The Actuarial Services East Africa (ActServ) pension schemes investment performance survey, Q3 2023 reveals an average weighted return of 0.7% for all registered schemes in Kenya. The overall inflation in the month of October 2023 was 6.9% p.a.
This means that pension assets have contracted at an alarming rate. Pension scheme trustees can mitigate this erosion in value by re-aligning their portfolios to include deposit administration or guaranteed funds. The Retirement Benefits Authority (RBA) allows pension funds to invest up to 100% of their assets in guaranteed funds. It is worth noting that the top three underwriters in this category have posted returns north of 10% per annum, over the last twenty years.
The current economic climate is to blame for the dismal weighted average return of 0.7% year to date. If you throw in the overall inflation and taxes then the real return in 2023 will certainly be a negative value for most pension schemes.
One of the possible solutions for trustees of pension schemes is to consider investing at least 10% of the scheme assets in deposit administration or guaranteed funds. These are run by underwriters or insurance companies. These funds have a minimum guaranteed return of up to 5% per annum. The top three have averaged returns north of 10% over the last 20 years. In the event that a scheme wishes to exit this investment class, then it can be done within 12 months. This offers a degree of flexibility should a need to liquidate arise.
The three steps to mitigating losses starts with a review of the Investment Policy Statement (IPS). We recommend allocating at least 10% of the scheme assets in a guaranteed fund. Its is important to note that the RBA investment regulations and policies allow schemes to invest up to 100% of their assets in guaranteed funds.
Secondly trustees could competitively appoint an underwriter of repute that will invest these funds on behalf of the pension scheme. An underwriter with a track records in delivering outstanding results, one that is financially sound and whose internal workings is in the public domain.
The third step would be to engage a financial advisor that is well versed in guaranteed fund operations. Further to this, the advisor being on-boarded should not be offering services to the scheme, this would ensure that the advise given is devoid of conflict of interest.
The last three quarters have been particularly difficult, characterized by low and/or negative returns owing to the poor performance of the stock market. All indications are that this trend will carry into 2024 and beyond. If trustees do not take evasive action now then their schemes’ value will continue to erode putting them at odds with the membership.
Some of the pension schemes that have invested in guaranteed funds have posted strong positive returns in this asset class. Furthermore, the steady income earned from these funds, have come in handy in paying the benefits for the members who exit the schemes.
Trustees should consider dusting their investment policy statements, reviewing and aligning them to the realities on the ground.
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