Capital Markets

Pension scheme contributors benefit as returns grow in Q2

jua kali

Jua kali artisans at work in Gikomba market. The welfare of pension scheme contributors improved in the year to June as annualised returns doubled to 3.8 per cent thanks to better yields from fixed income investments. File

Summary

  • Pension funds are among the major investors in medium- and long-term bonds and are the second-largest lenders to the government in the domestic market after banks.

The welfare of pension scheme contributors improved in the year to June as annualised returns doubled to 3.8 per cent thanks to better yields from fixed income investments.

A survey covering 388 pension schemes with total assets of Sh581.3 billion done by financial services firm Alexander Forbes shows that the returns from fixed income were the only ones in positive territory in the year to June, with equities and offshore investments in the negative. Annualised median returns rose to 3.8 per cent from 1.4 per cent as at the end of March.

The uptick in returns this year will be welcome news to pensioners, for whom returns in 2015 suffered badly on the back of a poorly performing stock market. Although they did not hit the highs seen in the third quarter of last year, interest rates in both the primary and secondary securities markets were still in the double digits for the first half of the year.

The stock market on the other hand has been in the clutch of a sustained bear run since March last year, with the main NSE 20 share index down 14.2 per cent year to date.

Median offshore return

“The median equity return for all schemes over the year was -14.5 per cent which was only slightly lower than -14.4 per cent as at March 2016. The median fixed income return was 13 per cent, significantly higher than 9.2 per cent as at March 2016.

The median offshore return saw a very large drop from 0.5 per cent in March 2016 to -7.1 per cent in June 2016,” said Alexander Forbes in the survey.

In the second quarter of the year, the government issued bonds paying out interest rates of between 12 and 15 per cent, attracting investor funds away from equities. Pension funds are among the major investors in medium- and long-term bonds and are the second-largest lenders to the government in the domestic market after banks.

READ: Pension funds seek incentives to boost uptake

Central Bank of Kenya data shows that the pension funds now hold 26.8 per cent of total government debt, equivalent to Sh485 billion. This is a 22 per cent increase from their holding of Sh397 billion at the beginning of the year, which at the time represented 25.4 per cent of total debt.

The data shows that pension funds are increasing their lending to government at a faster rate than the other institutions such as banks and insurers.
The volume of total government debt has grown by 18 per cent this year, with the portion held by banks up by 16.8 per cent, insurance firms up by 6.0 per cent and pension funds 22 per cent.

Investments in short term government paper (91 and 182-day T-bills ) that were made between October-November 2015 when interest rates hit 24 per cent also matured and were booked within the first half of the year.

Going forward, analysts expect that the interest rates on government securities will remain on an upward trend.

“Interest rates have bottomed out and we are currently witnessing upward pressure on interest rates given government borrowing for the new fiscal year. It is due to this that we advise investors to be biased towards short to medium-term papers,” said investment firm Cytonn Investments in its latest weekly markets update.

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