Retirement Benefits Schemes Performance In Kenya

A retirement benefits scheme is a savings avenue that allows contributing individuals to make regular contributions during their productive years into the scheme and thereafter get income from the scheme upon retirement.

There are a number of benefits that accrue to retirement benefits scheme members such as post-retirement income replacement, compound interest, tax-free contributions as well as the ability to own a house.

Historically, pension schemes in Kenya have allocated an average of 56.9 percent of their members’ funds towards Government securities and Quoted Equities over the period 2013 to H1’2020.

The high allocation to government securities, an average of 35.9 percent over the last 7 years and highest among the asset classes invested in, can be attributed to the fact that pension schemes prioritize on safety of their members’ funds and prefer a high allocation to low-risk investments.

Additionally, the allocation towards Quoted Equities declined by 3.4 percentage points to 14.2percent in H1’2020, from 17.6 percent as of December 2019 given the volatility in the Equities Market.

This coupled with the increased allocation to Government Securities to 44.0 percent in H1’2020, from 42.0 percent in December 2019 further highlights capital flight towards safer investments as pension schemes fled the highly volatile Equities markets.

Over the years, retirement benefits schemes have skewed their investments towards traditional assets, namely, Fixed Income and Equities Market.

In terms of the Alternatives Market i.e. immovable property, Private Equity as well as Real Estate Investments Trusts (REITs), the industry has an average allocation of 18.8 percent against the total allowable limit of 70.0 percent in these asset classes.

Additionally, the average allocation to offshore investments in the period 2013 to 2019 is a mere 1.2% (Kshs 1.2 bn) of the total Kenyan retirement benefits industry assets. This is despite immovable property and offshore investments delivering returns of 13.2% and 14.2% over the last five years, respectively.

The overall return for segregated schemes in FY 2020 dropped to 7.0 percent down from the 17.0percent recorded in 2019. This was mainly attributable to the effects that the pandemic had on the equity markets.

The average returns of the Guaranteed Funds over the period 2013 to 2019 was 9.7 percent whereas Segregated Schemes’ members enjoyed a higher return of 12.0 percent during the period.

Key to note, segregated schemes performance fluctuates over the years reflective of the performance of the market whereas guaranteed performance has remained somewhat stable over the years.

The stability of returns is attributed to the fact that, unlike segregated funds, guaranteed funds do not have an obligation to distribute all the returns, net of fees, that they attain in a given year; instead, they have an obligation to distribute the minimum guaranteed return regardless of the performance of their investments.

“We expect that the gradual recovery of the economy as evidenced by the 6.3% YTD gain of the NASI and the upward shift of the yield curve will translate to improved returns for pension schemes in Kenya, especially given the high allocation to Equities and Government Securities.”

It is important for Fund Managers to have a well-balanced portfolio on a risk-return basis to ensure that they offer their members high returns and at the same time protecting their contributions.

Overall, given the continued changes in the Retirement Benefits Industry and increased knowledge of investments, the sector is expected to do well both in terms of growth and returns offered to members, and can further be supported by increased education to trustees of the schemes, increased competition of Fund Managers and innovation and product development.

For more information, please see our Retirement Benefits Schemes Performance in Kenya topical.

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