Mar 10, 2019
The Retirement Benefits Industry plays a huge role in the economy. According to the Organization for Economic Co-operation and Development (OECD) in 2017, assets in Retirement Benefits Schemes totaled 50.7% of GDP in the OECD countries and 19.7% of total GDP in the non-OECD jurisdictions. It is clear that most non-OECD countries still have a long way to go in the growth of the sector. In Kenya, the Retirement Benefits Assets as a percentage of GDP stood at 13.4%, compared to more developed markets like the USA at 84.1% and the UK at 105.3%. Over the last decades, we have seen reforms and education initiatives by the Retirement Benefits Authority (RBA) to educate people on the importance of saving for retirement. The industry has registered great growth from both member contribution and good performances leading to the assets under management growing to Kshs 1,166.6 bn in 2018, from Kshs 287.7 bn 10-years ago, which is a compound annual growth rate of 14.3% over the 10-years.
We cannot emphasize enough on the importance of saving for retirement, as everyone will have needs at retirement. These needs may vary greatly for different people, but everyone will have basic needs and expenses such as home maintenance or rent, transportation, medical care etc. In order to enjoy your retirement years, one needs a stable source of income, and the primary way to achieve this is through disciplined saving, and investing these funds to grow by gaining interest and returns. This can be achieved by signing up to a registered Retirement Benefits Scheme and contribute to it during your working years. As you contribute, it is also important to review the performance and management of your funds to ensure the returns are attractive on a risk-adjusted basis and outperforming the inflation rates in the economy.
In this report, we will look at how this industry has grown, with a key focus on the performance reported by Fund Managers of Retirement Benefits Schemes in 2018. We shall also analyze this performance and the factors that contributed to the same, as well as give our view on how the growth of this industry and the returns offered can be further supported. As such, we shall cover;
Section I. Retirement Benefits Industry Growth over the Last 10-Years
The Retirement Benefits Industry in Kenya has registered significant growth, with the total Assets Under Management (AUM) having grown by a Compound Annual Growth Rate (CAGR) of 14.3% to the current AUM of Kshs 1,166.6 bn as of June 2018, from Kshs 287.7 bn in 2008. This growth can be attributed to (i) growth in contributions as members registered to Retirement Benefits Schemes continue to increase, (ii) actual individual contributions have also increased driven by the growing middle class, and (iii) increased returns on the investments. Despite the immense growth, the penetration rate of the Retirement Benefits Schemes remains low at 15.0% of the adult population, indicating that most Kenyans are yet to subscribe to a formal Retirement Benefits Scheme.
Changes in the Asset Allocation by Retirement Benefits Schemes in Kenya
Over the years, allocation by Retirement Benefits Schemes has been skewed towards traditional assets, which include Government Securities and Equities. The allocation to alternative assets, including Property, Private Equity, and REITs, has however been increasing, rising to 19.8% of total Assets Under Management (AUM) as of June 2018 from 17.2% in 2013. There is, however, room for improvement and growth as the regulations allow up to 70% allocation towards alternatives, i.e. (Property 30%, Private Equity 10%, REITs 30%).
Source: RBA Industry Report June 2018
Fund Managers’ low allocation in alternatives can be attributed to lack of expertise and experience with asset classes such as private equity and real estate, as investing in these asset classes requires detailed due diligence and evaluation as well as engaging legal, financial and sector-specific expertise.
Key Drivers that Determine the Investment Performance of Retirement Benefits Schemes:
Section II. Historical Performance by Retirement Benefits Schemes
Guaranteed Schemes are largely offered by insurance companies and they guarantee a minimum rate of return, with the maximum allowable rate that can be guaranteed is 4.0% p.a. The insurance companies, however, give higher returns based on the portfolio performance, as seen below:
Historically, guaranteed schemes have offered lower returns compared to segregated schemes, at a basic average of 9.8% in the last 5 years compared to the basic average of 11.3% for segregated schemes in the same period, as the insurance companies hold some reserve every year to cater for years where the performance of the market is below the promised rate. For instance, in the year 2013, guaranteed schemes declared a return of 12.1%, which was 8.0% points lower than the average return of 20.1% declared by segregated schemes. However, in 2013 when markets dipped and segregated schemes declared an average return of 1.4%, guaranteed schemes declared a return of 8.1%, 6.7% points higher than the average return declared by segregated schemes. Guaranteed schemes are therefore attractive for members with a conservative risk appetite as the contributions are protected and a minimum return is guaranteed. The 2018 results for guaranteed schemes are yet to be released; we, however, expect them to perform better than segregated schemes, which recorded an average of 5.2% over one year, as they utilize their reserves to shore-up members’ returns and cushion their schemes from the poor performance in the equities markets experienced in 2018.
Segregated Schemes are those where members’ contributions are invested directly by the Trustees via an appointed Fund Manager. The declared returns are based on what the fund achieves, fewer expenses, for the period in the review and the returns are fully accrued to the scheme for the benefit of members. In Kenya, there are two reports that are released on an annual basis. These are the Actuarial Services Company (EA) Limited (Actserve) Pension Schemes Investment Performance Survey, and the Zamara Consulting Actuaries Schemes Survey (Z-CASS).
For the year 2018, the Actserve and Z-CASS reports have indicated average returns for segregated schemes came in at 5.2% (Z-CASS reporting 5.4% and Actserve reporting 5.0%), a 71.7% decline (representing a decline of 13.2% points) from the 18.4% declared in 2017 (Z-CASS reporting 18.1% and Actserve reporting 18.7% in 2017).
The low performance was greatly attributed to the protracted bear run in the equities market in 2018, which wiped out about Kshs 488.0 bn of investors wealth in the bourse, with NASI and NSE 20 declining by 18.0%, and 23.7%, respectively, in contrast to 2017, where NASI and NSE 20 rose by 27.0% and 16.5%, respectively. Schemes that have huge exposures in the equities market reported much lower returns. The lackluster performance in the equities markets can be attributed to;
Section III. Conclusion and outlook
Given the continued changes in the Retirement Benefits Industry and increased knowledge of investments, the sector is expected to do well both in terms of growth and returns offered to members. This can be further supported through:
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.