Schemes shouldn’t defer interest payments

It is granted that desperate times call for desperate measures. Clearly, the coronavirus pandemic is causing the government to look for money even from the most unexpected corners.

Who would imagine that the government would as a survival tactic contemplate deferring payment of interest on government paper? Indeed, a deferral of payments of maturing Treasury bills and bonds as is being contemplated amounts to declaration of a default on domestic debt.

Have we thought of the wave of uncertainty that would ensue if we jeopardised the risk- free status of government paper?

On Tuesday, Retirement Benefits Authority (RBA) CEO Nzomo Mutuku mobilised 20 top pension schemes in the country for a meeting at the Treasury to discuss the feasibility of a deferral of payments on government securities for up to one year.

I gather from my sources who attended the meeting between the Treasury and the pensions industry that the meeting basically adopted the proposal to defer payment of interest on government paper and what remained were details on the mechanism of executing the plan.

From the correspondence that I have seen, I think that fund managers have cleverly thrown the spanner at the workers.

Even though they were represented at the meeting, the secretary of the Fund Managers Association, Mr Jonathan Stichbury, wrote to Mr Mutuku informing him that at a meeting of the council of the Fund Managers Association, it was felt that the consent of trustees of schemes needed to be sought before the plan is even contemplated.

There is a clever tactic in the whole scheme. I think the originators of the whole idea decided that in order to circumvent pushback from trustees of pension schemes, the whole thing would disguised as if it was the pensions industry that had offered to support the fight against the pandemic by offering a deferral of interest payments on Treasurybills and bonds.

As I write this column, I have in my possession a draft letter written for the pension schemes by the originators of this madcap idea to the Central Bank of Kenya (CBK), disguised as originating from the pension schemes.

The draft letter says in part: ‘we want to provide support to the government by deferring the interest payments falling due in the period up to December 2021 on certain of our existing holdings of government securities’.

This is a hair-brained idea that should be dropped quickly without further ado. If you defer payments of interest on government paper for a year, where will pension schemes get the money to pay pensioners whose payments are due this year?

As a matter of fact, it is the pension schemes that badly need government support during this pandemic. Indeed, pension schemes have been hit by retrenchment and by sponsors who are unable to remit money on time because of the negative economic impact of the pandemic.

Because of the pandemic, pension schemes are suffering from a combination of people thrown out of work and businesses whose productive capacities are shrinking by the day.

Why don’t we ever think about the individual? If I am retiring this year, do you want the pension scheme to tell me that they cannot pay me because the government has deferred payments? These are private assets that the government should not touch.

I have some unsolicited advice for CBK governor Dr Patrick Njoroge. He must reject this ill-advised idea pronto for the following reasons.

First, If you create uncertainty in domestic debt markets by allowing the madcap idea, the pressure on the exchange rate will be insurmountable.

How do we expect non -resident holders of government paper to respond to breach of the risk-free status of government paper and to a situation where Treasury bills and bonds are now subject to risk like any other lending?

Remember that our credit markets-or even capital markets all price risk off the benchmark rate. Why do we want to create chaos in the financial markets?

Secondly, fiscal agent of the issuer, you are bound to give the government the best advice.

You also have the responsibility of maintaining a safe and sound financial system. Government securities are at the heart of a safe and sound financial system.

Kill this hare-brained idea and let’s not hear about it again.