Pension savings as key to home ownership

Mortgage uptake in the country is still low compared to envisaged demand. It stands at 17,000 annually against a housing demand of over 150,000 each year. Photo/FILE  NATION 

 

By JOSHUA MASINDE jmasinde@ke.nationmedia.com
Posted  Wednesday, May 8  2013

 

In Summary

• The country’s pension system is fragmented and comprises the civil service pension scheme, the NSSF, the private occupational pension schemes, and individual retirement savings which operate under different Acts.
• The National Social Security Fund Bill, 2012, nevertheless, proposes an increase in contributions to the fund from Sh400 to up to 12 per cent of the employees’ gross monthly income. Also, the Transformation Bill 2012, proposes that workers and employers contribute six per cent of their basic pay to the fund instead of the mandatory Sh200.
• The loan is not supposed to exceed 90 per cent of the value of the property or the accumulated benefits of the member and can be used to buy land, purchase a house, improve their home, and repay a third-party loan secured by a mortgage bond.

Players in the real estate sector want the laws governing pension funds amended so that some of the billions of shillings held in such schemes can be used as deposit for house purchase.

They argue that this would lessen the pain of home ownership for thousands of Kenyans.

Do not be confused. Apparently, according to a senior research officer with the Retirement Benefits Authority (RBA), Monica Were, there has been a misconception that 60 per cent of a person’s accumulated pension benefits can be released towards the purchase of a home or land.

The reality, clarifies, the National Social Security Fund (NSSF) managing trustee Tom Odongo, is that prospective home buyers can use the said proportion of their savings only as collateral for accessing mortgage.

Market indicators show that this has not had the desired impact since it was initiated in 2009.

Mortgage uptake is still low compared to envisaged demand. It stands at 17,000 annually against a housing demand of over 150,000 each year. Players are blaming this on high costs.

The chief executive officer of The Mortgage Company, Ms Caroline Kariuki, argues that the amendment of the laws to allow access to pension funds for use as down payment or deposit for homes would encourage more employed people to make the first step towards home ownership.

“Allowing access to pension benefits for use as down payment on a home would be a positive way of ensuring that each employed person makes the first step towards home ownership,” Ms Kariuki says. This, she adds, could see mortgage uptake rise to over 100,000 annually.

Housing Finance managing director Frank Ireri, agrees. “It is something that we have also been pushing for,” he says, explaining that the move would reduce the initial costs like closing fees, stamp duty, and requisite down payment that push up the overall cost of home ownership and keep house purchase out of the reach of many. 

But there are challenges.

The country’s pension system is fragmented and comprises the civil service pension scheme, the NSSF, the private occupational pension schemes, and individual retirement savings which operate under different Acts.

The low levels of contribution to these pension schemes imply that many people would still have difficulty raising enough funds as deposit towards home ownership even if the law was changed to allow the practice.

The National Social Security Fund Bill, 2012, nevertheless, proposes an increase in contributions to the fund from Sh400 to up to 12 per cent of the employees’ gross monthly income. Also, the Transformation Bill 2012, proposes that workers and employers contribute six per cent of their basic pay to the fund instead of the mandatory Sh200.

This is expected to raise the level of individual savings in pension schemes, a result that would then enable the savers to access a good portion of their funds to finance house purchase.

Section 38 of the Retirement Benefits Act was amended in 2009 to allow members of pension schemes to attach up to 60 per cent of their accumulated benefits as collateral for mortgage, inching closer to the provision that could eventually allow prospective home buyers to withdraw part of their pension funds to buy homes. Such is the case in Singapore and South Africa. 

But according to a 2011/12 Policy Brief by the RBA, the process of assigning benefits is not easy because of the number of legal docume

cent of the employees’ gross monthly income. Also, the Transformation Bill 2012, proposes that workers and employers contribute six per cent of their basic pay to the fund instead of the mandatory Sh200.

This is expected to raise the level of individual savings in pension schemes, a result that would then enable the savers to access a good portion of their funds to finance house purchase.

Section 38 of the Retirement Benefits Act was amended in 2009 to allow members of pension schemes to attach up to 60 per cent of their donations which have to be signed to ensure that the guarantee is in place.

