RBA tightens supervision of retirement schemes

Retirement Benefits Authority CEO Edward Odundo. Photo/FILE 

By Jackson Okoth

While the pension industry controls an asset portfolio worth over Sh264 billion, and contributes five per cent of the Gross Domestic Product (GDP), it is one of the least understood sectors.

Most people, especially the young, consider saving for retirement a venture not worth the bother, while those already saving for old age have no idea what happens in their pension schemes.

In the past, retirement benefit schemes were few and far between, with unscrupulous employers taking advantage of the unregulated environment to misappropriate employee benefits.

But that is changing. "Supervision of pension schemes has been a challenge in the past. But we have made tremendous progress in ensuring they comply to laid down regulations," said Mr Edward Odundo, Chief Executive of Retirement Benefits Authority.

The industry has also been growing over the past few years, largely due to a number of factors.

"We have had tax incentives from the Government which has boosted growth," says Odundo.

There is a growing awareness among Kenyans on the need to save for retirement. This trend is unlike in the past, when parents invested and relied on their children for support in their old age.

Apart from aggressive public awareness campaigns, and education on the need to save for retirement, pushed by a fully fledged corporate communications department at RBA, a huge demand for funds by the Government for its public projects has also created market for pension funds.

"A large percentage of pension funds are invested in Government treasury bonds-used mainly to finance projects such as infrastructure development.

Also on the list of growth factors is an upward trend by companies to issue corporate bonds and IPOs, creating room for involvement of pension funds.

"Pension schemes have been allowed to invest in the East African Region, where this is treated as local investment, thereby expanding the savings horizon of the various schemes," says Odundo.

Expected to set the pace for the entire pension industry will be a national pension conference in November, where all stakeholders will craft a policy document.

"At this conference, we shall be discussing a draft policy that includes introduction of a universal pension scheme," says Odundo.

Such a scheme is working in countries such as Botswana and South Africa where the state offers pension for all its citizens, funded by Treasury.

In the case of Kenya, the idea is to have a basic scheme, which provides pension to all citizens who attain the age of 65 years, to be paid by the exchequer.

At the head of RBA, Odundo’s strategy involves setting up at least four pillars to ensure all citizens have a reasonable and sustainable standard of living upon retirement. There is a plan by RBA to construct at least four pillars, to ensure this objective is achieved.

The first pillar will be a universal pension scheme, a basic safety net that will cover all Kenyans attaining the age of 65 years and above.

The second pillar, already in place, is the National Social Security Fund (NSSF), a provident fund, where employees make statutory contributions. The third is the promotion of more pension schemes, where both employers and employees contribute.

stepped up

And the last pillar is the individual pension scheme plan, where an individual contributes.

"When all these pillars are in place, one is able to have a reasonable and sustainable level of living upon retirement. This is our vision," says Odundo.

RBA is pushing for a policy document that will realise this objective, including making it compulsory for one to contribute to a pension scheme.

Those already targeted are people in informal sector, which comprises more than 60 per cent of the country’s workforce.

urrently, there are more than 11 companies running individual pension schemes. Most of these are insurance companies, with products that also cater for people in informal employment.
Following the rapid growth of the industry, the regulator has also stepped up its supervision. Previously, its role has been to ensure compliance by the various schemes, to the laid down regulations and procedures. But following impressive compliance rates, the regulator has now scaled up to risk-based supervision.

"We are now looking at risks faced by various schemes after which we pre-empt them before the scheme collapses," says Odundo.

The role of RBA is basically to supervise the establishment and management to monitor the various pension schemes on a quarterly basis, to ensure they are run professionally, effectively and efficiently.

At present, the regulator receives basic compliance documents on a quarterly basis from the schemes, ensuring money is there to pay out when one retires.

RBA is also receiving an increasing number of complaints from the public, an indicator that the level of awareness about operation of pension schemes is improving.

In the past, a number of pension schemes had problems with record keeping, while others were poorly managed due to poor supervision. Often many were avenues of outright theft of funds belonging to members.

