How Covid-19 affected retirees' finances and health in Kenya

Why we did this study

Covid-19 put Kenya's pension sector under strain. Some companies shut down, some cut staff and others stopped paying contributions. Citing Business Daily, our report notes that growth in assets under management slowed from 11.3% between 2018 and 2019 to 7.7% in 2019–2020.

Retirees were already stretched before the pandemic. The income replacement ratio, which compares the income a pension pays in retirement with what a person earned before retiring, is estimated at 35% in Kenya, against a recommended global range of 70% to 80%.

Working with Strathmore University, our Social Security Study Group set out to learn what a year of the pandemic had done to retirees' finances, their health and mental wellbeing, and their satisfaction with life. We focused on pensioners drawing an income from annuities and income drawdown funds.

What we found: money coming in and going out

Costs went up. 60% of the retirees we surveyed said their expenses had increased since Covid-19 reached Kenya. The report links this to the pandemic's effect on the economy and to rising prices, with support to family members one of the main reasons. Rising costs also help explain the debt retirees took on.

Borrowing came mostly from mobile loan apps and commercial banks, and the money went mainly on business expenses and everyday spending. Retirees who had worked in the public sector were less likely to have borrowed than those from the private sector. The report links this to the higher income replacement often associated with public-sector schemes and their longer periods of service.

Many do not rely on their pension alone. 57% told us they had another source of income. Rental income came first, followed by farming, business, and consultancy or lecturing. Bonds and shares were among the least common sources, which suggests retirees felt weak market returns mainly through their pension schemes rather than through their own investments.

Most had taken part of their benefits as a lump sum. 77% had accessed a third of their pension, and 68% had invested the money they took out, mostly in farming, business, rental or commercial property and money market funds. For the money left in the scheme, 61% chose income drawdown, 31% deferred it and only 8% bought an annuity.

The pandemic also changed how some people left work. 15% of respondents had been retrenched, and they told us their employer had gone bankrupt or into receivership because of Covid-19.

What we found: health and wellbeing

Health costs weighed on many retirees. 23% of those we surveyed had seen a doctor more than five times in the year. 41% paid their medical bills in cash, 32% had insurance that covered them and 20% used the National Hospital Insurance Fund (NHIF). In the report's view, health insurance still needs to reach more older people, who are more at risk of illness during a pandemic.

We also asked how often, over the past year, retirees had felt cheerful, calm, active, rested and interested in daily life. On our six-point scale, they said they were satisfied only some of the time. The report sees a gap between this and the satisfaction expected at this stage of life, and argues that mental wellbeing deserves as much attention as physical health.

When we asked what the pensions industry and government should do in a crisis, retirees put health care first, asking for a comprehensive medical cover for senior citizens. Next came more money for retirees during a crisis, followed by training before and after retirement on handling a crisis.

The COVID–19 situation reinforces the message that old age security is maintained through diversified pension provision.

What this means

For members and savers, the lesson is to plan for health costs and for more than one income in retirement. Many of the retirees in our study had built rental, farming or business income alongside their pension, and the report notes the value they place on spreading their sources of income. It also asks that savings be protected until retirement, with tighter limits on what can be taken out early.

For employers and trustees, the report recommends that retirement benefits schemes set up post-retirement medical funds, which members contribute to so that their medical care is covered after they retire. It also urges pension funds to spread their investments across a wider range of asset classes, to soften the effect of future shocks on members, especially at the point they draw their benefits.

For policymakers and the industry, the report calls for a tax framework that cushions retirees, a National Treasury emergency fund for the needy and the elderly with its own yearly budget, a review of the RBA Act to keep retirement savings locked in for longer, and more financial literacy teaching in schools and at the point of taking out microcredit.

The full report sets out the charts behind each finding and the reasoning behind each recommendation.

What we recommend

• Pension funds should spread their investments across a wider range of asset classes to manage risk.
• A tax framework that cushions retirees, and a National Treasury emergency fund for the needy and the elderly.
• Review the RBA Act to limit what members can take out before retirement age, or lock savings until early retirement age.
• Build financial literacy into school curricula and into microcredit and microfinance transactions.
• Retirement benefits schemes should set up contributory post-retirement medical funds.
• Retirees' own top asks: comprehensive medical cover for senior citizens, and more money for retirees during a crisis.