In the UK, pension scheme members can use their accumulated savings as collateral and only rely on the remaining accumulated savings to pay the debt of the mortgage at the point of retirement.

In South Africa, The Pension Fund Act allows a retirement fund to grant a direct loan to members or furnish a guarantee from a member’s loan.

The loan is not supposed to exceed 90 per cent of the value of the property or the accumulated benefits of the member and can be used to buy land, purchase a house, improve their home, and repay a third-party loan secured by a mortgage bond.

“The loan can be increased to 100 per cent only if the employer offers an additional guarantee for the difference,” states a research paper in the policy brief written by Ms Were of RBA. 

Pension-backed mortgages
In Singapore, members are allowed to withdraw their savings to finance the purchase of houses. The funds may also be used as down payment, mortgage payment, interest on loans, and stamp duty.

This has seen house ownership in Singapore stand at over 88 per cent.

In Kenya, the retirement benefits, apart from being used as collateral for mortgage, can only be released once one has retired.

But, even with the use of 60 per cent of accumulated pension as security for mortgage loans, the uptake level of pension-backed mortgages is still at about 0.006 per cent, a trend that has been partly blamed on trustees who do not sensitise their members on the possibility of using part of their pension savings as security in acquiring mortgage.

“It is up to the trustees of the funds to educate their members about it,” Mr Odongo says. 

According to Mr Luke Kinoti, the chief executive officer of Fusion Capital, a private equity firm that raises funds to finance real estate projects, the problem further lies in the fact that the price of land is soaring. This, he contends, is exacerbated by the difficulty of accessing long-term financing like pension funds to bankroll projects in the real estate sector.

“People are making land very expensive and inflation has also reduced the value of money. This is where pension funds can come in,” he says.

“They (pension funds) should be vehicles to allow people to access part of their money for investment in homes. Regulators should come in to amend the pension laws to allow for funds in the sector to be channelled to real estate development,” Mr Kinoti said.
He said that opening up the funds to access by savers and private equity players and other real estate investors would create room for entry by more players, increase competition, and eventually bring down the overall prices of property.

“I have approached some of the pension funds to ask for money for investment in the property market but they tell me the law does not allow that,” Mr Kinoti complains.

The Kenya National Bureau of Statistics (KNBS) put the total number of workers in the private and public sectors at 2.1 million as at the end of 2011. Of these, 681,100 are employed in the public sector.

Real estate players argue that if only 20 per cent of these workers could have access to part of their pension savings annually towards home ownership, the housing problem in Kenya could become a thing of the past.
   

Propose changes to framework
According to Rafiki Deposit Taking Microfinance marketing manager, Mr Zack Syengo, it is practically impossible to use pension funds without legislation even when a portion of the funds is to be used as collateral.

Sector players say property managers in private sector institutions like banks and real estate firms should take the initiative to propose changes to the regulatory framework to allow pension funds to be channelled to real estate development.

The NSSF has been involved in the construction of homes for sale through mortgage, but given the high demand for housing in the country, pension scheme funds ought to be unlocked to supplement efforts in widening access to home ownership. 

“When you look at the number of people accessing mortgage annually, that is only 17,000 in a population of 40 million, it is like a drop in the ocean,” says Mr Syengo.

In his view, a person who has been working and by age 55 has saved about Sh5 million may not find much help in the money to purchase a decent house after retirement. Had the person been allowed access to just about 30 per cent of their pension 10 or five years earlier, they would have been able to start paying for a house whose value would be much higher by the time they retire. 

Using microfinance models

For the lowest end of the market, which comprises mostly casual labourers or people with unstable income, strong government intervention and/or subsidies would be needed to get rid of informal settlements to pave the way for affordable houses.

Also, using microfinance models and savings groups to service mortgages among the lower end of the income pyramid could provide hope for home ownership for many Kenyans.

The proposal to have unclaimed assets or funds channelled to the sector could additionally help in lowering the cost of acquiring a house.

Unclaimed assets, which are held by different institutions including banks and the NSSF, are estimated to stand at about Sh200 billion, according to a 2008 survey by RBA and the Unclaimed Property Asset Register.