Hybrid Pension Investment

Most pension fund managers are heavily invested in Safaricom the leading blue-chip company in the region.

Safaricom was down 36.6% in 2022 and the trend continued with the share price closing 2023 down 42.44%. In simple English,if a scheme held 100 million worth of Safaricom shares at the beginning of 2023 the value at the end of the year would be 57.56 million.

Whereas this is market problem and not the fault of any fund manager, trustees are going to have a difficult time managing member expectations.

Segregated pension schemes are now rushing to the hybrid model where 10-20% of the scheme assets are being channeled to guaranteed funds that offer a known minimum return of as high as 5% per annum. These funds have an upside potential of up to 11% per annum. Guaranteed funds are now offering relief to trustees who have opted for this hybrid investment strategy.

Deposit administration or guaranteed funds are best vetted using these three metrics.

Capital Adequacy Ratio (CAR) compliance. The insurance regulatory authority (IRA) requires long term business underwriters to have a minimum capital of 400 million. Capital adequacy ratio is pegged at 200% meaning insurance companies offering guaranteed funds need to have capital of at least 800 Million.

Secondly performance of the fund as a measure of the industry average. Over the last three years the industry average performance is 7.77% . A suitable guaranteed fund must meet or exceed this benchmark to enable the scheme grow its assets and comfortably pay for exits.

Finally, the ease of accessing information concerning the management of the approved issuer or insurance company running the guaranteed fund is of uttermost importance. Private companies have opaque operations not subject to public scrutiny. However, it is best to use an underwriter that is listed on the Nairobi Stock Exchange.

A publicly listed company has their information exposed in the public domain. Such as senior staff movement that would impact on the business and any other pertinent information being found via simple internet search.

Transparency is key when trusting billions of shillings of member funds to an approved issuer or any other service provider for that matter.

Trustees are bound to have a very chaotic year especially at AGMs as a result of the decline in the value of the scheme assets. Even though this is a market problem, most members tend to be very impatient in a year when losses have been made.

There is a sudden rise in hybrid investments with large schemes like NHIF, Kenya Forest Service, KWS and others placing billions in guaranteed funds to weather the storm and balance out the negative returns from the stock market.

Trustees should find a scheme advisor with specific knowledge in the guaranteed funds segment for action on portfolio re-balancing.

Such an advisor should not be conflicted in service to the scheme to deliver best advice.