Pensions holding in State bonds crosses historic Sh1 trillion mark

Pension funds have raised their holding in government debt past the Sh1 trillion mark for the first time ever, new data shows, on the back of volatility in the securities market.

The returns-chasing funds doubled their investments in government securities in the six months to December 31, stashing in Sh133.33 billion compared to Sh52.29 billion in a similar period of the previous year — an equivalent of a 154.98 percent jump.

The aggressive investment lifted retirement schemes’ holding to nearly Sh1.04 trillion as at end of last month from about Sh923.17 billion in June, the Central Bank of Kenya (CBK) statistics show.

This came at a time the Treasury tapped Sh309.57 billion through bonds and bills in the six-month period through last December, a climb of Sh147.72 billion, or 91.27 percent, compared with Sh161.85 billion in the July-December 2019 period.

Pension funds are normally the biggest subscribers to long-term government bonds given the need for assured stable returns in the long-term to service the payment of pensioners.

The Treasury borrowed heavily from domestic investors amid gaping shortfalls in tax collections in a depressed economy largely as a result of Covid-19 crisis that prompted tax reliefs which have were terminated last month.

Coronavirus-induced uncertainties resulted in volatility on the stock and property markets, largely hitting returns in quoted equities and real estate, and prompting pension schemes to cut their exposures.

“Most of new money went into government securities and a lot of funds adjusted their allocations to equities impacted by a downward revaluation (of the stocks),” said Sandeep Raichura, CEO of Zamara Group, a pension management firm.

“The main reason pension funds increased their exposure to government securities was because there was a lot of volatility in equities because of the downward trend in prices on the Nairobi Securities Exchange.”

The CBK data shows the amount invested by the pension schemes in the July-December 2020 was higher than about Sh116.19 billion by banking institutions.

The retirement funds accounted for 43.07 percent of the Sh309.57 billion gross debt that the CBK— the government’s fiscal agent— procured from domestic investors in the six-month period.

This dwarfed the 37.53 percent share of the banks, with insurance firms (Sh32.06 billion), parastatals (Sh16.03 billion) and other investors (Sh11.67 billion) making up the remainder of the half-year gross debt.

Returns on Kenyan government securities ranges from 6.9 percent for the shortest tenor (91-day Treasury bill) to 13.4 percent for the longest (25-year bond), the latest CBK data shows.

This beats inflation which averaged 4.8 percent in the July-December period.

The indicative NSE 20-Share Index, which gauges returns for blue-chips, last year shed 30.34 percent.

“Fixed-income securities have given a pretty good returns in Kenya over a period of 10 years. So if you compare with equities, fixed-income has actually given a better risk-adjusted returns and that’s one of the reasons pension funds have been demonstrating a preference for government securities,” Mr Raichura said.

Pension schemes are under the investment regulations set by Retirement Benefits Authority (RBA), the industry regulator, allowed to allocate up to 90 percent of their assets in government securities offered by authorities in the six-nation East African Community (EAC) bloc.

This could rise to 100 percent of assets under management for the schemes receiving statutory contributions such as National Social Security Fund (NSSF).

Latest RBA data shows pension total assets under management in the pension industry climbed to Sh1.323 trillion in June 2020 from Sh1.298 trillion in December 2019.

This means an equivalent of 68.23 percent of the industry’s assets were in government securities whose returns are assured and the risk of default is nearly zero.

Banks, however, remain the largest holders of total government debt, accounting for 53.29 percent, or Sh1.82 trillion, in December from 54.4 percent or Sh1.7 trillion in June.

Insurance companies held 6.44 percent, equivalent to Sh220.06 billion, while parastatals accounted for 5.68 percent, or Sh194.09 billion, gross debt.