The blanket definition of a formal enterprise and the lack of succession structures such as family trusts have been cited as reasons behind the low participation in pension contributions among small businesses.

The existence of well-formulated structures among larger entities and their compliance with tax obligations make them more attractive to financial institutions managing pension schemes, leaving out small businesses, which happen to be the largest employers.

Edward Karani, Director of Infrastructure Development, Technology, and Innovation at the Micro and Small Enterprises Authority (MSEA), a state agency dedicated to small enterprises, notes that some employees in the informal sector earn more than those in formal enterprises.

Karani highlights that micro, small, and medium enterprises (MSMEs) contribute 33.8 per cent of the national output with 14.9 million employees. Despite this significant contribution, there seems to be more interest in managing pensions for formal employees than those in the informal sector.

“Why is it that there has been low participation for the informal sector in pension?

Is it low awareness because some earn more than people in the formal sector? Is it an issue of inaccessibility or exclusivity? How then do we design products that are more inclusive?” he posed.

Pools people

Mr Karani, speaking during the launch of the Ngao Umbrella Pension Scheme, a product of Britam that targets SMEs, said one of the challenges explaining this low participation is the blanket definition of what a formal business is.

“What is a formal business? A simple question. Is it just an entity that is only registered by the Business Registration Service (BRS)?

Is it a cooperative or an association? Can a body that pools people together for certain interests be considered in your formal pension scheme?” he questioned. “What can the regulator do so that you can start admitting those people who are excluded, the 15 million, and still need to plan for retirement?”

He said that if this is done, the sector can build on economies of scale, which will be cost-efficient for investments, risk management, and planning for retirement.

MSEA defines a micro enterprise as one with an annual turnover below Sh1 million and fewer than 10 employees. A small enterprise has a turnover of between Sh1 million and Sh5 million and between 10 and 50 employees.

The State Department for MSMEs Development estimates that there are close to 18 million MSMEs in the country. However, the Kenya National Bureau of Statistics (KNBS) has a record of 7.4 million.

The United States Agency for International Development (USAID) breaks this number further, stating that the country has an estimated 1.5 million formally registered MSMEs and over five million informal ones, which collectively generate 30 percent of the Gross Domestic Product (GDP).

Data from BRS shows that in 2022/2023, there were 145,284 enterprises registered, a growth from 101,219 in 2015/2016.

“The cake (pension contribution) is being shared by all these umbrella schemes. The regulator probably has registered about 40 schemes, but if this cake remains on the formal side, then we are losing out on the 15 million who are in the informal sector,” he said.

Referring to the numerous legislative changes aimed at increasing pension contributions, Mr. Karani said that on Tier 2 contributions of the National Social Security Fund (NSSF) Act 2013 benchmark for average income per month, many people in the formal sector make more than Sh36,000 monthly.

“But they do not have any pension? They totally operate on the other side of the economy, which we rarely talk about. As these regulatory changes have been happening, at the industry level, what has been happening? Are we bringing more into the pool or are we excluding?” he probed.

Barack Obatsa, Chief Executive, Britam Asset Managers, said there is a need for businesses to formalise not only to benefit from pension products such as the Ngao Umbrella Pension Scheme but for the sake of their businesses as well.

“It is a good thing to be taxed and registered. There are advantages to that, and we are not only educating them on normal pensions but also record-keeping. It allows you to get credit from banks because they want evidence that you are able to pay – so if you do not have those records, then your ability to get credit is compromised or becomes very expensive,” he explained.

He added: “We encourage being registered and at least having a Personal Identification Number (PIN) and putting their taxes in order.”

Mr. Obatsa said the development of the SME-centered pension product was informed by the lack of posterity plans for both the employees and the founders.

“They do well and are able to take care of the expenses, but once they age or retire, it is very easy for poverty to catch up,” he said. He said the product is crafted with the understanding of cash flow challenges among SMEs, which also eliminates the setup cost for an individual employer scheme since, as an umbrella scheme, it pools funds from different employers.

He said one of the issues the institution has been advocating for among SMEs is safeguarding generational wealth and the longevity of businesses.

“One of the tools we have advocated for is for businesses and owners to have trusts so that this business lasts many generations. And they should have better structures so that when they are not within the family, they are able to sell,” he said.

Dr Caesar Mwangi, Executive Dean of Strathmore University Business School, said while the entrepreneurial journey is challenging, one of the challenges that has not been fully addressed is the retirement plan. He echoed the idea of setting up trusts and preparing the business for the possibility of selling it if the owner is no longer able to run it.

“Do you have children? Can this business be passed to them? The problem is most business owners have been busy and never thought one day they need to retire,” he said.

Dr Mwangi said the retirement plan should also entail the exit strategy.

“You could even identify some of your old clients who could be interested in (buying) your business,” he said

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