Financial Literacy and Retirement Planning among Pension Scheme Members in Kenya

Abstract

The rising cost of living, increasing life expectancy, and high levels of old-age poverty in Kenya imply that many older adults cannot afford necessities upon retirement. The need for individuals to plan for their future financial needs through preparation for their retirement has become important occasioned by the shift toward defined contribution schemes. Unfortunately, the majority of the people who save for retirement in Kenya contribute to the National Social Security Fund (NSSF), which has a low replacement rate (the amount of income in retirement needed to maintain pre-retirement living standards) of 20% of basic income compared to the recommended level of 70% to 85%. Financial literacy plays a critical role in influencing savings behaviour and member participation in pension schemes, reducing debt loads and accumulating wealth. The purpose of this study was to establish the influence of financial literacy on retirement planning, more specifically focusing on the influence of financial awareness, financial knowledge, attitude towards saving and financial behaviour on retirement planning. The study was anchored on life-cycle theory, behavioural life-cycle theory, Theory of planned behaviour and family resource management theory. The study adopted a positivist research philosophy with a descriptive research design while targeting 2,828,713 pension scheme members from contributory pension schemes. Stratified sampling was used to derive the 332 pension scheme members in Kenya and primary data collected through a questionnaire.The study used binary logistic regression and found a positive significant influence on retirement planning of financial awareness, financial knowledge, and financial behaviour. However, attitude towards savings had a negative insignificant influence on retirement planning. Generally, financial literacy was also found to have a significant association with retirement planning. The results further indicate that a pension scheme member who was financially aware of financial products and financial institutions was 1.769 times more likely to be a comprehensive planner than one who was not aware of financial products and financial institutions. Additionally, a pension scheme member who is financially disciplined is 1.416 times more likely to be a comprehensive retirement planner. Pension scheme members who are financially knowledgeable are 1.296 times more likely to plan comprehensively for their retirement. Age and income had no moderating effect on the influence of financial literacy on retirement planning but were found to be key elements of retirement planning. The study therefore concludes that financial awareness, financial knowledge, financial behaviour, age and income significantly influence retirement planning among pensions scheme members in Kenya. However, this finding can only be attributed to pension scheme members of contributory schemes as non-contributory scheme members were not incorporated in the study. The study recommends formulating training and educational programs on critical financial concepts and products linked to retirement planning to spur pension schemes to actively participate in retirement saving while utilizing behavioural change interventions in the financial education programs. The study further recommends integrating financial education in the formal education programs at the foundational levels to enhance financial capabilities of Kenyans from the formative years.