By Kevin Koech and Hanab Hassan
Introduction
In Kenya, about 83.6 per cent of the workforce is in the informal sector, contributing substantially to economic development but lacking financial security as they age due to limited access to pensions. Unlike formal sector employees with statutory pensions such as the National Social Security Fund (NSSF), informal workers are often excluded from these programmes. The work environment in the informal sector can be enhanced by developing pension schemes as retirement social protection for the workers. Promoting pension scheme acquisition among informal sector workers is essential not only for individual financial security but also for reducing the strain on public resources in the long run.
The absence of pension schemes for informal sector workers is not just a future problem, it is a current and urgent economic and social problem that if addressed will serve to improve the social welfare of the workers, enhancing quality of employment. This blog focuses on pension schemes for the informal sector workers.
Status of Informal Sector Pension Schemes in Kenya
Progress of employment in informal sector and pension landscape
The informal sector comprises industries such as manufacturing, retail, and services, with the majority of employment concentrated in wholesale and retail trade, hotels, and restaurants (59%), followed by manufacturing (20%). Sectors such as community services, construction, and transport employ fewer workers, contributing less to the overall informal employment.
Figure 1: Distribution of jobs in the informal sector (%) (2023)
Source: Kenya National Bureau of Statistics – KNBS (2024), Economy Survey
Figure 2 shows that the informal sector mainly offers employment to people in the rural areas compared to urban areas, and this trend has been increasing in the last three years.
Figure 2: Distribution of informal employment (Number)
Source: Kenya National Bureau of Statistics – KNBS (2024), Economy Survey
Informal sector workers, often without structured payroll systems, lack easy access to pension contributions, leaving them unprotected after retirement and dependent on family or personal savings. Despite efforts by microfinance institutions, cooperatives, mobile platforms, and new pension providers to reach this group, uptake of informal-sector pension schemes remains low due to structural, financial, and awareness gaps.
Insights from the Retirement Benefits Authority show that while total pension coverage and formal sector coverage have remained relatively stable at around 20-22 per cent, the informal sector coverage is significantly lower at 1.3 per cent in 2019 to 2.5 per cent in 2023. The informal workers rely on savings groups, or chamas, over formal retirement plans. While schemes such as the Mbao Pension Plan, Haba Haba Scheme, Taifa Pension Fund, NSSF Voluntary Contributions, and DigiSave Pension Plan exists, low enrolment persists due to seasonal work, inconsistent earnings, and limited financial literacy, highlighting the need for targeted interventions.
Challenges and Emerging Issues in Inclusiveness of Pension Schemes
Low uptake of formal pension schemes
Currently, the pension system is largely focused on the formal sector. The NSSF, for instance, only caters to salaried employees. Attempts to include informal sector workers, such as through the Mbao Pension Plan, has not achieved significant uptake due to various factors, including low awareness, irregular incomes, and limited trust of financial institutions.
Inconsistent earning
Informal workers often face inconsistent earnings, making it difficult to contribute regularly to pension schemes. Most existing schemes assume a regular monthly contribution model, which is impractical for workers whose income flow is not consistent.
Limited awareness
Many informal workers are unaware of the benefits of pension schemes or how to access them. A World Bank (2019) report that only 10-20 per cent of informal workers in sub-Saharan Africa have a basic understanding of pension benefits. Without targeted awareness campaigns, these workers may continue to rely on traditional savings mechanisms that offer no long-term financial security.
Policy Recommendations
Promote inclusive coverage of pension schemes
The informal sector is critical in the economy, employing much of the workforce and contributing to economic resilience. While informal workers have strong income potential, improved access to skills, finance, technology, and supportive policies could stabilize earnings and drive economic growth. Expanding pension access in this sector can indirectly boost job creation by enhancing economic stability and disposable income for retirees, thereby supporting demand in areas such as retail, healthcare, and local services.
Strengthen flexible contribution plans
Pension schemes tailored to informal workers to adopt flexible contribution models that allow workers to contribute based on their income flow. Expanding such flexible schemes could significantly increase pension uptake. The country’s robust mobile money system, particularly through M-Pesa, presents a unique opportunity to simplify pension contributions for informal workers. Pension schemes could be linked directly to mobile money platforms, allowing workers to make small, regular contributions whenever they have available income. The Mbao Pension Plan is a good example of how mobile money platforms can help in increasing members’ contributions.
Mount targeted awareness campaigns and incentives
The Government could consider partnering with financial institutions and grassroots organizations to run campaigns tailored specifically to educate informal sector workers on the benefits of pension schemes and how to enroll. The Government could provide incentives, such as matching contributions and tax exemptions, to encourage informal workers to enroll in pension schemes.
Finally, the welfare of Kenya’s informal workers is crucial as they lack essential financial safety nets despite being central to the economy. Expanding pension schemes to include them can sustainably improve their livelihoods and prevent old-age poverty. Achieving this requires flexible pension models, digital-based schemes leveraging mobile money, and outreach programmes to boost awareness and trust. Strengthening public-private partnerships and offering government incentives will be essential to scale and encourage participation.