Is 2020 darkest year for retiring workers?

With every sunset, the journey to retirement shortens.

This distant reality remains just that as many Kenyans operate on survival mode to weather the economic impact of Covid-19.

The virus is strangling Kenya’s Sh1.2 trillion pension industry, with the value of assets and profit from investments set to be greatly eroded.

The industry is set to lose Sh1.78 billion in contributions, a new report from the Central Bank of Kenya (CBK) shows.

The current state of affairs means growth has been stifled for an industry with low penetration of just 22 per cent.

This reflects a growth of only two per cent since 2018, pushed mainly by formal workers.

Now, pension fund managers stand at a crossroads, with not much they can do as many employers have moved to put workers out jobs while halting contributions for the remaining lucky few in a bid to weather the corona wave.  

“Pension is pegged on people having an income. Anything affecting this directly affects the industry,” says Pension Manager at CIC Life Assurance Jane Wanjiru.

According to the Financial Sector Stability (FSR) Report 2020, the pension industry recorded a strong growth of 11.3 per cent in total assets last year compared to 2018, supported by monthly contributions.

The report, which is produced by CBK in collaboration with the other financial sector regulators, including the Retirement Benefits Authority (RBA), assesses the global and domestic macro-financial developments and risks to the Kenyan economy and on the stability of the financial sector.

Attention has also now shifted to how pension fund managers invest members’ contributions.

They are notorious for not opening up to alternative investments such as private equities despite a push by the industry regulator, RBA.

CBK’s FSR report noted that 94 per cent of their exposure is concentrated in four core asset classes.

These are government securities, immovable property, quoted equities and guaranteed funds.

CBK notes that the concentration on the four classes is among the main risks facing the industry.

“For instance, an increase in interest rates will lead to valuation losses for government securities and corporate bonds. There is also loss of corporate bonds and fixed deposits in case of insolvency,” says the financial sector regulator in the report.

“In the equities market, a decline in prices as in the first-half of 2020 reduces the value of quoted equities held by the schemes.”

CBK, however, notes that the pension industry has been relatively stable, putting the risk score at 3.09 points last year, which is below the desired overall risk score of 2.88.

Further, the report observes, pension schemes and fund managers who have invested in buildings and land also face liquidity risks.

This translates into delays in settling members’ benefits.

“The decline in equity and bond prices on the financial market as a result of a slowdown in economic activity is further expected to curtail the growth of the pension industry, especially for schemes that invest a large proportion of the contribution in the stock market,” says the report on pension investments in the bourse.

CIC’s Ms Wanjiru agrees that pension managers are conservative in terms of their investments due to “fluctuations” in most of the instruments and have to be extra careful as they handle retirees’ money.

CIC manages about Sh5 billion worth of pension assets.  

This, says Wanjiru, is why they prefer the more secure long-term assets such as government securities.

“The main underlying factor about pension funds is that we understand that they are long-term investments and also need to maintain liquidity to pay those who are retiring,” she says.

“Because you know you are going to have funds for the long-term, you go for a similar long-term investment,” adds Wanjiru.

Other asset managers such as investment bankers have also put pension fund managers on the spot for shunning alternative investments.

Poor yields

Standard Investment Bank (SIB) Executive Director for Global Markets Nahashon Mungai accuses pension funds of appearing to have a “similar script” when it comes to the returns they offer.

“Literally, all pension fund managers report the same figures. It’s like they sat down and said this year we are all doing eight per cent,” says Mungai.

“Some give as low as four per cent. It would have been easier to take their money to the bank,” he adds.

Mungai says that the poor yields tend to offer pensioners no value for their investments and they end up struggle in retirement.

“If the returns make sense, then why are most pensioners unable to survive on pension cash? That means there’s a disconnect between the return and the real cost of living,” he says.

Ms Wanjiru for her part, while acknowledging there’s a disconnect on the returns that pensioners get, says it has more to do with behaviour in terms of contributions.

“An ideal pension is something that can give you 70 and 80 per cent of the salary that you’re earning,” she says.

“Majority save a maximum of 10 per cent. So where will the miracle come from? People are also not self-driven to pay for retirement. It’s more of a behaviour issue foregoing today for a better tomorrow.”  

How then can one heighten resilience? Wanjiru says they advise clients on how to segment their savings.

This is as it emerged that some of those who’d lost employment wanted their pension savings to continue meeting their daily needs.

She says people should strive to have a separate rainy day emergency fund that can last up to six months.

“This concept has really been tested. Those who didn’t have an emergency fund had to rely on the pension kitty.”