New rules set to slash pension funds equity bets

Traders at the Nairobi Securities Exchange. The industry watchdog says retirement schemes are faced with high investment risks. File 

By RAWLINGS 

 

The Retirement Benefits Authority (RBA) is working on proposed regulatory changes that if adopted will introduce new caps to asset classes that retirement funds are allowed to invest in.

The proposals are based on recommendations given by a consultant hired by the World Bank, who borrowed heavily from the regulatory framework in Chile and Nigeria.

If passed into law, they could fundamentally alter Kenyan fund manager’s asset portfolios and cut back their substantial presence at the stock market.

One of the most radical proposals recommends that the level of exposure pension funds can have in ordinary and preference shares be slashed from the current 70 per cent to between 20 per cent and 40 per cent of total investments as it is in Chile and Nigeria.

“We have implemented various initiatives and reforms aimed at increasing coverage and mitigating risks faced by the schemes,” said Mr Guillermo Larrain a World Bank consultant who was involved in the study.

Data from RBA shows that exposure to quoted shares by pension funds dropped significantly to Sh93 billion as at the end of 2011 from Sh130 billion in the same period in 2010, showing the proposed cut back could take away significant investment capital from the stock market.

The proposals also seek to remove the limit on the amount a retirement fund can invest in government securities, currently capped at 30 per cent of total assets.

Investment in corporate bonds will be limited to 35 per cent of total portfolio as it is in Chile but subject to the quality of the bond. A limit of 16 per cent could be placed on corporate bonds with a triple B rating and 25 per cent for triple A rated securities.

The proposed rules do not place a limit on exposure to government bonds given their triple A rating.

The chief executive officer of the Retirement Benefits Authority Edward Odundo said a recent risk profiling done by RBA showed that retirement schemes are still faced with high investment risks.

“The implementation of risk-based supervision approach will encourage a pro-active response to scheme risks, and allow RBA to focus on schemes whose systems require greater attention to reduce their risk levels,” said Mr Odundo.

The RBA data also shows that retirement funds’ investments in government securities rose from Sh143 billion to Sh145 billion in the same period. The funds also increased their presence in immovable property to Sh57 billion from Sh50 billion.

Pension funds increased their presence in fixed deposits from Sh16.1 billion as the end of 2010 to Sh21.9 billion at the end of 2011 due to high returns on deposits. The total industry fund dropped from Sh420 billion to Sh403 billion in the year.

The proposals says that there is need for pension schemes to invest in more long-term instruments that can contribute to financing infrastructure requirements in the Vision 2030 development blueprint without compromising returns to members.

Mr Odundo said investment regulations have been somewhat conservative in terms of the variety of investment options and may have limited options for Pension Fund Managers. 

Investment options such as private equity and venture capital are not specifically included in the guidelines but instead classified under “other assets” which require specific regulatory approval.

He said the proposed regulations are keen to diversify the investment portfolio so as to reduce the risk of market volatility and uncertainties.

He said he had seen increased volatility where average scheme one-year returns moved from positive 37 per cent in September 2010 to negative 11 per cent in September 2011 and positive 25 per cent in September 2012. 

There was also need for more flexible investment and broader asset classes by pension fund managers so as to achieve greater portfolio diversification and the need for the facilitation and the implementation of multiple portfolios and member choices in pension fund investment.

The proposals also suggested new investment vehicles such as private equity, infrastructure-related equities and real estate investment trusts.

The rules propose that Investment in corporate bonds by one issuer should be capped at between five per cent and 7.5 per cent and a similar ratio for investment in shares of one company.

rotini@ke.nationmedia.com