Why Pension-Backed Mortgages in Kenya Are Unlikely to Return in The Near Future

To state it simpler, pension-backed mortgages are secured against the savings a contributor in a mortgage scheme has amassed.

Pension-Backed Mortgages: What Are They?

Pension-backed mortgages are mortgages that can be accessed by contributors to retirement benefit schemes which allow the contributor(s) to leverage their savings in pension schemes to access financing.

To state it simpler, pension-backed mortgages are secured against the savings a contributor in a mortgage scheme has amassed.

Naturally, no fiscally-responsible government would allow a contributor to access 100% of their pension contributions to meet their housing requirements since the very essence of those contributions is to create a nest egg for the contributor’s retirement.

Inevitably, therefore, the assets against which the loan (mortgage) is secured, are partially against the contributor’s savings in the pension scheme and partially against the asset (house) against which it was borrowed.

Synopsis of Enactment of Pension-Backed Mortgage Regulations

In April 2020, the Government of Kenya, through the then Treasury Cabinet Secretary, published the Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020. The amendments were made by the Tax Laws (Amendment) Act, 2020 to Section 38(1A) of The Retirement Benefits Act, No.3 of 1997.

Intended Purpose of Pension-Backed Mortgage Regulations

By allowing members of retirement benefits schemes to leverage their amassed contributions in their respective pension schemes, the goal was to unlock financing that could be targeted at home ownership, thereby accelerating the country’s homeownership goals that were a critical pillar of the Government’s Big 4 affordable housing agenda.

Legal Challenge to Pension-Backed Mortgage Regulations

In May 2020, civic-activist-turned-politician, Okiya Omtatah, with the backing of the Association of Retirement Benefits Schemes and the Association of Pension Trustees and Administrators filed an application in the High Court of Kenya challenging the legality of the regulations.

Enactment of Pension-Backed Mortgage Regulations

Thereafter, in September 2020, the legislature approved, vide Legal Notice Mortgage Regulations LN 192 Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020 – an amendment to the Retirement Benefits Act. The regulations were published on September 14, 2020.

Operationalization of Pension-Backed Mortgage Regulations

As per the regulations, it would fall within the purview of the individual pension schemes to determine the procedure by which their members would apply to access their contributions into the scheme for the purpose of applying for a pension-backed mortgage. The regulations required individual members to make their application through the trustees of the scheme. Trustees from the different pension schemes would consider applications relating to the utilization of the benefits by members and review their consistency with the retirement act and scheme rules.

Pension schemes would be given a year until September 14, 2021, in which they would “operationalize” the issuance of pension-backed mortgages, allowing their members to access their savings to acquire homes.

Ruling on the Legal Challenge to Pension-Backed Mortgage Regulations

Subsequently, on 23^rd November 2022, the judge hearing the Judicial Review Application 095 of 2020, Republic v National Assembly & 2 others – the petition filed by Mr Omtatah – issued a judgement quashing the regulations that brought pension-backed mortgages to life in Kenya, citing a flawed process in their enactment due to lack of public participation.

Why were the Pension-Backed Mortgage Regulations deemed unconstitutional?

Because lawmakers did not allow for stakeholder engagement or robust public participation in the legislative process, Parliament, in passing the regulations that birthed pension-backed mortgages, had failed to meet the thresholds required by Article 118 (1) of the Constitution.

Major Proposals by the Pension-Backed Mortgage Regulations

As per the regulations, in a defined contribution scheme, an amount not exceeding 40 per cent of the member’s accrued benefits shall be available to a member for the purchase of a residential house, provided that such sum shall not exceed seven million shillings.

The residential houses that would have been eligible for purchase under these regulations would have to have been certified for occupation before the intended purchase – precluding the possibility that the funds could be used to either develop property on vacant land, or even secure houses being sold under off-plan schemes. Eligible homes for purchase would include those developed under government initiatives, such as the AHP, and those being offered for sale by private developers, SACCOs, insurers and entities running tenant purchase arrangements.

Pension fund trustees would have been allowed to offer members the option to deploy the mortgage funds as either a guarantee to access a mortgage or utilize their benefits for the purchase, but not both.

Further, scheme members would only be allowed to access the benefit as a one-off, locking out members who were already receiving their pension earnings and those who had already attained retirement age.

Reception towards Pension-Backed Mortgages?

The idea of pension-backed mortgages in Kenya is not new. It was initially touted more than a decade ago. Not until 2020 were there any hard and fast regulations to facilitate the realization of homeownership via pension-backed mortgages.

Now that there have been missteps with this initial substantive effort, it seems less likely that pension-backed mortgages will become a reality.

The new regulations caused a stir when they were first announced with a very warm reception to the idea that pensions, traditionally deferred resources, could be used to access homeownership. On the other hand, uptake did not reflect the original enthusiasm.

The market has had several challenges that muted interest in pension contributors, not least of which have been the lean economic times following the Covid-19 pandemic and a looming recession as we enter 2023.

Nonetheless, the new regulations were perceived as a positive step in the right direction. While they were well within their rights to do so, it is telling that the new regulations were fundamentally opposed by industry stakeholders.

Which Way Forward for Pension-Backed Mortgages?

On the face of it, the opposition of the industry stakeholders via their constituent bodies, the Association of Retirement Benefits Schemes and the Association of Pension Trustees and Administrators, is obviously merited on the grounds that industry stakeholders were not involved in the formulation of the new regulations.

However, it is also indicative of an industry that isn’t particularly interested in actively seeking approaches to meeting the needs of its membership – the actual contributors to the pension schemes.

Indeed, it would be interesting to see if these same industry bodies will actively spearhead initiatives that could eventually make pension-backed mortgages a reality. They could do so by either proposing amendments to the regulations that had been proposed or even actively lobbying Parliament to relook at those regulations and championing the establishment of a workable framework of solutions that would make pension savings accessible to prospective homeowners.

Conclusion

The pension industry in Kenya controls over KES 1.5 trillion in assets with under 20% penetration of the formal labour market in the country. There is a glaring opportunity here not just to spur homeownership, but also to grow the industry.

Pension-backed mortgages would be an effective tool to deepen the conversation between finance and growing access to homeownership. Stakeholders will need to partner on initiatives like this if the goals of homeownership are to be achieved.