But the arrival to the scene of RBA has streamlined the industry.

"There is a Chinese wall between members of a pension scheme and the employer, thus ensuring transparency," says Odundo.

Apart from routine compliance supervision, RBA has moved to risk-based monitoring, including checking on the funding levels, expenses and risks.

The law requires that the custodian of a pension fund only keeps five per cent of the portfolio in cash, while the rest is invested in equity, bonds, property, offshore or in any other instrument.

It is projected that with a mandatory pension scheme for all, there will have a significant impact on poverty reduction, deepening of the capital and financial markets and increasing the level of savings.

RBA’s shocking admission on NSSF

 
"

Retirement Benefits Authority CEO Edward Odundo. Photo/FILE 

"NSSF problems are historical and that is why its needs a thorough audit.

By Elizabeth Mwai and John Njiraini

Even before the dust settles on a management crisis that rocked the National Social Security Fund (NSSF) barely two months ago, the extent of rot at the pensions custodian is again the focus of attention.

Having acquired the reputation of not learning from its past mistakes, the fund is yet again on the verge of losing billions of shillings after investing workers money through a troubled stockbroker.

Last week, it emerged the NSSF Finance and Investment Committee had for the umpteenth time goofed and invested Sh1.4 billion through Discount Securities that was in financial distress.
 
The committee, which until two months ago was headed by current acting managing trustee James Akoya, had authorised Discount Securities to trade NSSF shares but failed to secure the certificates thus exposing the fund to a Sh2 billion risk.

But more worrying was the revelation that over the past three years, NSSF’s Sh82 billion portfolio might have been eroded further through dubious claims that it bought shares at the Nairobi Stock Exchange (NSE) only for it to be later established there were no transactions.

While Labour Minister John Munyes moved with haste and dissolved the NSSF board of trustees and ordered a forensic audit on the fund’s true status, the man in charge of the pension industry believes the NSSF is a dead horse unless it is put under strict surveillance.
Legislation

In an exclusive interview with FJ, the Retirement Benefit Authority (RBA) Chief Executive Edward Odundo says NSSF will continue to invest workers money in questionable deals unless it is subjected to the RBA Act like other pension schemes.
"NSSF problems are historical and that is why its needs a thorough audit and also ensure the fund is regulated like other schemes," he says. 

Attempts to force NSSF adhere to RBA investment guidelines four years ago through the courts failed after it obtained an extension on the premise that it operates under the NSSF Act.

Though the RBA and other stakeholders have for long been pushing for NSSF to be subjected to RBA regulations, the fund has stubbornly refused. This in effect has perpetrated the culture of outrageous investment decisions that have led to the loss of billions of shillings.

A case in point is the disposal of a plot located along Nairobi’s Kenyatta Avenue next to the Laico Regency Hotel.
Title deed

Despite the NSSF selling the plot at a cost of Sh1.3 billion to Delta Resources, the fund released the title deed after being paid only 10 per cent (Sh130 million) of the purchase price.

However, ousted former Managing Trustee Rachel Lumbasyo argued the balance of Sh1.2 billion was being held in an escrow account at the CFC Stanbic Bank for safekeeping in the joint names of the fund and the purchase’s advocates.

In 2002, NSSF also lost Sh256 million in collapsed EuroBank in yet another suspect dalliance with a stockbroker, Shah Munge and Partners that has since gone under. According to Odundo, NSSF’s exploits and gambles in risky and shady ventures are borne from the fact that its investment committee has the freedom to deal directly with banks, something that should not be the case.

NSSF also does not employ the services of professional fund managers to advise its investment team, which is in contempt of RBA investment guidelines.
Duties

Odundo explains there should be a clear demarcation of duties with the custodian or managers tasked with the responsibility of handling transactions with the bank.
More importantly, money kept in trust should not be used to finance the fund’s activities, as is the situation currently.

