REFORMING DB FUNDS: THE CASE OF KENYA

Transcription

1 REFORMING DB FUNDS: THE CASE OF KENYA Presentation by; Edward Odundo Chief Executive Retirement Benefits Authority, Kenya OECD/IOPS Global Forum on Private Pensions, Istanbul, 7-8 November 2006

2 COMMENTS ON PRESETATIONS I concur with Colin that the future of DB especially with development of many hybrid schemes is changing from being dull Hybrid schemes tend to overcome the problems that traditional DB schemes suffer from. Cash balance Schemes for example tend to be age neutral, distribute benefits equally across years, are easier to understand and provide for portability of funds With these changes on traditional DB schemes, employees are saved from risk of job mobility Hybrid schemes partially shelter members from the investment risks and at the same time enables members enjoy investment returns However future of DB or DC types of schemes are open to various types of risks that affect these schemes differently

3 CHANGING SCHEME DESIGN IN KENYA Scheme by Design Absolute Numbe r Defined Contributions Defined Benefits

4 DB SCHEMES IN KENYA - I DB schemes are mostly public, quasi public and the big private multinational companies Public DB schemes are more than the private DB schemes PUBLIC AND PRIVATE DB SCHEMES Private, 46% Public, 54%

5 DB SCHEMES IN KENYA - II Both public and private DB schemes are converting to DC schemes and Reform DB All DB schemes guarantee benefits through formula 1/Pension Factor X Years of Service X Salary Salary most often than not has been final salary In recent times, salary has been calculated as average of last three years to reduce cost Pension Factor reflects the amount of income replacement a sponsor is willing to provide for employees in retirement and advised by actuary

6 DB REFORM TRIGGERS - I Cost Saving measures employer reducing open ended liabilities Non contributory schemes employers who have been making contributions alone are feeling the burden and see the need to involve employees Low funding levels less than the statutory required 80% caused by: Failure of schemes to carry out actuarial reviews - formulas were not revised leading to unaffordable generous pensions Where actuarial valuations were conducted, schemes failed to implement actuarial recommendations

7 FUNDING LEVELS OF DB SCHEMES 45% of Public Schemes are under funded below 80% Only 9% of Private DB Schemes are under funded 80% Funding Level of DB Schemes less than 50% 50-80% 80%-100% more than 100% Public Private

8 DB REFORM TRIGGERS II Failure by employers to remit contributions of both members and employers which worsened the liability position Failure to separate scheme assets and employer assets fund. Scheme funds constituted part of employer balance sheet High Mobility of employees employees agitate for DC schemes where transferability of funds is easy and simple

9 DB - RISKS & DANGERS DB schemes with identified surplus funds are given contribution holidays (despite having knowledge of world experiences). There is danger of repeated under - funding Closure of Sponsor businesses due to liquidity problems Members protection is minimal in cases of receivership members can only be guaranteed of protection of Kshs 20,000 (US $ 266) at most.

10 DB REFORMS Compulsory actuarial reviews every three years and implementation of findings for DB schemes Mandatory attainment of funding level of minimum 80% (underfunded schemes have remedial plans in place to recover un-remitted contributions from employers) Review of pension formulas Change from non contributory DB to Contributory DB schemes employees also to make contributions Conversion to Hybrid schemes DC with an element of DB Separation of employer and scheme assets Scheme investments guided by statutory investment guidelines Actual Investments done professionally by fund managers Surplus benefits not only belongs to sponsor members can benefit

11 CONVERSION PROCESS The Authority gives guidelines on conversions which must be followed Sponsors must seek approval from the regulator Trustees must pass documented resolution Only fully funded DB schemes qualify for conversion (DB Schemes with liabilities normally will be required to commitment to make good liabilities prior to approval) Members must be educated on implications of conversion and must give consent before conversion takes place Members should not in any way loss benefits due to conversions Usually, accrued rights from DB form the opening balance in DC scheme

12 NATURE OF HYBRID SCHEMES One Scheme with elements of both DC and DB Generally treated as DB scheme The DB component remains closed to new entrants Qualification requirements for DB application on benefits is determined by the number of years worked.

13 CONCLUSION Kenya like the rest of the world is undergoing reforms The objective of reform is to protect members interest and provide optimal benefits A number of schemes are converting from DB to DC schemes and hybrid schemes Members must consent always required before any conversion Conversion Regulations are being developed

14 Thank you. (Asante)