Low inflation leaves pension savers with positive earnings

The Retired Teachers Group members speak to journalists in Nakuru over pension arrears amounting to more than Sh42 billion last year. File 

By Mugambi Mutegi

In Summary

• Retirement schemes post average returns rate of 28.39 per cent from previous year’s negative.
• All the four investments vehicles preferred by pension schemes registered positive returns stopping a four-year value erosion.
• Returns were highest in the fixed income segment of the pension scheme investment.

Pension schemes rode 2012’s strong economic recovery wave to significantly grow their investments, leaving savers with positive returns for the first time since the 2008 global financial crisis.

An industry report by Actuarial Services East Africa (ACTSERV) says savers earned an average rate of return of 28.39 per cent in the year to December 2012 moving firmly in the positive returns territory.

All the four investments vehicles preferred by pension schemes registered positive returns stopping a four-year value erosion that began with America’s sub-prime mortgage crisis in the last quarter of 2008.

Returns were highest in the fixed income segment of the pension scheme investment, including government bonds that yielded up to 21.8 per cent earnings.

Offshore investments posted an average of 10.52 per cent rate of returns climbing out of the previous year’s dip that yielded -5.61 per cent performance rate.

Last year’s upturn in the equities market gave pension funds a 51.3 per cent rate of return — the highest among the investment mix compared to -23.55 per cent recorded the previous year.

The Pension Schemes Investment Performance Survey, which sampled 103 schemes in Kenya, brightens the pensioners’ prospects one year after they watched their investments shed value across all segments.

“2011 was not a good year for pension schemes as inflation, high international oil prices and a bear run at the Nairobi Securities Exchange (NSE) combined to erode investment value,” said George Kilibwa, one of the lead researchers in the study.

“But things improved last year with the stock market’s rebound and the easing of inflation pressure to record lows that has been reflected in the earnings.”

(Read: Bullish stock market lifts workers’ pension savings)

The schemes included in the study have an estimated asset value of Sh57 billion. The schemes’ stellar performance coincides with the NSE recovery that saw the 20-Share Index close the year at 4,133.02 points, 28.95 per cent higher than its opening level of 3,205.02 points.

During the bear market run of 2011, Retirement Benefits Authority (RBA) said that pension funds’ exposure to quoted shares dropped to Sh93 billion from Sh130 billion in 2010.

Last year’s good showing came in the wake of the Central Bank of Kenya’s (CBK) aggressive monetary policy intervention to tame runaway inflation that peaked at 19.72 per cent in November 2011.

Inflation steadily declined to single digit levels helped by a tight monetary policy and favourable weather that kept food prices in check.

Low inflation opened a window for investors to return to the NSE, putting share prices on a recovery path that peaked with the better-than-expected results in the second half of the year.

Analysts expect the trend to continue this year but caution that it all depends on the performance of equities and government securities in the third and fourth quarters of the year.

“The period after the second quarter of the year will be key to projecting annual investment returns,” said Eric Musau, an investment analyst at Standard Investment Bank.

“It will all depend on measures adopted by the new government, including its stay on the current path of heavy indebtedness or a change to a new model that involves raising revenues bearing in mind that each option has unique effects on the economy and for investors.”

The ACTSERV report also shows that pension funds increased their participation in real estate to 2.34 per cent of their total investment despite a slowdown in the construction industry in the first three quarters of last year.

The survey divided the pension schemes into three categories — large, medium and small — based on the total value of funds held.

Only 21 schemes qualified to be in the first group of funds with more than Sh500 million but control the largest fraction of the industry’s total savings of Sh49 billion or 86.04 per cent of the total.

The bulk of their portfolio (65.61 per cent) was invested in fixed income while equities accounted for 27.72 per cent of investments, property (2.49 per cent), cash reserves (2.41 per cent) and offshore 1.77 per cent.

Twenty-four medium-sized schemes with reserves of between Sh100 million and Sh500 million controlled Sh5.42 billion of total invested funds, translating to 9.52 per cent of the industry’s investment.

Like their top-tier counterparts, this cadre of pension schemes also had the largest fraction of their investments in the fixed income instruments despite the fall in total holdings to 68.36 per from 72 per cent the previous year.

These funds, however, spread their assets beyond the country’s borders by a whopping 74 per cent while also dabbling in real estate where investment rose by 1.25 per cent from a no-show the previous year.

Small-scale schemes — with less than Sh100 million — were the majority at 58 but with only Sh2.52 billion worth of industry assets or 4.43 per cent of the total.

“Most of the small schemes have an average of Sh43 million in saved funds and this is not enough capital to make any genuine investment in the real estate,” said Mr Kilibwa.

“The regulatory limit that the schemes cannot invest more than 30 per cent of their total portfolio in property leaves such funds with just about Sh13 million to invest.”

Benchmarks used in the quarterly survey include the 364-day t-bill rate, the PineBridge Investments 27 Share Index and the Morgan Stanley Composite Index for fixed income, equities and offshore investments respectively.

The RBA is currently working on regulatory changes that if adopted will introduce new caps on asset classes that retirement funds invest in.