Pensioners have enjoyed the highest returns from investments in four years helped by the big gains on the shares of Safaricom and large banks, which make up the bulk of the pension industry equities investments.
Pension funds surveyed by fund administrator Zamara and Actuarial Services East Africa (Actserv) show a return of 15.1 percent on investments for the one year to September 2021, the highest since they reported a 15.5 percent return in 2017.
Double-digit gains in the period on the stocks of Safaricom (41.8 percent), Equity Group (38.3 percent), KCB (19.6 percent) and Cooperative Bank (12.7 percent) fuelled the gains, with the funds’ overall equity portfolio gaining 31 percent.
The four firms alongside EABL make up the five largest counters at the Nairobi Securities Exchange (NSE), together accounting for 81 percent of the market’s total market capitalisation of Sh2.64 trillion.
The market-cap-weighted NSE All-Share index gained 27.5 percent in the period.
“The equity performance was mainly driven by gains attributable to positive investor sentiment on banking and telecommunications stocks.
“Performance in 2021 was (also) positively impacted by economic recovery due to increased Covid-19 vaccination drives and loosening of stringent measures,” said Zamara.
Fund managers find it easier to invest in stocks of firms such as Safaricom and Equity because they have the necessary liquidity to absorb the large pools of capital that the institutional investors control.
State-owned National Social Security Fund (NSSF) — the largest pension scheme in the country — for instance, holds up to a quarter of its equities portfolio in Safaricom, with the large banks accounting for up to 35 percent. This investment spread is typical of other fund managers’ asset allocation and reflects limited sectoral diversification on the NSE.
The large stocks were also able to weather the bear run that hit the market during the Covid-19 pandemic better than smaller listed firms owing to solid fundamentals, making them attractive to pension funds.
They are also boosted significantly by continued foreign investor appetite, also due to the liquidity and solidity which supports the large ticket trades common with this class of stock market investors.
Overall, the latest Retirement Benefits Authority data shows that out of the total industry assets of Sh1.478 trillion in June 2021, pension funds held 16.9 percent or Sh249.8 billion in form of listed equities.
This was an increase from the 14.2 percent share of equities in June 2020 (Sh187.5 billion), indicating that funds responded to the better fortunes of large NSE stocks by pumping funds into shares.
Government bonds remain the largest asset class in the industry at 44.1 percent, equivalent to Sh652.1 billion.
While bonds offer low risk, the returns available tend to be lower in percentage terms compared to equities in a bullish market. In the year to September 2021, fixed income assets offered a return of 10.2 percent.
Offshore investments meanwhile returned 20 percent, but account for just 1.13 percent of total industry assets.
Zamara’s survey covered 423 schemes with a total of Sh1.03 trillion of assets under management, while Actserv polled 421 schemes with a total fund value of Sh890 billion, excluding property.
The rise in overall returns to a four year high means though that pension savers can look forward to beating inflation for the year despite the cost of living going up, which helps preserve the value of their savings against erosion in real terms.
The average inflation rate in the 10 months to October stood at 6.06 percent, up from 5.25 percent in the corresponding period last year.
Risk however remains for pension funds due to the volatility of the stock market, where bear runs often result in very low or negative returns as wide losses at the bourse wipe out gains made in fixed income, property and offshore investments.
Away from the investment side, the pension funds also face longevity risk attributed to higher life expectancy after retirement, which strains their ability to continue servicing regular payments to retirees.
Low pension penetration has also been cited as a problem by the sector regulator, hampering the country’s ability to take care of its aged population as many are forced to rely on the goodwill of family in order to meet basic needs such as healthcare.