Fixed income lifts pension schemes return in Q1

Pension schemes posted positive returns in the first quarter of the year on increased yields from fixed income. FILE PHOTO | SHUTTERSTOCK   

By PATRICK ALUSHULA More by this Author

Pension schemes posted positive returns in the first quarter of the year on increased yields from fixed income to emerge from the negative returns they had booked in the

corresponding period last year.

Analysis of pension schemes by Actuarial Service East Africa (Actserv) shows that they recorded an overall return of 0.8 percent in the three months ended March, compared to negative 0.6 percent in the first quarter of last year.

The latest return, which was boosted by fixed income performance, trailed that of 2.26 percent that was posted in the first quarter of 2021 and was still far off the 6.5 percent of the first three months of 2019.

Actserv noted overall returns in the first quarter of the year remained under pressure due to a strained macro environment riddled with elevated inflation, debt repayment vulnerabilities and downstream effects of an unstable global market.

Read: Pension schemes seek safety in treasury bonds

Returns from the fixed income improved from 1.1 percent in the first quarter of last year to 2.6 percent in the period under review, to match the performance posted in the same period in 2020.

“These were majorly as a result of rising yields as investors pushed for compensation against a weakening shilling, sustained inflationary pressures and high domestic borrowing,” said Actserv.

Actserv polled 425 schemes with a total fund value of Sh950 billion—excluding property— in the periodic quarterly survey.

Increased returns from fixed income coincided with that of offshore investment emerging from a negative return of 8.7 percent to a 16 percent return.

“The rise in offshore performance was linked to easing inflation and improved sentiments with regard to China’s reopening,” said the survey.

But the impact of offshore investment on the overall return remains low given that it averaged 6.42 percent of the Sh950 billion compared with 79.92 percent that was in fixed income. Equities averaged 17.78 percent.

The downturn in the stock market saw the negative returns on equities worsen from negative 4.8 percent in the first quarter of last year to negative 7.2 percent as foreign investors sold shares in emerging markets and sought higher returns in other markets.

“The decline in local equities was attributable to foreign investor outflows following the dollar liquidity constraints and high-interest rate environment in developed markets,” said Actserv.

Geopolitical concerns over the continued Russia-Ukraine conflict and the spiralling inflation that forced benchmark interest rates hikes in Western markets such as the US, triggered capital flight from markets such as the Nairobi Securities Exchange.

Many schemes opt for low-risk, long-term local government securities to guarantee the stability of funds. While offshore investments often offer high returns, they come with high risks.

Read: Risk-averse pension schemes bag higher returns

Pension schemes’ returns from investments determine the interest that pension funds pay savers on their contributions each year, after factoring in administrative and other fund management expenses.

→ palushula@ke.nationmedia.com