Rwanda continues to post impressive economic growth figures as it makes strides towards Vision 2020. However, it is not lost to many economic analysts that the growth rates have not been commensurate with the level of domestic savings and private investments.
A good pool of long term domestic savings is imperative in stimulating private investments and the private pension subsector is key to broadening and deepening financial markets.
High level of domestic savings, coupled with private sector investment, will be one of the key engines in driving the Rwandan economy to achieving the aspirations of Vision 2020 of transforming the economy into a middle income.
With the pensions subsector accounting for only 17.2% of the total financial services sector contribution as at June 30 2017, there is more to be done by policymakers to promote voluntary retirement savings.
The pensions sub-sector contribution is principally made through Rwanda Social Security Board (RSSB) which continues to effectively play its part as a first pillar of social security while the other equally important pillars are left behind.
A comprehensive social security system must not only ensure the growth of the universal pillar but also ensure robust growth of other complementary pillars, namely the occupational pension schemes and long term individual savings.
As in other African countries, there is a looming social security crisis as a result of modernisation and the breakdown of traditional social security values. The success of modern social security interventions like universal health insurance (Mutuelle) and rural living arrangements (umudugudu) plus other development initiatives are resulting in declining fertility and improvements in adult and old age survival rates.
Indeed, the number of elderly aged 60 years and above is projected to more than double in the twenty years from 2012. This improvement in adult and old age survival rates, coupled with declining growth rates, means that future dependency ratio will increase.
As such, there would be a great implication on providing social support, healthcare and living arrangements of the elderly population. The country’s population is projected to double to around 16 million by 2020 from about 11.8 million in 2012 and life expectancy is projected to reach 71.4 years by 2031.
The Rwandan financial policy is robust and only a little effort needs to be done to stimulate long term domestic savings. It is important to appreciate that the current tax law allows for contributions to approved pension schemes to be income tax deductible for both employers and employees up to Rwf100,000 or 10% per month whichever is less.
The same law exempts investment income of approved pension schemes from corporate tax. These are valuable tax incentives that the Government has extended to individuals and employers to save on income tax while providing for employees future earnings.
In practice, therefore, a member who contributes to an approved pension scheme pays less tax and utilizes part of the tax due today as self-savings. The same savings attract tax free income during the period of investment.
Taking into consideration the power of compounding interest, there is less pressure in saving substantial amounts in an approved pension scheme when one starts early as a substantial proportion of the entire benefit is derived from tax currently paid.
As is the case in most countries, most of the young people tend not to appreciate the need for retirement savings as retirement is often long way to go; however, when one starts saving early in life, there is reduced pressure as the period within which to save is long and therefore the possibility of attaining reasonable replacement with less savings over time.
In dealing with wrong perception of ‘there is still time’, the policy makers could consider other immediate benefits that may accrue from pension savings. For instance, the use of retirement savings as collateral for purposes of accessing housing mortgages will not only entice young people into immediate savings but will also mean that majority of the working population are able to own affordable housing during their working lives while saving for retirement.
Banks and other mortgage institutions would also lend at reduced rates, which is likely to reduce the default risks. Any such provision must, however, not negate the principal objective of a scheme.
The writer is a pensions consultant.