Njuguna Ndung'u: Savings-investment cycle - supporting pension schemes by
protecting the value of pensions and promoting efficiency of the financial
sector
Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the annual
luncheon of the Association of Retirement Benefits Scheme, Nairobi, 23 May 2007.
* * *
Chairman and Council members of the Association of Retirement Benefits Schemes,
Distinguished guests,
Ladies and Gentlemen
I am happy to be with you today for this luncheon and I deeply appreciate this kind gesture
from your association.
Coming early in my tenure as Governor of the Central Bank of Kenya, an occasion such as
this affords me the opportunity to acquaint myself with so important a building block of the
financial sector of the economy as yours. I hope it also affords you an opportunity to
understand what I intend to achieve during my tenure and what that means to your
Retirement Benefits Schemes.
I would like therefore to take this opportunity to share with you a few thoughts on Retirement
Benefits Schemes and the Central Bank. I must first acknowledge and commend Retirement
Benefits Schemes in which your association is a stakeholder, for the very important role they
play in the welfare of the retirees as well as in support to the economy.
To the retirees, Retirement Benefits Schemes provide an invaluable vehicle for accumulating
savings during the life cycle of earnings and provides an insurance mechanism of a steady
stream of payoffs at retirement period, which allows a decent living standard in retirement.
This I regard as an important savings-investment cycle. But it works well when the financial
sector also works well.
To the economy in general, Retirement Benefits Schemes provide a vehicle for pooling
financial resources for investment. For instance, I am made to understand that Retirement
Benefits Schemes in Kenya have acquired assets amounting to KSh212 billion. This is a
significant amount of savings.
Retirement Benefits Schemes' assets require security in two senses. First, the schemes
require security in the ordinary sense of actual security of funds - the assurance that funds
are available when needed by the beneficiaries. This security is provided by the Retirement
Benefits Scheme managers operating within strict governance frameworks and oversight by
the regulator of the benefits schemes - the Retirement Benefits Authority. The security is
further enhanced by other regulators of the financial system like Capital Markets Authority,
Commissioner of Insurance, and (the institution I come from) - the Central Bank.
Secondly, I think the main source of security lies in ensuring investment opportunities with
rewarding returns that are also predictable, while at the same time protecting the savings
from inflation erosion. Retirement Benefits Schemes thus thrive well in stable financial
systems and where these benefits can be invested for gain and also develop the financial
market. Retirement Benefits Schemes benefit from Central Bank in both scores: stable,
predictable low inflation; stable, well-functioning financial sector.
The law mandates the Central Bank to play two overriding roles. I would therefore like to say
a word or two on how the Central Bank in pursuit of the two overriding goals would be
beneficial to the Retirement Benefits Schemes.
Let me start with inflation. The Central Bank is committed to pursue effective monetary policy
that is consistent with the development agenda of the country and the development of an
appropriate financial sector in which you play a role. In particular, the commitment is to a
prudent monetary policy that keeps a tight lid on inflation. This should help Retirement
Benefits maintain the value of benefits. This is a commitment which the Central Bank will
sustain and thus make a meaningful contribution to the economy and to Retirement Benefits
Schemes. This environment allows you decide where to invest your funds and assures you
that whatever payoffs you make to beneficiaries, they are not eroded by inflation and are
mediated efficiently by the financial sector.
To ensure financial sector stability, the Central Bank provides prudential guidelines and other
regulations to guide the operations of the banks and micro finance institutions to provide
proper functioning and orderly exit. The Bank is also charged with the responsibility to
promote an efficient and effective payment, clearing and settlement system. This facilitates
the proper working of the financial sector and stable payments systems.
Note: Effective monetary policy requires an efficient financial sector. This has been identified
as a sector to lead the way in the Vision 2030. I also anticipate that the financial sector will
require to develop innovative products to tap into these savings provided by your schemes. I
have observed the development of fund managers in the market in the last 5 years has been
tremendous - a positive development. I am therefore looking forward to a good working
relationship with the industry as we strive to achieve the nation's overall development goals.
Thank you.