The incoming parliament might pass an amended Bill containing a raft of proposals that, if passed into law, will bring about far-reaching changes in pension administration in the country.

The draft law, which has gathered dust on the shelves of the Parliamentary Committee on Social Affairs for nearly five years, seeks to end the monopoly of the state in the management of pension funds.

The proposed law will also raise the voluntary retirement age from 55 years to 60 years while involuntary retirement remains capped at 65 years. Officials say this is intended to avoid a situation where serious mismatches could arise in the dependency ratio.

Dependency ratio expresses a relationship between the people who do not have any income and those that do. It is the ratio of the unemployed to the employed. In pension administration, it is about the relationship between contributors and the claimants of the pension benefits.

If the Bill is enacted, which industry experts say is likely to happen mid next year, the new law will for the first time see establishment a provident fund and occupational pension schemes, and insurance companies are likely to set up life insurance businesses to tap into the new opportunity.

Create own pension scheme

A provident fund is a system where benefits are determined by contributions made and accrued interest and, according the draft law, a copy of which this newspaper has obtained, contributors to this fund can claim their contributions to cater for education or housing or at retirement when claimants are entitled to principal and interest.

Workers under a similar occupational pension scheme can pool savings to create their own pension scheme. Such schemes are usually managed by fund managers.

Eric Ruzindaza, the head of pension unit at Rwanda Social Security Board, noted: “With the advent of a provident fund, we hope people will be encouraged to save to get school fees for their children, housing or better life while in retirement.”

Mr Ruzindaza said the wide-ranging amendments contained in the draft the law aims at breaking state monopoly and is part of wider reforms in the non-banking financial sector that are likely to increase the level of national savings by bringing a variety of products to pensioners.

Less than 10 per cent of Rwanda’s working population saves with the pension scheme, which denies the country chances of marshalling an appropriate level of savings to finance development activities.

At the annual national dialogue in December, Trade and Commerce Minister Francois Kanimba and then finance minister John Rwangombwa, now Central Bank Governor, underscored the essence of reforming the non-banking financial sector to pool savings to supplement financing of the Economic Development and Poverty Reduction Strategy (EDPRS), national development blueprint.

A majority of economists who spoke to Rwanda Today said the current defined benefit system is unfair to pensioners because it does not cater for factors such as inflation.
Under defined benefits, pensioners do not claim their total contributions but earn a fixed amount until death.

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The other option is defined contribution, where a pensioner claims total contribution and accrued interest, with the amount paid in lumpsum.

“When you work out numbers to do with NPV [Net Present Value] of money, defined contribution is fair deal,” a senior economist told Rwanda Today.

Create opportunities

The reforms will create opportunities for pension experts who will be able to act as fund managers, Mr Ruzindaza said. However, industry experts warn that the state is yet to liberalise the pension sector.

“Mandatory pension scheme is established by the government for employees to provide income upon retirement age … this mandatory pension scheme is governed by this law and shall be managed by a public institution in charge of social security,” part of the law reads.

Mark Rugenera, a insurance veteran who heads the newly formed Radiant Insurance Company, said: “If they liberalise pensions people will want to increase savings, but this can only happen if premiums kept with life insurance firms are exempted from tax.”

A senior university lecturer noted that, in terms of risk management, it is risky for pensioners to keep their lifetime savings with one company and that if the sector is liberalised people will want to put their money in different pension schemes for security and benefit purposes.