Retirees face hard times as funds shrink by 9 per cent

Kenyans retiring in the next one year will take home less pension following underperformance of assets invested at the Nairobi Securities Exchange.

Fund managers said recovery is not expected until the second half of 2012.

A survey involving 128 pension schemes that control 28.4 per cent of the Sh451 billion pension assets revealed that they lost nine per cent in value in the year ending September 30, 2011.

However, performance over three years ending on the same date was 7.2 per cent up.

“One would hope that we have seen the worst of the market and that things should not get much worse now,” said Mr Sundeep Raichura, the managing director of Alexander Forbes Financial Services which carried out the survey.

The findings indicates that assets invested in equities performed poorest with a loss of 22.9 per cent of the value, followed by assets invested in fixed income like Treasury bonds and bills with a loss of 8.9 per cent.

The loss on assets invested in equities was attributed to a drop in the value of some of the shares that have been traditionally popular with the pension funds.

These include KCB, which has lost 34 per cent of its value in the year to November 2011, followed by East African Breweries which shed 27.88 per cent. Bamburi Cement lost 17.69 per cent of its value in the same period.

Assets invested offshore returned 7.6 per cent while those invested in the property market returned 3.8 per cent.

The survey indicates that most managers in the participating schemes allocated 67.4 of their assets in fixed-income investments that have a guaranteed return, indicating a cautious approach to the market.

Another 25.4 per cent of the assets were invested in equities while 3.9 per cent and 3.3 per cent were allocated to property and offshore investments respectively.

Fund managers said that while they did not expect major changes in asset allocation, additional assets may be invested in fixed income, especially bonds, because of the anticipated higher yield as a result of high interest rate compared to last year.

“I do not expect fund managers to offload their equity investments or make new buys because the market is still uncertain.

I expect better returns from the bonds in the next one year because the new offers have higher yields that will give return of just below 10 per end by end of next year,” said Joshua Njiru, the general manager of Madison Asset Management.

But while there is opportunity in the new bonds with higher interest rates, some fund managers have funds that are tied in the old bonds and any sale to raise new money will result in a loss.

Bond prices at the secondary market have fallen drastically because of the higher interest rates. Sellers with old bonds would have to take the lower prices as bond prices are inversely related to interest rates.

As at last Friday, the 25-year bond issued in July 2010 was trading for Sh75.62 down from Sh99.58 at the beginning of this year. The 20-year bond issued in 2008 was selling at Sh99.54, down from Sh120.25 at the beginning of this year.

“The performance of the pension industry to June 2012 is pegged on how the stock market will react to the political environment next year and if and when the interest rates will start dropping,” Mr Raichura said.

Fund managers, however, said the equity market presents a good opportunity for bargain hunters with a long-term outlook.

Mr Raichura said there may not be a significant shift in asset allocation because the negative performance has affected two of the key asset classes that Kenyan pension funds are invested in; domestic equities and government securities.

Retirement benefits regulations specify that a scheme can invest up to five per cent in cash and demand deposits, 30 per cent in fixed deposits, 70 per cent in government securities, 70 per cent in quoted shares, five per cent in unquoted shares and up to 15 per cent in offshore investments such as bank deposits and government securities.

Although more and more schemes are looking to diversify into property as a means of giving some stability to pension fund returns, it is an option only available to larger funds.

“It is unlikely to be an option for the smaller schemes although the introduction of Real Estate Investment Trusts (REITS) may enable smaller schemes to indirectly hold property investment,” said Mr Raichura.

REITS are collective investment vehicles through which investors buy units of real estate investments and then earn income derived from the rent of the houses in the trust.

They are popular in other markets because they enable retail investors to get a slice of projects that require huge capital outlays by buying portions similar to unit trusts which are tradeable at the stock exchange. Currently, the regulations are being finalised by the CMA.

According to HassConsult, which runs a local property market index, renting prices across all house types went up 3.9 per cent on average year-on-year as at the end of September.

However, between July and September rental prices were down 0.2 per cent.
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