The Effect of Financial Literacy on Pension Preparedness Among Members of the Informal Sector in Kenya

Abstract

Saving for old age is one of the most important decisions individuals have to make over their lifespan. It has been found that financial literacy helps individuals plan for their retirement adequately but efforts to test this in the informal sector has been rare. In Kenya, like any other country in the world, relatively low levels of financial literacy have been reported. Although some studies have been done locally on the formal sector, little is known on the informal sector. This study therefore sought to find level of awareness and participation among informal sector members on the existing pension schemes, finding the literacy level of the members of the informal sector and finally seeking to find if there existed a relationship between financial literacy and pension preparedness among members of the informal sector. This study used a descriptive survey design. Stratified random sampling method was used to pick small scale traders from each of the five categories namely second hand clothes dealers, small shops and Kiosks, Jua Kali Artisans, and vegetable & fruit vendors in some of the busy markets in Nairobi. The sample size for the study was 150 respondents. Primary data was collected using questionnaires. Data was analyzed using descriptive statistics such as percentages and frequencies. A regression analysis was done on retirement preparedness and financial literacy. The findings of the quantitative data were presented in tables, figures and charts. The study revealed that only 36.8 % of the informal sector workers in Nairobi were covered by the formal pension schemes. Although the study found a high level of awareness on the existing pension products (76%), only half of them actively participated in the schemes. Finally, the study found out that financial literacy had a significant positive relationship on pension preparedness. The study recommends that the government, RBA and NSSF undertake extensive education campaign to educate informal sector workers on the importance of membership to retirement benefit/pension schemes as a means to secure old age. The study further recommends necessary policy and institutional reforms to make access to retirement pension services easily accessible to informal sector workers.