Property rich, but cash poor pension funds

Telposta Towers, Nairobi, which is owned by Telposta Pension Scheme. [Wilberforce Okwiri, Standard]

“Selling property is not like hawking groundnuts on the streets.”

These words by Telposta Pension Scheme Chief Executive Peter Rotich convey the hard task before him, as the scheme starts the process of reducing its 75 per cent investment in real estate to below 30 per cent in the next three years.

Telposta and the Kenya Railways Staff Retirement Benefits Scheme (KRSRBS) are some of the pension schemes with an asset mix largely dominated by property.

The two have begun property disposal to comply with investment guidelines set out by the Retirement Benefits Authority (RBA), which regulates pensions in Kenya.

However, KRSRBS, with assets worth over Sh20 billion, is struggling with liquidity issues at the moment, as 90 per cent of its assets is property.

Last week, the scheme advertised the sale of two prime residential properties, with Chief Executive Victoria Mulwa saying they first wanted to bring the exposure down to 70 per cent to raise cash for member payments and administrative costs.

“Ninety per cent of our assets are property. We are having liquidity issues and will have to sell most of them,” she told Home&Away.

Both Telposta and KRSRBS are closed schemes, meaning that members no longer contribute, but the schemes are paying out pension benefits. This means that investment yields have to be higher than outflow.

But court cases, land grabbing and “emotional attachment” to property by members have prevented the schemes from disposing of property and diversifying into other investments.

The schemes are also selling at a time the property market is depressed and also dealing with a glut of buildings.

Mr Rotich put on a brave face, saying they would always find a buyer as they were selling a “brand” that would dictate the price.

“We are selling a brand, people will pay a premium. People will buy the properties as the titles are clean, and we’ve been having these properties since 1950s,” he told Home&Away.

Rotich said RBA had issued a directive that any property transfer should be done with written advice by a fund manager.

He said they had already presented a remedial action plan to the RBA on how they would adhere to the investment guidelines dubbed “Table G.”

“We plan to sell them in the next three years, depending on the market. You’ll soon be seeing adverts, but they will be sold in accordance with the advice of a professional fund manager with expertise in property,” he said.

“It will not be a haphazard disposal. We have to sell in a manner that members get value by ensuring we always sell at a profit so as to benefit pensioners.”

Ms Mulwa acknowledged a tough property market, but also said that even though they urgently needed to sell, value for members was the priority.

She added that the two properties they had advertised were a “quick sell” as they do not have court injunctions or charges to a bank. Most of the property is residential and even has tenants. 

The two properties they are selling to “boost investment returns” include Bristol Court on Ngong Road and a property measuring 0.48 acres along Woodlands Lane off Jabavu Road/Argwings Kodhek Road in Nairobi.

“We’ll advertise and advertise till they find a buyer. They can also be subdivided and sold,” she said of their property disposal strategy.

She said they were “still thinking about property” as some of theirs were too old and could be redeveloped.

Association of Retirement Benefit Schemes (ARBS) Chairman Simon Nyakundi said the attachment to property by members had curtailed the schemes’ power to sell at good prices when the market was ripe.

“When you talk about selling other investments such as bonds, nobody worries. But when selling a property, majority of members will protest,” he said.

“Because of that attachment, so many schemes have lost on the golden opportunity to sell while the market was still hot. They’ll be left with assets until that opportunity arises again and that might even take 10 years.”

Rotich said while they had been successful in the sale of some property, sometimes members were behind the encumbrances and did not realise they were the ones who stood to benefit. “What members don’t realise is when disposing at market rate it’s in their best interest,” said Rotich.

With a Sh16 billion investment portfolio countrywide, Telposta pays about Sh64 million monthly in pension to members. 

Properties they have tried to sell but failed include Kangundo Road flats, Elgeyo Marakwet flats, Kilimani and a Sh800 million property in Kisumu, and a section of flats on Nairobi’s Jogoo road.

Last year the scheme renewed efforts to reclaim its Sh1.2 billion grabbed assets countrywide by enlisting the help of the Directorate of Criminal Investigations. The DCI sought relevant documents to start investigations into how the properties in question were illegally acquired by powerful individuals.

Rotich, however, said they were spending too much money on litigation fighting for their property in court with land grabbers and even some members.

Why are the schemes not compliant with the RBA investment guidelines? And how did they come to own such huge chunks of land?

The Retirement Benefits Act in 1997 in the Table G section, spells out investment guidelines for retirement schemes. It says they are supposed to have an asset mix such that property does not exceed 30 per cent.

They are required to spread their portfolio into other asset classes including government securities, equities, fixed deposits and cash.

Mr Nyakundi, who is also the chief executive of Kingsland Court Group, which offers consultancy services to the retirement benefits industry, says Table G was meant to bring “sanity” to a largely unregulated industry then.

“We are an invalid market. We were just beginning to learn pension. Before, the framework for pensions used to be there but unorganised. There was a mix of everything,” he said.

Markets had their own dynamics because of returns and risks and volatility, hence the guidelines, he said. “Because people had worked all their life they needed a safeguard measure to be able to help so that in case there are shocks they don’t suffer. That’s why Table G came in.”

There are 1,258 registered pension schemes in the country and Nyakundi estimates that only a few were holding huge chunks of property in breach of RBA guidelines.

The initial funding of the pension schemes was by government through property assets with minimal cash injections.

“This was done on the understanding that it would be easier to sell, but the journey has been long and windy,” said Rotich.

KRSRBS was established with a concession to transfer property assets previously held by the Kenya Railways Corporation “to form a portfolio of property based assets for the purposes of funding.”

The directive by RBA was to curtail bad behaviour by some pension schemes, where members were losing value for their money.

Rotich said they did not have a liquidity issue due to the diversification and had no problem with the regulator, as they had been in a meeting where they laid out their remedial plan.

“Given our unique history, RBA has been lenient with us, as we realign portfolio to comply with Table G. We held a meeting and presented our remedial plan with steps planned to take in order to comply,” said Rotich.

Liquidity is important to a pension fund so that they can pay members hence over-concentration in property poses a risk. “Telposta have a luxury of a few more years and still have liquid assets invested in government bonds and securities,” said Rotich.

He said they were looking at other investment vehicles such as government bonds, treasury bills, private equity, derivatives and hedge funds.

Nyakundi, however, believes that time is now ripe for RBA to do away with the investment guidelines. He says that the value of property has grown faster than the other assets. “If properties are making better returns what is wrong with them doing 50 per cent?” 

According to Nyakundi, training can be offered to pension administrators on investment risk return assessments. “We need to start a conversation that perhaps Table G has outlived its usefulness,” he said. 

Heavy investment into property, he said, was limiting the savings culture. He encouraged diversification into new asset classes such as derivatives.

“When we invest in traditional markets we all make the same kind of returns, with very few seeking approvals for asset classes,” said Nyakundi.  

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