This archive report was first published on 22 October 2019.
October 22, 2019, marked a critical juncture for pension schemes in Kenya as they grappled with the consequences of subdued returns on their investments in bonds and equities.
According to Zamara Pension scheme, the industry's latest report highlights the need for diversification into private equity and property investments to safeguard pensioners from below-inflation returns.
Group CEO Sundeep Raichura emphasized that the current situation is exacerbated by the fact that both fixed income assets and equities, which account for 93% of pensions' assets, are posting depressed returns simultaneously.
'A good diversified portfolio should be one with asset classes that behave differently,' Mr. Raichura noted. 'These two have proved otherwise.'
He attributed this phenomenon to the practice of marking bonds to market, which treats them as if they were not being held to maturity. This, coupled with volatile interest rates, introduces uncertainty to fixed income assets.
As a result, pensioners' returns are at risk if this trend persists, given that 71% of assets are held in bonds and 22% in equities, leaving offshore and property investments at around 7%.
Last year, the median return for pensioners was 5.4%, below the inflation rate of 5.7%, resulting in a real-term decrease in contributors' money.
While bonds had an average return of 14.6%, equities and offshore assets posted negative returns of 13.4% and 13.2%, respectively.
Lead investment consultant at Zamara Neha Datta cautioned that the recent bright performance of fixed income returns could expose pensioners in the future.
'Our long-term fixed income and local equities have been moving in the same direction, meaning they are not giving us optimal diversification,' Ms. Datta noted. 'We are carrying too much risk.'
Despite the potential benefits of private equity investments, pensioners are only utilizing around 1% of their portfolios in this area, despite the availability of over 900 potential companies in East Africa.