The RBA boss says systematic changes aimed at transforming NSSF’s legal framework must be undertaken as a matter of urgency. "Under its current status, NSSF lacks the technical capacity to manage workers money appropriately," says Odundo. Though the need to put NSSF under RBA regulations is paramount considering the current law governing the institution, an Act of Parliament enacted in 1965, is outdated and cannot address the current demands and challenges, the proposed route does not offer any ra

The National Social Security Pensions Trust Bill , which seeks to convert the NSSF from a provident scheme to a pension scheme and is awaiting to be tabled in Parliament for the sixth time, exempts the new entity from RBA rules.
Section 62 of the Bill states that except as may expressly be provided to the contrary, the provisions of the RBA Act shall not apply to the trust.

Worse still, the new law empowers the board of trustees to formulate policies and guidelines for the investment of funds of the trust, meaning RBA investment guidelines would continue to be an anathema.
ys of hope. 

Pension firms should invest in goats

NSSF building in Nairobi. Photo/FILE  Nation Media Group

Ted Malanda

When I quit my previous job, my employer refused to part with his contribution of Sh390,000 towards my pension saying I had to wait till I became 55, wrinkled and frail before he paid me.

One and a half years ago, I asked him to transfer that withheld pension to my new boss. "I want to consolidate my savings in one basket," I lied. Truth is I was moving my money because I don’t trust government pension schemes.

To my great surprise, they sent a cheque for Sh430,000 last week. In other words, my pension had not been ‘eaten’ as I had feared. It has actually been laying eggs and in three years, it has made me Sh40,000 richer.

Yet when I resigned in 2005, a quarter an acre of land in the neighbourhood of Ongata Rongai was going for half a million bob, payable in beer rounds and small cash instalments. Today, the same piece goes for Sh1.2 million, hard cash.

Thus, anyone who bought land is getting rich without lifting a finger while I and millions of other idiots whose savings are locked up in fancy pension schemes are only paying investment bankers and getting poorer.

In fact, when we retire, that pension won’t even be worth a skinny he-goat.

When my father retired in 1977, I was in Standard Two. His pension was 700 bob a month. Last year, it had appreciated to Sh2,000 — the equivalent of an average beer bill for the evening.

To be honest, I still get shocked that the old man, aided by his cute wife who happened to be my mother, squeezed us through school. Don’t forget that unlike these days when we have one spoilt brat, my parents practically raised a football team. Of course, they didn’t achieve this feat on the old man’s Sh700-a-month pension.

foresight

Being a man of foresight, he had invested in two zebu heifers in 1959. The magic about zebus, what colonial farmers derisively called shenzi (stupid) cattle, is that they can literally survive through hell.

Unlike pampered hybrid cattle, zebus don’t need veterinary doctors, artificial insemination, mineral water and luxurious foods like Napier grass and biscuits. They are tough. They practically live on sisal and boiled rags.

By the time the old man was fired in 1977, his two heifers had multiplied to 85, including Jomo, a champion bull that sired calves left, right and centre and held the village bullfight champion award for a record four years.

It is those zebus that took my siblings and I through school. Every beginning of term, he would sell a cow or two and shoe us — three pupils at any given time — off to school, while Jomo did his thing. Now contrast that with yours truly, my father’s allegedly "educated and widely travelled" son.
leaky affairs

I own neither land nor livestock. My puny savings are instead locked up in fancy unit trusts, risky insurance schemes, questionable stocks, leaky pension schemes and a second-hand car that guzzles fuel like a witch and depreciates in value each day.

While my father wakes every morning to his mooing assets and the comforting aroma of fresh cow dung, I could wake up to news that some crooked investment broker has tinkered with my stocks and rendered me destitute.

My father knew. Jomo could always sire another calf. But a task force won’t bring back money that a government pension fund took from me by force and gleefully flushed down the urinal.

Government rolls out plans to make pension schemes attractive

National Social Security Fund chairman Adan Mohamed (left) chats with Finance minister Robinson Githae during the inaugural NSSF annual general meeting. Photo/DIANA NGILA  NATION MEDIA GROUP

BY PATRICK BEJA and PETER ATSIAYA

The Government is fast-tracking reforms in the pensions industry to raise returns for members and make retirement schemes more attractive.

