Hard times for retirees as value of pension assets dip

The value of pension assets fell for the first time in a decade, leaving in its wake marginal returns for workers and reduced payouts for those leaving the labour market.

Pension managers lost Sh17 billion in the year ended December 2011 – the first contraction since the Retirement Benefits Authority (RBA) started the records in 2002.

RBA last week said that the value of pension assets dropped from Sh420 billion in December 2010 to Sh403 billion in December 2011 as the bearish run at the Nairobi Securities Exchange (NSE) took its toll on equity investments and a steep rise in interest rates devalued government securities held by fund managers.

The industry’s average return on investment also plummeted to negative 9.9 per cent – the lowest ever and first time since 2009 that the sector reported negative returns.

“With the overall inflation standing at 18.93 per cent in December 2011, this result implies that pension savers received significantly negative real rates of return in 2011,” said Edward Odundo, the RBA chief executive.

In 2009, the industry average return on investment stood at negative 4.28 per cent following a battering of stocks at the stocks market that followed 2008’s post-election violence and the global financial crisis that engulfed markets in the same year.

“A survey sample of 127 schemes with segregated investments and assets of Sh130 billion returned a weighted average one-year investment of negative 9.9 per cent in December 2011 compared to 27.8 per cent in December 2010,” said Mr Odundo.

Negative returns on investment implies that the value of contributors’ savings dropped last year while those who requested to be paid their dues received less than they would have collected the previous year.

“The decline affected contributors as the negative rate of returns means the value of their savings dropped but those who felt it the most are those who cashed out,” said James Oyugi, chairman of the pensions committee at the Kenya Association of Insurers.

The rate of return for pensions is measured yearly based on the performance of each fund and the prevailing economic conditions.

Should the trend persist this year,  pension contributors will most likely outlive their savings upon retirement forcing some of them into poverty.

This erosion of pensioners’ funds is only affecting workers who have put their money into defined contribution schemes where the final payout is not guaranteed but largely depends on market performance.

Under this scheme, employers are required to make a contribution into a worker’s pension account, which is invested in shares, bonds and property.

In defined benefit schemes, where the employer promises employees a pre-determined level of pension in retirement regardless of the schemes performance, it is the employers who bear the brunt of the fall in the value of pension assets.

Under the defined benefits arrangement, employers are forced to pump money into the pension schemes to meet any shortfalls — a double blow to companies facing low corporate earnings.