Pension funds allowed to ignore bond paper losses

Government bonds and equities have long served as a cornerstone of pension fund portfolios. PHOTO | SHUTTERSTOCK

Pension funds have been spared from reporting paper losses from the fall in bond prices to members following regulatory changes.

Net returns declared and credited to members’ accounts are now excluded from both unrealised gains or losses arising from changes in the value of debt instruments funds hold starting in the financial year ended December 2023.

According to the Retirement Benefits Authority (RBA), pension funds have faced challenges in accurately reflecting the true value of their bond holdings.

“The timing of these changes is crucial, given the backdrop of rising inflation since the previous year, which has adversely impacted the value of bonds. Income generated from bonds have struggled to keep pace with the eroded purchasing power caused by inflation,” noted RBA deputy manager in the Supervision Department Dennis Oluoch.

Last year’s rising bond yields exposed pension funds to mark-to-market losses as bond prices plunged, requiring various retirement benefits schemes to reprice their holdings of government securities.

Effective December 21, 2023, the RBA introduced amendments targeting the requirements for the valuation of the scheme fund and introduced two new provisions including the reporting of debt instruments held to maturity at amortised cost. Additionally, pension funds are expected to apply the fair-value method in determining the value of both debt instruments available for sale and equities.

The RBA has, however, agreed with the Institute of Certified Public Accountants (ICPAK) to limit application of the guidelines to reports prepared by trustees for members.

Pension schemes are expected to continue the preparation of financial statements in accordance with the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).

“ICPAK had noted that according to the fundamental principles of accounting, the debit and credit approach should be used to account for the changes in the fair value of debt instruments affecting the net return declared and credited to members’ accounts," ICPAK indicated in a statement.

Pension schemes have in recent years turned to government securities as alternative asset classes including equities remained depressed.

According to data from the RBA, retirement benefit schemes have continued to heavily invest in government debt which accounted for 47.79 percent of total assets under management as of June last year.

The schemes' total assets increased by 8.09 percent from Sh1.576 trillion in December 2022 to Sh1.7 trillion in June 2023.

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