Why pension funds still bet big on State bonds

Mark Napier, CEO of FSD Africa. [Courtesy]

Pension funds’ preference for government paper has been linked to the complexities that come with alternative asset classes, which are less straightforward.

The absence of appropriate tools and frameworks that can promote the allocation of private capital, primarily pension funds, into these alternative assets has also been noted by experts in the field of investing.

These experts believe that capital accumulation in the markets necessitates that private capital begin to flow away from government-sanctioned debts, even though the risk in other asset classes is said to be higher.

Fund managers have always favoured government debt through bonds and Treasury bills, although other financial instruments can yield higher profits.

According to Mark Napier, chief executive of Financial Sector Deepening (FSD) Africa, the structure of pension fund boards of trustees is one of the causes of this normalised anomaly.

“They are not very experienced,” he said.

Napier was speaking on the sidelines of the Pan-African Fund Managers Association conference in Nairobi yesterday.

“They dedicate their lives to promoting pension funds in easily comprehensible government securities.”

According to Napier, alternatives like sustainability bonds and green bonds are viewed as complicated because there is a lack of understanding about how these financial instruments work.

He added that about half of Kenya’s pension funds are held by the government through securities, saying, “It takes a long time to familiarise with these new products.”

According to Napier, alternative asset classes provide a pathway for private capital to enter the real economy, even though the government must borrow money.

However, there is also a problem with the instruments used to facilitate this cash flow and the packaging of these alternative assets.

He claimed that there aren’t enough projects that can be funded.

He continues by saying that professional investors may not find the projects appealing when they are presented in certain ways.

“That is partly because the intermediaries, such as investment bankers and financial advisers, are not doing a good enough job. I think they could try harder,” he said.

“There is a lot of capital in Africa—pension funds, insurance companies, collective investment schemes—and we need to work on how to get that capital into the real economy.”

Nick Ithondeka, chairperson of the Fund Managers Association (FMA), said there are attempts to create instruments to ensure this private capital finds its way into the economy.

The government’s extensive discussion of public-private partnerships (PPP) is one obvious example.

Ithondeka claimed that in order to gain fund managers’ trust to divert funds from government securities, the appropriate structures are essential. Investors can feel secure knowing they will get their money back thanks to a PPP structure.

The completion of the Nairobi Expressway, he said, has assured fund managers that such projects are feasible.

“That way, you will find capital can be channelled because the structures are accommodating,” he says.

Ithondeka said, interestingly, the market has observed more foreign investors taking a risk locally.

This is why local fund managers steer clear.

“Ideally, this is our home, and we should be able to take more risks,” he said.

He noted that returns from government securities are cooling off. Additionally, the amount of assets under management in the pension sector is now over Sh3 trillion.

As such, government paper may not be as profitable due to the size of funds and reduced yields.

“Investment in government bonds is straightforward. You put in money, and the government pays you a yield. But yields in government are low, which means people should appreciate taking more risks,” Ithondeka said.

“The money is there; how you channel it into that sector is what we are looking for.”