Kenya pension funds increase investment in long-term govt bonds ahead of banks

The Kenya Pension Fund Investment Consortium, whose members control about $2.63 billion in assets under management, says it has identified 17 infrastructure projects in the water, energy, affordable housing and roads sectors that are viable for investment. PHOTO | PSCUBy CHARLES MWANIKI

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Kenya pension funds recorded the biggest growth in lending to government in 2021, helped by the National Treasury’s consistent issuance of long-term bonds, which favour their investment preferences.

Central Bank of Kenya (CBK) data shows that pension funds grew their holdings of government debt by $1.8 billion to $11.05 billion between January 1 and December 17, ahead of banks, whose holdings went up by $1.55 billion to $17.9 billion.

Total domestic public debt stood at $35.54 billion in December, up from $30.63 billion in January, with the share held by pension funds going up from 30.3 percent to 31.3 percent in the period. Banks in the meantime saw their share of domestic debt fall from 53.3 percent to 50.3 percent.

For pension funds, long-term bonds align more closely with their long-term investment outlook, unlike banks which prefer shorter dated paper due to their shifting liquidity needs and the short term nature of deposits.

Kenya's Treasury has largely floated longer dated bonds this year in an effort to lengthen the maturity profile of domestic debt and reduce refinancing risk for the exchequer.

Maintaining stability

CBK Governor Patrick Njoroge said at the end of November that the average time to maturity for Treasury bonds has lengthened to nine years from 7.5 years in June 2019.

The government has also cut the amount of debt held in form of short term Treasury bills — largely used by banks for liquidity management — to 18 percent from 24.6 percent in January.

“It has helped maintain stability in the yield curve. The ratio of T-bills to bonds has also fallen…a remarkable achievement in terms of stability in government’s borrowing programme,” said Dr Njoroge.

The pension funds have also been looking at other investment options, including public projects.

In October 2021, a consortium of 18 pension funds said they were seeking to invest up to $263.3 million in public projects through the public-private partnership (PPP) model to diversify their asset portfolio and raise returns for pension savers.

The Kenya Pension Fund Investment Consortium (KEPFIC), whose members control about $2.63 billion in assets under management, said it has identified 17 infrastructure projects in the water, energy, affordable housing and roads sectors that are viable for investment.

The law allows a fund to put up to 10 percent of its portfolio in infrastructure and other asset classes.

“We are doing a study of all the projects on the PPP pipeline to see how we can make investments in them,” said Zamara Chief Executive Sundeep Raichur, who is also the chairman of KEPFIC.

Mr Raichura added that they have held talks with the World Bank and GuarantCo to guarantee projects.

“There are a couple of projects that are at a very close stage of closing but with the infrastructure, it takes a while due to due diligence to be sure because this is people’s money… we have to get the guarantee from contractors as well as the government the that they will pay the amounts due to us on time,” he said.

The pension schemes in the consortium include those of Safaricom, Kenya Ports Authority, Kenya Revenue Authority, Kenya Power, KenGen, Moi Teaching Referral Hospital, Stanbic Bank Staff Pension Scheme and Zamara.

The Kenyan pensions sector had $12.97 billion in assets under management as of June 2021, meaning that they can potentially unlock up to $1.29 billion for infrastructure funding.

Pension schemes are already a key source of cash for public projects in countries such as Brazil, Colombia, Mexico and Chile.

Among the other investor classes, retail investors outpaced parastatals and insurance firms in growing lending to government this year.

This class of investors — comprising Saccos, listed and private companies, self-help groups, educational institutions, religious institutions and individuals — raised their holdings of State debt by $868.9 million to $2.18 billion.

For these investors, bonds have become an increasingly attractive option due to lower returns in other asset classes such as property and equities, while also being a safe haven due to the economic uncertainty brought by the Covid pandemic.

Insurance companies added $431.8 million to their stock of public debt to hit $2.4 billion, while parastatals saw their holdings go up by only $210.6 million to $1.94 billion.

Parastatal holdings were eroded following an order by the Treasury to State corporations to surrender cash balances held in bank accounts and near-liquid assets, a move intended to cut the government’s cost of borrowing.