Recent reforms to Kenya’s pension fund regulations, announced in mid-2015, are opening up more diverse avenues for investment and increasing prospects for growth.
In the FY 2015/16 budget speech, Henry Rotich, cabinet secretary for the National Treasury, announced that pension funds would now be able to invest up to 10% of their portfolio in private equity and venture capital funds licensed by the Capital Markets Authority (CMA).
The reforms offer greater investment options and will help the sector grow, Stephen Muriu, CEO of investment bank African Alliance, told OBG. According to predictions from the sector regulator, the Retirement Benefits Authority (RBA), pension funds are expected to grow by almost $2bn this year to reach $10bn in assets and contributions.
“For a long time, the rules governing investments allowed by pension, retirement and insurance funds have been too conservative, but this is changing as they become more liberalised,” Muriu told OBG.
Kenya’s burgeoning private equity market should provide significant scope for investment. Last year alone the country attracted more than KSh102bn ($1bn) in private equity, impact investment and venture capital deals focused on energy, financial, health care and real estate companies, according to press reports.
At present, pension funds' exposure to private equity remains relatively low. As of December, private equity accounted for less than 1%, or KSh170m ($1.7m), of the pension industry’s KSh814bn ($8bn) portfolio, according to a report issued by the RBA.
In contrast, government securities accounted for 30% of pension fund holdings, or KSh242.4bn ($2.4bn) – the largest of any investment category – followed by quoted equities at 23%, immovable property at 19% and guaranteed funds at 12%.
One fund that is already looking to expand into private equity is the state-operated National Social Security Fund (NSSF).
“We are looking at very many private equity firms,” Anthony Omerikwa, acting managing trustee of the NSSF, said during the fund’s annual meeting in August. “We have gone through a very rigorous process for some, but we have not zeroed in on any. It is an ongoing process.”
The fund, which had KSh176bn ($17.9bn) in assets under management at the end of June, saw the prospect of stronger returns going forward, Gideon Ndambuki, chairman of the NSSF, told local media in August.
“Higher spending on infrastructure and continuation of reforms are expected to provide further growth and should translate into a healthy growth potential for the fund in terms of membership and assets,” he said.
The widening of the investment net comes as fund returns have come under pressure in recent years, mainly due to the poor performance of the Nairobi Securities Exchange (NSE). Last year the NSE All Share Index decreased by 14.7%, according to the bourse, while overall market turnover was down 3% at KSh209bn ($2bn).
This has prompted pension schemes to reduce their exposure to the NSE, scaling back their holdings of listed equities from 30% as of March to 27.1% in June.
Inflation has also weighed on net returns. With the consumer price index up 5.8% year-on-year in June, retirement schemes posted a net loss of 3.7% despite an average return on investment of 2.1%.
Going forward, a concerted shift towards private equity will likely depend on implementation of a regulatory framework for licensing and greater investor awareness, according to industry stakeholders.
The CMA is expected to finalise regulations on licensing of private equity funds by year’s end, a move that should enable pension funds to invest more freely in the sector. According to press reports, the industry has been slow to move into the new asset class due to the lack of clear regulations.
Greater investment in private equity and venture capital funds will also likely hinge on improved public awareness, Paul Muthaura, CEO of the CMA, told OBG.
“The fund managers have the expertise, but must seek explicit approvals to invest from pension trustees, who are often unfamiliar with these products,” Muthaura told OBG. “So there is an educational element here too, in order to contextualize the value proposition of moving some pension money into some higher-risk categories.”
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