open to currency shocks that have in the past proven costly. Pensioners would be happy to build a road and witness it tolled to recover the money. This could attract other schemes to jointly fund such projects that guarantee them good returns as well as directly benefit Kenyans. As opposed to foreign funds whose profits are repatriated abroad, profits from pension funds will be recouped and spent in Kenya thereby growing the local economy, he said. Local pension managers could also influence the projects to be implemented with the most positive impact on the local economy as opposed to foreign sourced funds where the national government solely determines where the funds will be spent. 26 The Fund January - June 2018 Edition 4

27 Future With devolution in its second phase, the government is now able to reach more people than before, with decisions made locally on the best way to raise savings for pension. But the recent introduction of a welfare scheme where Kenyans over 70 years old will be compensated with a Kshs 2,000 stipend monthly could derail the ongoing campaign to encourage more Kenyans to voluntarily join pension schemes. While formal employees enjoy some form of pension membership, they account for a paltry 15% of the workforce, the rest are excluded, raising fears that a large number of Kenyans could retire to a life of misery and poverty a life with no dignity. Scholars have called for auto-enrolment to pension funds where every Kenyan has some form of savings whether employed or self-employed. Indeed, a creative idea to incorporate all Kenyans would be to require that a small percentage be deducted from every purchase of airtime by adults owning mobile phones for remission to their pension schemes. The same could be done to bank account holders and those in Saccos, thereby boosting retirement savings. CS Rotich is also relying on the emergence of new products such as post-retirement medical schemes, among other asset classes, to promote long-term savings. The Fund January - June 2018 Edition 4 27

28 We strive to be the leading scheme in Kenya providing secured retirement 28 The Fund January - June 2018 Edition 4

29 Global benchmarks on managing pension funds in a devolved system of government The world over, pensions have a reputation of being confusing and somewhat complicated. For many millennials and adults, contributing towards a private or public pension is more often than not a statutory requirement rather than a deliberate informed decision. However, pension industry players have not done enough to demystify this important aspect of financial planning to Kenyans. Moreover, the pension industry in Kenya has been characterized by rampant mismanagement and misappropriation of funds that has in many instances led to underperformance. This has led to sector experts, investors, Nairobi Securities Exchange officials and the Retirement Benefits Authority to increasingly probe the management strategies employed by Kenyan fund managers. After the promulgation of the 2010 constitution, which brought about devolution of resources and power from the national government to the 47 counties, global best practice on the management strategies that can maximize returns of a pension fund became key. This is because devolution has created challenges and opportunities alike that have greatly tested conventional ways of managing pension funds. The challenge for all pension providers thus far has been to ensure that their funds are adequately managed while meeting their obligations to members. Learning from countries like Scotland that have decentralised their pension sector from the previously European Union based system, here are some best practices that Kenyan pension sector players can learn and adopt: 1. Governance To be considered well managed, a pension fund needs to demonstrate good corporate governance. Tenets of good governance must guide all the decision-making processes of the fund. For instance, where a trustee is also a senior executive within the company, there is a serious potential conflict of interest between the need to manage the company and the responsibility of looking after the pension fund s assets. Good governance behoves that such potential conflicts of interests be identified and action taken to mitigate them. 2. Effective Decision-Making The biggest challenge for any pension fund is to ensure that the people taking the decisions have the skills and expertise that qualify them to do so. Trustees appointed to a pension fund should have adequate knowledge of the pensions and financial sectors, and should cut across an array of educational and professional backgrounds including law, actuarial science, corporate management and finance. 3. Training All trustees should undertake sufficient training to enhance their understanding of the pension environment. This process should not simply be as part of an induction, but should be ongoing for the time that the trustee is in office. This requirement is true even for members of the finance function appointed to act as trustees. Where in-house support is required, trustees should not be asked to work independently of professional support. The finance function must always be asked to assist trustees who may have little financial experience. And where a fund does require expert advice, whether for actuarial services or investment advice, it should have a clear policy stating how such appointments are made and for how long an appointment will apply. 4. Attention to Asset Allocation One of the major difficulties for pension providers is the need to manage assets in the context of the fund s liabilities. The ideal practice is to adopt the least risky investment decision relative to the fund s liabilities. However, this decision needs to be taken in the context of the fund s available resources. Trustees should examine the market place and all projections underlining their investment decisions and consider whether they are appropriate in the light of future obligations. A fund manager, once appointed, should be given a clear objective. This needs to be consistent with the trustees risk appetite, which should reflect the balance between assets and liabilities in the portfolio. 5. Process of Measurement and Evaluation Pension fund management is a long-term activity. It is important that any process of measurement and evaluation reflect that. Fund managers must therefore be given sufficient time in order to pursue their investment strategies. In particular, investment managers should not be removed from their positions because of short-term underperformance. However, trustees should continue to receive interim reports on the progress made by investment managers. 6. Regular Reporting Trustees need to remember that they act on the behalf of the fund s members. Annual reports covering the fund s objectives and performance need to be prepared for consideration by members. These should contain all and other kinds of detail as the ones listed above. Ultimately, good management of a pension fund is about ensuring that clear objectives are set and that the correct decisions are taken in the context of those objectives. This is what we can learn from countries that have devolved their pension sectors and successfully managed to provide shareholder and member value. It is such benchmarks that Malaysia, following the devolution of its pension sector, adopted and which have helped streamline the Employee Provident Fund (EPF) which is a compulsory saving scheme for individuals employed in the Malaysian private sector and a fundamental support of the country s pension system. Adherence to these best practices have enhanced financial security for many people in Malaysia in the wake of rising life expectancy, a general weakening of family ties and increasing medical costs like in many other Asian Pacific countries. This has led to the current success of the Fund, which in February 2018 declared its highest dividend rate in more than two decades. The EPF is expected to pay more than USD 13.5 billion to 14 million workers this year, a true testament that devolved pensions have a great potential for profitability. The Fund January - June 2018 Edition 4 29

