Informal Sector Must Also Save Towards Retirement

In Zimbabwe, the informal sector has become a means through which citizens pursue sustainable livelihoods.

The informal sector is pervasive and plays an important role for the growth of the economy. However, the informal sector does not have a retirement funding option. This funding is a critical social security issue in Zimbabwe.

For informal sector employees saving for a distant and uncertain retirement often competes with the pressures and demands of day-to-day survival, which are perceived as more imminent than an uncertain future.

The rapid growth of the informal sector relative to the formal sector is evident in the country.

Although in some instances the growth of the informal sector has been linked to overall economic growth, the insurmountable task inherent in the notion of bringing the sector into the formal sector; the breakdown of traditional forms of social security due to migration and increased job mobility over the past decades, have initiated debate.

The debate relates to the need for informal sector employees to contribute towards their social insurance in the form of retirement funds to alleviate chronic poverty during old age.

Retirement funding and its regulation never enjoyed much prominence in Zimbabwe. Voluntary participation towards retirement funding was mainly through privately managed occupational retirement funds.

It should be mentioned that retirement funding schemes in the country are not mandatory, hence, many employees formally employed do not have access to retirement funds as well.

It is estimated that the informal sector accounts for about 60 percent of the labour force in Zimbabwe (IMF Study). Regardless of this statistic, progressive legislative reforms still relegate persons engaged in the informal sector to the periphery, thereby depriving them of the protection afforded by the Pension and Provident Fund Act.

It is worthwhile to consider how countries such as Ghana and Kenya have established informal sector pension schemes for the purpose of enabling employees in the sector to save for their retirement.

In 2008, Ghana enacted the National Pensions Act. This legislation broadened the scope of its beneficiaries to incorporate those in the informal sector as well as self-employed persons, who make up the majority of Ghana’s active workforce.

The Social Security and National Insurance Trust manages and administers retirement benefits for employees in the formal sector. The National Pension Regulatory Authority exercises regulatory and supervisory oversight over SSNIT and all licensed pension funds under the Act.

In terms of section 58(1) of Ghana’s National Pensions Act: (t)he social security scheme applies to (a) every employer and to each worker employed by its establishment; (b) any other employer, worker or self-employed to whom the repealed Social Security Act of 1991 applied, and (c) self-employed persons who opt to join the social security scheme.

This section makes provision of retirement benefits mandatory in the formal sector, while the same is voluntary for persons engaged in the informal sector.

Of significance is how the law in Ghana recognises the different degrees of financial resilience between employees engaged in the formal and informal sectors.

Informal sector employees are permitted to participate on more lenient terms. Thus, provisions enable flexibility and differentiation in the rates of contribution by the participants in the formal and informal sectors.

Nonetheless, the experience of Ghana makes it clear that legislation meaningfully translates the challenges unique to informal sector employees. Incorporating these differences is one of the key elements in providing an enabling environment for persons belonging to the informal sector to actively participate in saving towards their retirement.

Kenya, through legislative amendments to the Retirement Benefits Act 63 has made similar changes. Kenya through the Mbao Pension Plan has managed to register as members a relatively large number of persons engaged in the informal sector.

In June 2009, the Government of Kenya through Regulation 4 of the Retirement Benefits (Mortgage Loans) 2009 amended the Retirement Benefits Act to allow retirement fund members to assign up to 60 percent of their accumulated retirement benefits or savings accounts to access mortgage facilities.

This aspect proved to be the feature that attracted participation of informal sector employees in the soon to be established Mbao Pension Plan (R Kwena & J Turner in “Extending pension and savings scheme coverage to the informal sector: Kenya’s Mbao Pension Plan”)

Mbao Pension Plan, a voluntary hybrid retirement funding scheme targeting informal sector employees was established in June 2011. It operates under the auspices of the Retirement Benefits Authority (RBA), which is the retirement benefits sector regulator in Kenya, the National Federation of Jua Kali Associations and private sector service providers.

The service is regulated by the Communications Commission of Kenya, (Regulator of communications companies), with the Central Bank of Kenya having regulatory oversight over the mobile money transaction aspect.

The Mbao Pension Plan is registered with the Kenya Revenue Authority (KRA), for preferential tax treatment as a pension plan. The trustee and custodian for the Mbao Pension Plan is Kenya Commercial Bank Group.

