Pension funds cash in from bullish Nairobi bourse

The civil servants’ housing scheme in the Kilimani area of Nairobi. The lower classes of the market do not have such developments targeted at them. Photo/FILE  NATION MEDIA GROUP

By Jackson Okoth

In the last one year, the Nairobi Securities Exchange (NSE) has remained the most attractive option for pension funds managers followed by fixed income securities, property and offshore investments.

Pension funds earned an average of 25.3 per cent over the past 12 months to the end of September, mostly driven by the upsurge in the equities market.

An analysis by Alexander Forbes Financial Services (EA) Limited, an actuarial firm, indicates that over the one year period to September 30, 2012, investments in equities by pension schemes achieved an average return of 38 per cent, ahead of those on fixed income at 21.9 per cent while offshore investments had an average rate of return of 0.6 per cent.

This is a major turnaround from last year’s average return of -11.4 per cent when most share prices at the NSE were on a downward trend. “The equity market is attractive primarily for its return in excess of inflation potential. Investors in an equity market can obtain both capital gains and dividends, with the former being the primary target,” said Shera Noorbhai, an officer at Alexander Forbes Actuarial and Consulting.

She adds that pension fund assets represent a member’s lifelong saving that is supposed to be used in retirement. There is therefore a desire to ensure that the benefit at retirement has grown – affords a reasonable pension – and provides a benefit that can keep pace with inflation – hence a return in excess of inflation.

Investments offshore

“Equities afford this opportunity and hence are an asset class that most pension funds invest in,” said Noorbhai. The only risk pension funds managers’ face when exposed to equities is a fall in the price of the equity relative to its purchase price at valuation or sale date. The other danger is when the dividends are paltry or nil.

Pension Funds can invest in a number of other asset classes including fixed income instruments such as government securities, commercial paper, corporate bonds, property and offshore investments amongst other asset classes. Incidentally, average rate of returns for pensions funds invested offshore performed the lowest at 0.6 per cent. “This is reflective of the returns in the jurisdictions where the various pension funds have invested in. Investments offshore, like in Kenya consist of equity, fixed income, property, amongst other investments in jurisdictions outside East Africa,” said Noorbhai.

She adds that investments offshore are exposed to two key risks. This includes performance of the underlying investment whether this is an equity, fixed income or property investment. Then, there is the currency risk – movement of the Kenya Shilling relative to the currency in which the offshore investment is denominated.

“However, the exposure offshore is quite low for most pension schemes at less than 5per cent and therefore should not shift the overall pension returns too much,” said Noorbhai. The financial services firm surveyed 140 schemes, of which 134 have a total of Sh175 billion under management qualified for inclusion in the survey.