30 r Preaching to the choir Details on how to become a LAPFUND member. MEMBERSHIP to LAPFUND is open to all employees of the 47 county governments as well as affiliated institutions such as Water And Sewerage Companies, private companies, parastatals and individuals in the informal sector. Statutory contributions This is a benefit for those employed under permanent terms. The contribution rates are as follows: Employee 12% of Gross Salary Employer 15% of Gross Salary How to join 1. Members to fill LAPF/1 Admission Form Attach a copy of your National ID and Passport photograph. 2. Attach copy of National ID of your next of kin. Voluntary contributions Designed to enable contributors enhance their retirement package by making additional contributions. 1. Contributors enjoy tax relief on contributions of up to KES. 20,000 at a point of deduction (i.e. less PAYE). 2. Contributors enjoy tax free income and tax relief on benefit. It s open to both existing Members and Non Members How to join 1. Members to fill LAPF/1 Admission Form and LAPF/9 Voluntary Form 2. Attach a copy of your National ID and Passport photograph. 3. Attach copy of National ID of your next of kin. 4. Members are able to view their statements and account balances on the LAPFUND website Visit any of our offices around the country to get a membership form. Alternatively, you can visit our website and download the membership form. Once completed, submit the form(s) and the necessary documents to the nearest LAPFUND office for processing and await notification on the success of your application. LAPFUND will issue members with membership cards. Contact us on: LAPFUND 8th Flr, JKUAT TOWERS (Former ICEA Building), Kenyatta Ave, P.O. Box , Nairobi, Kenya. Tel.: / Address: info@lapfund.or.ke 30 The Fund January - June 2018 Edition 4

31 As part of the youth of this country, we strive to be driven, attentive, and innovative, and always deliver excellence. The Fund January - June 2018 Edition 4 31

32 To advertise in the Fund, please call /100 or Talk to us 32 The Fund January - June 2018 Edition 4