Kenya, through the use of technology, has managed to utilise to its advantage the very characteristics that prohibit informal sector employees from actively participating in retirement funding.

The Mbao Pension Plan is structured to enable participants to make small payments irrespective of their income or age. Members can save a minimum of 20 Kenyan shillings per day with no maximum limit save for the Safaricom daily transaction limit of KSH 140 000.

Accessibility is de-centralised by permitting remittance of premiums from anywhere through digital mobile banking platforms. Participation in the plan requires a basic cellphone and nominal credit.

This bypasses the need for brick and mortar banking systems. As such, it is able to reach people where the presence of brick and mortar financial institutions is sparse or non-existent.

The Mbao Pension Plan capitalises on the fact that over the last few years there has been a rapid uptake in the number of people with mobile phones.

The growth in popularity of the use of mobile financial services proved to be a convenient platform for Mbao Pension Plan as potential members were already users of the mobile financial services platforms. There is a link between the growing use of mobile financial services and the success of the Mbao plan.

For purposes of illustration, the Mbao Pension Plan uses Safaricom mobile network, whose digital banking platform is known as M-pesa. Users of M-pesa are assigned an electronic money account that is connected with their cellphone number, which is accessed through a subscriber identity module (SIM), which is a memory chip in a cellular phone.

Users of M-pesa exchange cash for e-float, which is the credit to their account that can then be used to make payments, including retirement savings contributions.

The acceptable Know Your Client (KYC) requirements are met by using the national identification card. Mobile networks in Zimbabwe could also be exploited for this important initiative. Already, there is OneMoney and EcoCash.

The key to the success of this innovation is the realisation that low-income earners can easily make small contributions towards retirement savings at a relatively low cost, with flexible withdrawal conditions and ease of participation.

The Mbao Pension Plan has struck a delicate balance between the need for long-term savings and imminent demands of life that necessitate early withdrawal in certain circumstances.

One of the challenges that may arise in administering retirement funds for persons engaged in the informal sector is the voluminous numbers of persons involved and the rural location of a good proportion of potential members.

It is highly probable that a significant percentage of them may not have adequate identification documentation or other relevant papers, which would enable the authorities to assist them. This would make administration of retirement funds highly complicated.

In spite of this challenge, the sheer numbers of persons employed in the informal sectors of the economy justify the extension of pension coverage.

There is a need for the provision of social insurance coverage in Zimbabwe to be modified in order to accommodate informal sector employees. Extending retirement fund coverage to informal employees would assist to avert old age poverty due to lack of social security or social assistance programmes for these employees.

Based on the lessons from Ghana and Kenya, there should be legislative amendments, which would enable informal sector employees to contribute towards retirement savings.

Despite several amendments, Zimbabwe’s Pension and Provident Funds Act of 1976 is outdated.

This piece of legislation is not flexible enough to take into account the ever changing trends in management of pension funds. The current pension legislation does not adequately reflect the increasing sophistication and ambition of pension funds.

Pension funds are seeking to invest offshore, but the legislation requires that they only make domestic investments.

There is a Provident Funds Bill (the Bill) under consideration and is a proposed law that will repeal the existing Pensions and Provident Funds Act (Chapter 24:09). The Bill seeks to modernise the regulation and supervision of the pensions sector.

An improved legal and regulatory framework can also support broader objectives in the financial sector, including ensuring that the sector grows in a more transformed and inclusive manner.

It is proposed that the Pension and Provident Fund Act be amended to enable informal sector employees to participate in saving for their retirement on flexible terms and conditions taking into consideration their unique needs. The proposed amendments introduce relatively new terms that have not been defined in the current Pension and Provident Fund Act.

Informal employment, means an employer-employee relationship that is not subject to national labour laws, income taxation, social protection or employment benefits.

These employees include self-employed persons, members of informal producers’ co-operatives, contributing family workers, irrespective of working for an entity that has been classified as formal or informal, and domestic workers among others.

Remunerated employees are classified as belonging to the informal sector, if they are without employment benefits such as paid leave, contribution to social security benefits, no payment for unutilised leave days, no paid sick leave and medical aid benefits.

Milton Nyamadzawo is a former Mwana Africa Football Club team manager and a human resources chief advisor to a leading global book publishing company. He writes in his personal capacity, and can be contacted on [email protected]

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