How you can live on Sh20 per day…in the future

 By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

03 July 2011

There is a new pension scheme christened “Usitupe Mbao” which literary translates to “Don’t Lose the Timber”! But of course in Kenya, it means “don’t lose your [route] board” – a phrase that was popularised by matatu crews to indicate that the vehicle is on the wrong route.

Mbao is also slang for Sh20 which is equivalent to one Kenyan pound. If you are old enough, you will remember the days when the figures in the national budget used to be in Kenya pounds…then everyone had to multiply them by 20 in order to get shillings!

Usitupe Mbao is therefore a very creative name for an ingenious pension programme where members are encouraged to save only a minimum of Sh20 each day – Monday to Friday – and then transfer Sh100 to the scheme at the end of the week. The target group are people in the Jua Kali sector and the money is transferred via the mobile phone system.

The question, of course, is whether the scheme is worth it: how much can one possibly accumulate by saving just Sh20 per day? First of all, if you think Sh20 daily is too small, then your income must be too large for this scheme!

Normally, people should put aside about 5 per cent of their income in a pension scheme. Thus the target group is those who earn about Sh400 per day. That might sound as if it is too much for a Jua Kali person, but try and remember the last time you bought something from one of them: how much did you pay and how many other customers were buying?

Now, suppose a 20-year-old person signs up for the Usitupe Mbao scheme and saves Sh100 per week. It is easy to see that this come to about Sh5,200 per year – there are 52 weeks and one day in a year. If the contributor continued at this rate until he reaches the age of 60, he would accumulate a total of Sh208,000.

Now there is a quick way of assessing whether this amount is significant: we simply look at its present value in relation to the current income of the contributor. Using Sh400 as the daily income, it turns out that Sh208,000 can last for 520 days.

In other words, with Sh208,000, the contributor can continue with his normal life for 520 days (a year and a half) without earning anything. To put that in better perspective, take your current income and multiply it by 18 months – it’s not a small amount, is it?

However, inflation will gradually eat away the savings and after 40 years (from age 20 to age 60), Sh208,000 will be worth much less than it does today. Now that becomes the greatest challenge for the managers of this scheme. They must ensure that, at the minimum, the funds will earn enough to recoup the loss to inflation.

In addition, it is not reasonable to assume that the contributor will continue earning Sh400 daily for the next 40 years. Therefore, members must increase their weekly contributions as their incomes go up. Failure to do that will mean that there won’t be enough money to live on when they retire.