ROE

Pensions uptake low as returns increase

Ready for retirement

In Summary

• Assets under management in the pension funds industry grew eight per cent to Sh1.2 trillion as of December 2018.

• Fund managers are still relying on traditional, low-risk assets such as government securities and equities.

A file picture of the elderly queuing outside a Post Office for their pensions.
A file picture of the elderly queuing outside a Post Office for their pensions.
Image: FILE

The country’s pension penetration remains at a 15 per cent low despite returns growing at an average 10.7 per cent annually over the past six years.

According to a report by Cytonn Asset Managers the retirement benefits assets under management in the pension funds industry grew eight per cent to Sh1.2 trillion as of December 2018.

The report shows fund managers are still relying on traditional, low-risk assets such as government securities and equities which cumulatively accounted for 56.7 per cent of total allocation last year.

“Fund Managers’ low allocation to alternatives can be attributed to lack of expertise, focus, and experience with asset classes such as private equity and real estate,” the report stated.

This is despite alternative asset classes offering much higher returns than traditional investments.

According to analysts, investing in such asset classes requires detailed due diligence and evaluation as well as engaging legal, financial and sector-specific expertise.

The report shows increasing diversification in schemes’ portfolios will enable fund managers to cushion pensioners funds from the effects of non-performance in a particular asset class thereby minimising the devaluation of their investments.

Allocation to alternative assets, including Property, Private Equity, and REITs, has been increasing, rising to 19.8 per cent of total Assets Under Management as of December 2018 from 17.2 per cent six years ago.

“There is, however, room for improvement and growth as the regulations allow up to 80 per cent allocation towards alternatives, including Property at 30 per cent, Private Equity 10 per cent, REITs 30 per cent and Others 10 per cent.

Speaking during the launch of Cytonn Asset Managers Ltd’s Pensions Business, Nzomo Mutuku, the head of supervisions department at Retirement Benefits Authority challenged the firm to develop products suitable for the informal sector whose participation in pensions is less than one per cent.

 

“Part of the mandate of RBA is to develop and promote the retirement benefits sector, and we are glad to work hand in hand with Cytonn Asset Managers to increase coverage for citizens,” he said.

A survey by Infotrack Research & Consulting shows only one in 10 Kenyans belongs to an individual pension scheme other than the National Social Security Fund which is compulsory.

This is because most Kenyans don’t believe there are viable pension schemes that meet their needs, pushing retirees to rely on inheritance, savings, and investments to meet their post-employment financial needs.