The number of pension schemes adopting a conservative investment approach that is heavy on risk-free government bonds doubled last year as they sought to protect returns against the volatility of both the local and overseas equities markets.
A survey done by pension administrator Zamara on 423 pension schemes holding Sh1.03 trillion in assets under management (AUM) shows that 196 had allocated at least 80 percent of their investments into fixed-income securities by the end of last year, up from 85 in 2021.
Funds are considered to have a conservative investment approach when they put in more than 80 percent of AUM in bonds.
Moderate schemes between 65 percent and 79 percent in these securities, while aggressive schemes that are after high returns have lower than 65 percent exposure to fixed-income assets.
In terms of actual AUM, conservative schemes raised their allocation to fixed income from Sh115.6 billion to Sh326.1 billion between 2021 and 2022.
Over the one-year period, funds recorded a return of 8.1 percent from fixed-income assets, while equities and offshore investments returned -14 percent and -21.3 percent.
“Conservative schemes posted the highest returns over all periods (three months, one, three and five years) aided by higher allocation towards a fixed income that had stable performance over these periods,” said Zamara.
“Aggressive schemes had the lowest return over all the periods on the background of lower performance from the equity class over these periods.”
Last year, pension funds that opted for the most cautious approach to investments were able to eke out a return of 3.5 percent, compared to 1.2 percent for those adopting a moderate approach, and -0.6 percent for the aggressive schemes.
The overall return for all schemes was 1.8 percent, which was well below the average rate of inflation of 7.64 percent in the period.
Due to their long-term investment horizon, pension funds traditionally seek out long-term bonds and property as their preferred investments, with an eye on lowering risk in order to protect retiree savings from erosion or loss.
The past few years have heightened this flight to safety due to uncertainty in the equities market, which has since 2020 been hit by major shocks including the Covid-19 pandemic, and the ongoing Russia-Ukraine conflict.
The local equities market has experienced sustained foreign investor flight as a result of the war in Ukraine spilling over into the global economy in the form of higher inflation.
The higher inflation has seen the US raise its interest rates, which has caused a flow of capital into its economy.
The volatility was also evident in other offshore markets that were also affected by stronger dollar and capital outflows.
