Planning a sustainable micro pension scheme
Micro Pensions has worked and succeeded in some countries and markets which Nigeria could learn from. Operators in this market have quite a lot of lessons to lean by looking at strategies and models adopted by these other market and bringing it down here. When, micro pension is mentioned, Kenya readily comes to mind because of the great success that country has recorded through the useof mobile technology for distribution of insurance and pension products, particularly at the grass root and among informal sector people.
Report shows that about 80 percent of the working population of Kenyans is found in the informal sector, which is similar to what is found in Nigeria and most sub-Sahara African countries.
Experts, looking at the Kenyan market describe micro-pension scheme as a pension arrangement that supports small, regular and sustainable savings by low income earners so as to provide them with a regular stream of pension for the old-age. Pensions increase older people’s access to services such as health care and reduce their dependency on the younger generation, and can therefore play an important role in breaking intergenerational poverty cycles and thus increase the life expectancy of the elderly generation.
In the report, “Critical Success Factors for a Sustainable Micro Pension Scheme in Kenya” published in 2012 by the United States International University, using data from 1083 informal sector participants, 30 Micro-finance institutions and 20 Savings and Credit Cooperative Societies, the study concludes that the ideal micro-pension scheme needs to address governance, administrative, design and efficiency issues to succeed. The study recommends a multi-model implementation of micro-pension plans in addition to a separate set of regulations to govern the micro-pension plans.
According to the report, Micro-pension arrangements are meant to insulate low-income earners against old-age poverty. The formulation of such a plan requires a delicate balance between economic viability and generation of adequate returns to the participants.
From the report, informal sector participants listed the challenges to the implementation of a micro-pension scheme to include limitation in income, inaccessibility of retirement benefits in the short-term, lack of knowledge on operations of pension schemes, complexity of pension schemes, difficulty claiming benefits at retirement, absence of a pension scheme, lack of involvement in management, income irregularity, lack of trust in the formal systems, low rates of return, perception that pension schemes are for the formal sector, failure of employers to submit contributions, ignorance on the need to join a pension scheme age, as younger members may perceive pension plans as meant for older people and membership in the current national social savings plan.
According to the report, the ideal micro-pension scheme should embrace honesty between service providers and members, contribution of small-frequent amounts, timely payment of benefits, information dissemination, free accessibility of the retirement account, frequent statements, diverse mobile money transfer options, government co-contribution, portability of the system, benefit withdrawals before retirement, member involvement in management and no contribution by the employers.
The critical success factors to a sustainable micro-pension plan it noted includes increasing enrollment to lower administrative costs, maintaining an effective accounting system that tracks contributions and payments by members, maintaining an effective risk management system, transparent management, continuous adaptation and innovation, commitment in serving the low end market, financial literacy amongst clients, waiving transaction costs for clients, customizing the micro-product for the customers, co-contribution by the government, developing unique regulation for the micro pensions, location of branches near the clients, geographic diversification, centralized payment system, specialized human resource to deal with the product and allowing withdrawals from the scheme.
The report therefore recommends that for immediate implementation, operators should target increased participation in the current system. This should be done by following up on inactive subscribers and publicizing success stories; educate the informal sector participants on the need to save for retirement through the use of television and brochures; provide more information on the current centralized system in terms of the roles of the various service providers with an emphasis on the simplicity of processes and ability to claim benefits.
They should also come up with innovative solutions to respond to administrative and transaction costs challenge for example; enhance mass membership and partner with outlets that deal extensively with the low income earners. This reduces costs associated with identification of participants, record keeping, collection of contributions and disbursement of benefits; as well as implementing soft compulsion where participants are automatically enrolled and given the chance to opt out. This strategy will work well if implemented together with the multi-employer pension schemes. In the short term, operators should augment the current system with the partner-agent model; additional benefits will be realized without necessarily going through the disadvantages. This can be done by amending the current regulations; develop a multi-employer pension system to cover organized industries and this can be done by amending the current regulations.
For the long term, operators should develop a unique regulatory framework to address pension schemes in the informal sector. The framework should create incentives for informal sector savings and address the unique needs of the informal sector. It should also rethink the payout structure to incorporate minimal state supported guarantees because the current design does not protect participants from market down turns.