Finance PS Joseph Kinyua said this year’s Finance Bill seeks to amend the Retirement Benefits Act to allow members of pension schemes to use their benefits as collateral for mortgages. Kinyua said as a source of long-term funds, the pensions industry was one of the anchors that could stabilise the economy.

The PS said this in a speech the Economic Secretary Geoffrey Mwau read on his behalf at the sixth Retirement Benefits Authority open day held at the Aga Khan Jubilee Hall in Mombasa at the weekend.

"The Government will therefore continue to put in place policy measures to further strengthen this important industry," Kinyua said.

Meanwhile, Nairobi Metropolitan Assistant Minister Elizabeth Ongoro wants the Constitution changed to enable civic leaders be entitled to pension. Ms Ongoro said she would push for the review of the law to allow councillors who serve for two consecutive terms benefit from a pension scheme when they retire, or are voted out. "Councillors deserve a pension scheme. I will push for change of law to make them eligible to such benefits," she said.

Addressing mourners during the burial of Kariobangi Ward councillor Japheth Bonyo at Wagusu village, Bondo District, at the weekend, Ongoro said civic leaders’ entitlement to pension would boost their performance.

Pension scheme, property developers’ conference

PHOTO | FILE A consultant has faulted the proposed changes to the country’s pension scheme.  NATION MEDIA GROUP

By David Odongo

Octagon Pension Services and Ark Property Consultants have organised a one-day conference that will see retirement pension associations and property developers meet to network, share, and discuss investment in real estate.

The conference, to be held on October 12 at Serena Nairobi, has received attendance confirmation of more than 100 pension schemes associations and members drawn from Kenya Property Developers Association.

“Pension schemes have the money, but we have developers who have the ideas and the skills. The idea is to bring them together to invest in real estate,” says Fred Waswa, Octagon Pension Services Managing Director.

He reveals that pensions schemes in Kenya have a cumulative asset base of Sh500 billion, yet less than ten per cent of the amount is invested in real estate.

The pension industry regulator, the Retirement Benefits Authority, allows pension funds to invest up to 30 per cent of their assets in real estate, a move that helps diversify investments.

“All pension funds have about 30 per cent, and this works out to about Sh150 billion. This money, if injected into real estate, can drastically reduce the severe housing shortage experienced in Kenya, especially in urban areas,” said Waswa.

Of late, pension schemes have been attracted by high and consistent returns in the property market, and few of the cash rich schemes have set up projects in real estate.

Kenya Commercial Bank’s pension fund constructed a Sh2.1 billion building dubbed KCB Plaza in Upper Hill, Nairobi, joining other big pension funds like Kenya Power and Lighting and Kenya Ports Authority that have lately set up big housing projects in Nairobi.

High returns

Waswa says that high and consistent returns are the main attraction for pension funds. “It is time for all major pension funds to consider investing in the property market because the returns are high and assured,” said Reginald Okumu, the managing director of Ark Consultants.

Analysts say Kenya’s high population — which grows by one million people per year — and the inadequate supply of housing, is set to hold the rally in property prices in the medium term, helping to boost returns for investors.

Pension funds cash in from bullish Nairobi bourse

The civil servants’ housing scheme in the Kilimani area of Nairobi. The lower classes of the market do not have such developments targeted at them. Photo/FILE  NATION MEDIA GROUP

By Jackson Okoth

In the last one year, the Nairobi Securities Exchange (NSE) has remained the most attractive option for pension funds managers followed by fixed income securities, property and offshore investments.

Pension funds earned an average of 25.3 per cent over the past 12 months to the end of September, mostly driven by the upsurge in the equities market.

An analysis by Alexander Forbes Financial Services (EA) Limited, an actuarial firm, indicates that over the one year period to September 30, 2012, investments in equities by pension schemes achieved an average return of 38 per cent, ahead of those on fixed income at 21.9 per cent while offshore investments had an average rate of return of 0.6 per cent.

