Why I smell a rat in pension funds

I came across an article that was talking about Kenyans’ poor savings culture and the link to Government seeking alternative significantly higher loans for various infrastructure projects. I do agree that Kenyans could do better at saving, but that is certainly not the whole story.

While in most African countries savings rates are low, standing at 17 per cent of Gross Domestic Product, Kenya’s rates are lower at around 14 per cent of GDP with Tanzania and Uganda being cited as having crossed the 20 per cent mark with a lower per capita income.

Poor countries save less than richer ones, obviously, because they have to prioritise basic needs such as food, shelter, healthcare and education. In Kenya, for example, despite the recent reforms in the education and health sectors whose results will take a much longer time to realise, the Government still does not play a significant role in delivering amenities which are within their mandate. This then means that all Kenyans who can afford it lean towards privately provided services.

We are also plagued by the bane of high consumption and almost insignificant production in comparison, resulting in lacklustre growth rates and weak exports. According to a World Bank article in 2013 however, compared to countries which were categorised as poor or low income status in Asia a few decades ago, this situation is far from irreversible.

Vietnam has had a savings rate of over 30 per cent over the past few years while for  China, success is attributed to the fact that more than half of what is produced is saved and then invested. While experts argue between high growth explaining high savings or the other way around, whichever way you look at it the two concepts create a virtuous cycle.

Unfortunately, the kind of focus and institutional leadership required to achieve such strides are what we are so lacking in. The way in which we select ambitious infrastructure projects is very telling. I have written before about how India and China’s prioritisation of their various national investments led to a significant difference in where the countries are now GDP-wise.

I have nothing against ambitious infrastructure. I do, though, have everything against the kind of short-sightedness that pushes us to be completely out of touch with our current realities in favour of perceived, yet indefensible future returns on investment (ROI), backed by a certain amount of ego. In the same way that we have to evaluate which projects give us the best ROI within the shortest payback period in organisations, the same principle applies to nations.

And just as firms have to evaluate low-hanging fruit that we can start to reap from versus a more fastidious approach toward larger investment projects, we owe it to our population to conduct the same meticulous engagement before we make commitments. But there must be something about Kenyans’ taxpayer’s funds that screams ripe and ready for the taking. Without repercussions, if events of the last couple of years are anything to go by.

One of the sources of investment funds for developing countries, whether for infrastructure or manufacturing projects, has always been pension funds, alongside taxes, domestic and foreign based financing.

The reason why pension funds are relevant is due to the extent of predictability there is around them.

Because funds in the national schemes are locked in until the legal retirement age, except in extenuating circumstances, it is possible to reliably plan on long-term investments that take advantage of compounding and grow this to provide healthy returns for the sector. The same applies for private individual or corporate funds, as these have certain amounts locked in for a certain number of years.

Sadly though, it feels like all we’ve been doing is play Russian Roulette with our pension funds. According to NSSF’s financial statements for the past few years, administrative costs (day to day operations, salaries and wages) account for the bulk of members’ contributions. Just as an example, for the financial year ending June 2013, it was cited that these administrative expenses stood at over 80 per cent of contributions and in the next, they accounted for over 58 per cent of contributions.

Considering that these kind of funds are used for the workforce, how is it that there is still the kind of fraud that led the institution to declare a move away from land in favour of securities. For some reason, I smell a rat. It is completely unacceptable that at a time when real estate has had and continues to have the highest returns on investment, the institution would be so keen on divestment. And while I am all for diversification, I think that deterring of land related fraud is a poor excuse to throw the baby out with the bath water.

With the kind of housing shortage we have in the country, that decades upon decades NSSF had an opportunity to address this sector at realistic pricing and frittered it away is simply disappointing. From where I sit, the national fund needs reforms, and not the knee-jerk variety we have become accustomed to seeing. Anything less just will not do.