The government is exploring a significant reform in the pension framework, introducing a two-pot system that would let workers withdraw part of their retirement funds before the official retirement age.

According to the proposals by the Retirement Benefit Authority (RBA), the initiative aims to boost participation in formal retirement savings plans, especially among workers in the informal sector, and strengthen long-term financial security for more Kenyans.

Under the proposed system, a worker’s pension would be divided into two parts. The first pot would remain locked until retirement, ensuring that funds intended for old age are preserved.

On the other hand, the second pot would be accessible to meet short-term financial needs, such as medical emergencies, school fees, or starting a small business.

“As such, the introduction of the subaccounts will enable the Sector to achieve the following National Retirement Benefits Policy objectives: Enhancement of the retirement benefits coverage – The subaccount enables members to access a portion of their savings to meet short-term financial needs,” RBA argues.

“This value proposition is an incentive that is expected to encourage uptake of retirement products, particularly by the informal sector. Promote adequacy of retirement benefits. The model advances the adequacy of retirement benefits by promoting preservation of benefits and providing incentives that encourage members to opt for a regular pension, as opposed to a lump sum payment. o Introducing sub-accounts in retirement benefits schemes besides retirement savings to address short-term needs of scheme members.”

Moreover, the authority stated this approach is expected to make pensions more attractive to people who currently avoid saving because they fear they cannot access the money when needed.

”The Authority, after receiving proposals from stakeholders in the retirement benefits sector, has compiled proposed policy changes to the Retirement Benefits Act and regulations thereunder for FY 2026/2027 Budget Policy Statement,” RBA confirmed.

Under Kenya’s current law, pension savings held in schemes regulated by RBA are generally locked in until a member reaches the scheme’s retirement age, usually around 60. 

However, members who leave employment before retirement may withdraw up to 50 per cent of their accumulated benefits, with the balance preserved in the scheme, transferred to another pension plan, or deferred until retirement. 

Tax exemptions

The RBA is also considering reforms aimed at making pensions more efficient and cost-effective. One key proposal would exempt survivor benefits paid to pension fund members from taxation, ensuring families receive the full benefit.

Additionally, the removal of value-added tax (VAT) and excise duties currently levied on pension fund managers could lower operational costs and boost returns for members.

Beyond financial measures, the authority plans to enhance governance and transparency in the pension sector. This includes quarterly reporting requirements for pension funds and mandatory vetting of senior fund managers, designed to strengthen oversight and safeguard workers’ retirement savings from fraud or mismanagement.

Kenya’s pension sector currently oversees Ksh2.53 trillion in assets, with the majority invested in government securities.

While secure, these investments offer modest returns. By lowering costs and encouraging broader participation, the government aims to grow both the size and performance of pension funds.