Rotich's asset class rules unlock new investment options for pension schemes

Money Markets Retirement Benefits Authority CEO Edward Odundo. PHOTO | FILE 

By HERBLING DAVID

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Summary

• Retirement schemes are now allowed to invest up to five per cent of their assets in listed contracts technically known as exchange traded derivatives, according to a gazette notice.
• Mr Rotich has also permitted pension funds to sink a maximum of 30 per cent of their portfolio into listed income-earning real estate securities, also referred to as real estate investment trust.
• The regulator cut to 10 per cent from the previous 30 per cent ceiling for pension schemes investing in commercial papers, and unlisted bonds that have been rated by ratings agency registered by the Capital Markets Authority.

Treasury secretary Henry Rotich has issued fresh guidelines on the asset class caps for pension schemes after the government introduced new investment categories including derivatives.

Retirement schemes are now allowed to invest up to five per cent of their assets in listed contracts technically known as exchange traded derivatives, according to a gazette notice.

Mr Rotich has also permitted pension funds to sink a maximum of 30 per cent of their portfolio into listed income-earning real estate securities, also referred to as real estate investment trust.

Private bonds and commercial papers issued by privately-held firms are now eligible for a slice capped at 10 per cent of their holdings.

The Retirement Benefits Authority (RBA) is betting on the new guidelines to unlock new opportunities in Kenya’s Sh1 trillion pension industry and generate higher returns to retirees.

RBA chief executive Edward Odundo said pension schemes’ trustees should invest in a portfolio mix along the revised rules, and ensure diversification to limit exposure to risks.

He, however, said that there has been poor uptake of alternative asset classes such as private equity, hence no justification to allot them a higher share in the mix.

“The uptake has not been high for new classes such as private equity. We don’t see any need to change the ratios,” Mr Odundo told the Business Daily in an interview.

Investment caps

The new asset classes and their investment caps, part of what is officially known as Table G of RBA’s regulations, were contained in the Finance Act 2016. There are now 14 investment classes in the amended table up from the previous 10.

The limits on asset classes that pension schemes can invest in were introduced in 2000 to curb rogue retirement fund trustees who were arbitrarily investing members’ cash in doubtful ventures or with their cronies.

The regulator cut to 10 per cent from the previous 30 per cent ceiling for pension schemes investing in commercial papers, and unlisted bonds that have been rated by ratings agency registered by the Capital Markets Authority.

Alexander Forbes Kenya chief executive Sundeep Raichura said the new classes were “a step in the right direction”, but the challenge is availability of investment grade opportunities that will excite the pension industry.

“The regulator has opened up the space, but what is lacking is supply of such products. There is also some level of risk aversion, hence need for awareness and training for trustees to appreciate these new asset classes,” Mr Raichura said in an interview.

No other changes were made to the limits permissible for existing asset classes such as cash at banks (five per cent), fixed deposits (30 per cent), listed bonds (20 per cent), and government securities such as T-bonds within East Africa at 90 per cent with window to 100 per cent subject to regulatory approval.

The cap for investing in preference shares and listed stocks is 70 per cent of their assets, unquoted shares (five per cent), offshore investments (15 per cent), real estate (30 per cent), guaranteed funds (100 per cent), private equity and venture capital (10 per cent), and another 10 per cent for any other assets not included in the list.