This is a major turnaround from last year’s average return of -11.4 per cent when most share prices at the NSE were on a downward trend. “The equity market is attractive primarily for its return in excess of inflation potential. Investors in an equity market can obtain both capital gains and dividends, with the former being the primary target,” said Shera Noorbhai, an officer at Alexander Forbes Actuarial and Consulting.

She adds that pension fund assets represent a member’s lifelong saving that is supposed to be used in retirement. There is therefore a desire to ensure that the benefit at retirement has grown – affords a reasonable pension – and provides a benefit that can keep pace with inflation – hence a return in excess of inflation.

Investments offshore

“Equities afford this opportunity and hence are an asset class that most pension funds invest in,” said Noorbhai. The only risk pension funds managers’ face when exposed to equities is a fall in the price of the equity relative to its purchase price at valuation or sale date. The other danger is when the dividends are paltry or nil.

Pension Funds can invest in a number of other asset classes including fixed income instruments such as government securities, commercial paper, corporate bonds, property and offshore investments amongst other asset classes. Incidentally, average rate of returns for pensions funds invested offshore performed the lowest at 0.6 per cent. “This is reflective of the returns in the jurisdictions where the various pension funds have invested in. Investments offshore, like in Kenya consist of equity, fixed income, property, amongst other investments in jurisdictions outside East Africa,” said Noorbhai.

She adds that investments offshore are exposed to two key risks. This includes performance of the underlying investment whether this is an equity, fixed income or property investment. Then, there is the currency risk – movement of the Kenya Shilling relative to the currency in which the offshore investment is denominated.

“However, the exposure offshore is quite low for most pension schemes at less than 5per cent and therefore should not shift the overall pension returns too much,” said Noorbhai. The financial services firm surveyed 140 schemes, of which 134 have a total of Sh175 billion under management qualified for inclusion in the survey.

NSSF chief executive defends planned reforms

PHOTO | FILE  NSSF managing trustee Tom Odongo.  NATION MEDIA GROUP

By James Anyanzwa

National Social Security Fund (NSSF) has defend the proposed Transformation Bill from criticism saying the Bill takes into account the existence of private schemes.

The National Social Security Fund Bill, 2012 seeks to position NSSF as a public mandatory social security scheme covering all employees in the formal and a voluntary scheme for the self-employed in the informal sector who wish to contribute.

In a statement yesterday, Acting Managing Trustee Tom Odongo said the Bill had been drawn to address the national social security plight and is not aimed at antagonising existing private schemes.

Private retirement benefit schemes, he said, have fears that the proposed changes to the NSSF functions will hurt other players in the industry.

The Association of Retirement Benefits Schemes (ARBS) had threatened to oppose the proposals in the Bill, notably  raising of  contributions and the planned transformation of the public pension fund into a pension scheme, saying the move threatens their business.

But in a rejoinder, Odongo said failure to provide an expanded social security product would necessarily discriminate various sectors of the economy that are currently neither covered by NSSF nor by the private schemes.

Odongo said social security is important for the well being of workers, their families and the entire economy.

 “Social security is an indispensable part of the Government’s social policy and an important tool to alleviate poverty,” he said, adding that the Bill, which seeks to expand social security coverage would benefit members from the time they join until they retire.

Opt out model

“Unfortunately, the occupational schemes currently cover about 350,000 people only excluding public service schemes, a situation that is regrettable,” he said.

He discounted the notion that the Bill will starve other schemes off business, saying an ‘opt out model’ for schemes meeting specific reference tests had been incorporated.

Under the new arrangement, NSSF would be regulated by the Retirement Benefits Authority — which would ensure issues of governance, prudent investment and ‘opt out’ options are addressed. “The pie is too big for all of us and we us NSSF commit to fairness in recruitment of members,” he said.

The association comprises about 100 of the biggest pension schemes that control more than 70 per cent of the country’s retirement savings pool. The entire sector is estimated at Sh450 billion.