National Social Security Fund Building in Nairobi. RBA has set limits allowing pensions to invest in bonds, shares and property. Photo Stafford Ondego/Standard
By Jackson Okoth
With
activity at the Nairobi Stock Exchange (NSE) maintaining a downward
trend, the local pension industry is among the worst hit.
"A
falling market has affected asset value and returns on most funds,
especially those invested on fixed income and equities," says Mr Dominic
Kiarie, the Managing Director British American Asset Manager
Figures
indicate that performance for the pension sector was not strong last
year, with the rate of return averaging between ten per cent and 12 per
cent.
Although providers are yet to release last year’s results, among the worst performing funds are those invested in equities.
"For those who invested in equity funds in 2005, returns have fallen on average by about 14.5 per cent," says Kiarie. The
NSE dropped by more than 30 per cent last year and is still sluggish.
"We expect the market to pick up in the fourth quarter or the first
quarter of next year," he says.
In the past, investments by pension funds were mainly in the property sector, with equities being secondary.
Presently,
industry regulator Retirement Benefits Authority (RBA) has set limits
allowing pensions to invest in bonds, shares and property. "There is
need for more diversification into other asset classes, including
private equity and venture capital," says Kiarie.
Although RBA rules allow investment in ‘other’ asset classes, it is a blanket provision.
There is lack of knowledge and awareness among trustees on alternative avenues.
While the local financial market has been
on a decline, a global recession has made offshore markets a hostile
ground for most fund managers.
At
present, there is massive correction in markets such as India and
Brazil, while the sub prime has been doing poorly. Local pension funds
are not allowed to invest more than 10 per cent of their funds offshore.
Off-shore exposure
"Our exposure offshore is between five and seven per cent. We are not overweight in the offshore market," says Kiarie.But he adds that the market is attractive because prices are low compared to fundamentals.
With returns on equity investments on the decline, fund managers are offering some reprieve. "This is the best time to top up or switch to money market funds," he says. Among safe havens are cash or near cash investments, including fixed deposits and call accounts.
Fund managers can also realign their equity portfolio by selectively picking only those strong stocks that will take off when the market rebounds.
Apart from a fall in the market, the local pension faces the challenge of lack of alternative investment avenues and low coverage, especially in the SME sector.
Quarterly reports submitted to RBA indicate that pension sector investment in quoted equities as at December 2007 stood at Sh95.2 billion. The entire pension industry has had more than 1,066 schemes during this period. There were 16 registered managers, with some of the notable including African Alliance, AIG Global, British American Asset Managers, Zimele, Old Mutual, ICEA and CFC financial services.
The investment portfolio of retirement benefits schemes as at this period stood at 182.4 billion, invested as cash, fixed income or deposits, Government securities, quoted and unquoted equity, offshore, immovable property and guaranteed funds.
An estimated Sh71 was in Government securities, Sh9 billion invested offshore and Sh7.4 billion in immovable property. Growth of the pension industry has been rapid and is now projected to reach Sh300 billion in asset value over the next two years.
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