Markets & Finance

Pension schemes eye higher returns in risky ventures


A conservative risk strategy sees schemes invest between 80 and 100 per cent of assets in interest bearing assets. PHOTO | FILE

Larger pension schemes have taken on more risky investments than their smaller counterparts, seeking higher returns from property, equities and offshore investments.

The smaller and medium sized schemes are on the other hand contented to drive the bulk of their returns from conservative, interest bearing and secure investments such as government securities, fixed deposits, corporate bonds and commercial papers.

Pension market analysis done by the Actuarial Services East Africa Limited (Actserv) shows that in the first quarter of the year, the large and mega schemes were the only ones to pursue what is termed as aggressive investment strategy, which involves holding between 46 and 70 per cent of the asset portfolio in property, equities and offshore investment.

A conservative risk strategy sees schemes invest between 80 and 100 per cent of assets in interest bearing assets.

“For those pursuing aggressive risk profile, mega schemes account for the largest proportion in number and fund value at 71 per cent and 94 per cent respectively,” said Actserv in its quarter one pension industry risk profile survey.

“Small schemes account for the largest proportion in number of about 71 per cent for those pursuing the conservative profile.”

Investments in property, for instance, is capital intensive, meaning that it is often a preserve of large pension schemes that have a large funds base.

READ: Pension schemes record poor returns in 2015 as stocks dip

The risk factor in equities also means that smaller schemes may be wary of the effect of a bear run on their ability to finance short term liabilities to pensioners.

All class assets are, however, capped by law, protecting the schemes from overexposure to a particular asset class that would in turn place the livelihoods of pensioners at risk in case of shocks to that particular sector.

In terms of returns, the survey shows that an aggressive investment policy did not translate into a higher return during the quarter for the large schemes, coming in at 2.1 per cent as opposed to 2.9 per cent for those that chose conservative options.

Analysis of returns for the sector in quarter one done by Actserv indicated that equities and offshore returns, at 1.8 per cent and — 5.2 per cent respectively, lagged behind the 2.9 per cent return recorded by fixed income, thus negating the advantage to be gained by adopting an aggressive stance in investments.

Analysis by Alexander Forbes, which took into account a longer period of one year to March 2016, shows a similar picture with the returns from equities and offshore investments coming in at a -14.3 per cent and -1 per cent respectively, while fixed income brought returns of 9.1 per cent.