Pension schemes are at a crossroads as returns on their two most popular asset classes—bonds and equities—remain subdued, exposing lack of diversification in the portfolios.
Zamara Pension scheme says in the latest industry report that diversification into private equity and property investments can save pensioners from below inflation returns as was seen last year.
Group CEO Sundeep Raichura said both fixed income assets and equities, where 93 per cent of pensions’ assets lie, are posting depressed returns at the same time, amplifying the need to look beyond the two classes.
Pension schemes are at a crossroads as returns on their two most popular asset classes—bonds and equities—remain subdued, exposing lack of diversification in the portfolios.
Zamara Pension scheme says in the latest industry report that diversification into private equity and property investments can save pensioners from below inflation returns as was seen last year.
Group CEO Sundeep Raichura said both fixed income assets and equities, where 93 per cent of pensions’ assets lie, are posting depressed returns at the same time, amplifying the need to look beyond the two classes.
“A good diversified portfolio should be one with asset classes that behave differently. These two have proved otherwise,” said Mr Raichura.
“One reason for this is that our bonds are being marked to market, meaning they are being treated as though not being held to maturity. When you have volatile interest rates, the same is introduced to fixed income assets.”
This could hurt pensioners’ returns if it persists since 71 per cent of assets are held in bonds and 22 per cent in equities, leaving offshore and property at about seven per cent.
Last year, the median return for pensioners was at 5.4 per cent compared with previous year’s 18.1 per cent. This was below inflation (5.7 per cent), meaning that the contributors’ money shrunk in real terms.
Bonds had an average return of 14.6 per cent while equities and offshore assets posted negative returns of 13.4 per cent and 13.2 per cent respectively.
Lead investment consultant at Zamara Neha Datta said while fixed income return has shined bright in the recent past due to the State’s sustained appetite for debt, this could expose pensioners in future.
“Our long-term fixed income and local equities have been moving in the same direction, meaning they are not giving us optimal diversification. We are carrying too much risk,” said Ms Datta.
Pensioners are allowed to invest up to 15 percent of their portfolio in private equity but currently, this is only below one percent. Mr Raichura says this is despite there being over 900 potential companies in East Africa to invest in.
Diversification has been slow due to the fear of high risk and the narrow budgets from the small schemes.
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