Tapping the potential in Kenya’s pensions sector
In September 2018, local pensions funds teamed up to target alternative investment asset classes including affordable housing, private equity, energy and infrastructure projects which would be tough to crack if pension funds were to invest individually.
The organizations intend to cast their nets wider through their umbrella body, the Kenya Pension Fund Investment Consortium, which is currently made up of 10 pension funds that collectively command an asset base of over Sh150 billion, comprising both private and public sector pension funds.
According to The Retirement Benefits Authority (RBA) data, Kenyan pension funds’ assets stood at Sh1.17 trillion as at June last year. The bulk of the investments (93 per cent) are still in the traditional asset classes mainly comprising of fixed income and equities, which are proven low risk options that provide good returns. Scarcity of innovative alternative investment vehicles has been blamed for pension schemes’ tendency to over invest in fewer asset classes.
However, alternative investment asset classes are gaining traction in the local market, as viable options for pension schemes to diversify risk, while positioning their members to achieve potentially higher returns. The local pension industry is showing increased appetite for investments in new segments such as energy, private equity, and affordable housing and infrastructure projects.
According to Mr. Simon Wafubwa, CEO Enwealth Financial Services Limited, a leading independent pension fund administrator with a portfolio of over USD62Million, the pensions sector has grown ten – fold in the last few years largely due to a supportive legislative environment, but there is still potential for accelerated growth.
“We are operating under a legislative framework that is fairly trusted, and which has encouraged fund members to make voluntary additional contributions. Employers are also making timely payments due to stringent regulations, affording pension schemes funds to invest in-time for enhanced performance,” he says.
Until recently, Pension Funds had shied away from big-ticket infrastructure investment projects. “You realize that you are holding funds on behalf of members, shouldering the the risks of governance, compliance and investment. So it is generally true that you take responsibility for investment decisions, and sound stewardship for member’s savings,” says Wafubwa. This in a big way influences the cautious approach by many trustees.
He avers that lack of technical awareness regarding options like REITS, private equity, venture capital, and an asset class like Public Private Partnership (PPP) which is already provided for in the law, is to blame for the reluctance by pension schemes to invest in the complex and ‘adventurous’ assets and strategies. The organizations instead play it safe and purse stable returns with a level of predictability. Most trustees prefer to be much better informed on the risk reward profile of available investment options before plunging in.
“It is true that we need to diversify and that is why the RBA Act has continued to be updated to reflect that desire. For example, now pension schemes can invest up to 10% in private equity, property up to 30%, REITS 30% as opportunities for diversification so as to spread the risk in investment,” says Wafubwa. “More information is however crucial on the attractiveness of each segment for investment at any given period.”
Wafubwa says that industry players want to see government commitment in ensuring efficiency and transparency in procurement processes. He emphasizes the need to see to it that project funds are efficiently utilized for the purposes for which they were intended, which would create confidence in the timeliness in conclusion of projects, to attract and tailor investment with an acceptable level of certainty. He cites the SGR as an example, which, because of the murky procurement intricacies and over-the-top costing, will require quite a while to break even or become profitable in order to recoup public funds invested in the project.
Sound governance is important, because the fish begins to rot from the head. To enhance better decision making, formulation of policies that will enhance better performance is important. “There are of course positive steps we have seen being taken to improve the operating environment and cultivate a more fertile market; such as the requirement that pensions trustees be trained and certified, the recent market conduct guidelines that has been issued by the RBA to assure an increasingly discerning and informed investor that the quality of trustees on a given pensions firm’s board is competent and above reproach,” says Wafubwa.
Pension schemes have gone under with members’ contributions. “It is reassuring that the government made an amendment to the RBA Act that ensures that from the time a scheme shows symptoms of trouble, there are mechanisms in place that can be implemented to remedy the situation to safeguard investors’ interests,” says Wafubwa.
The industry has nonetheless continued on a growth trajectory, and innovation has become necessary to not only rope in more contributions from a diversified pool, but crucially, increase the product menu.
Wafubwa insists the regulatory environment has to improve further to facilitate innovation, and industry players have been active in pushing this agenda.
“We submit budget proposals through the regulator on specific topical issues that we wish innovatively considered, because even if one needs to innovate, there has to be an enabling legislative framework that supports these processes,” says Wafubwa.
“We also do capacity building to outreach to trustees so as to empower them with skills and knowledge on some of the products and opportunities in the market,” says Wafubwa.
“We are seeing a lot of ICT innovations, including online portals which enhance the ability of service providers to outreach to members with real-time access to information, and actualize contributors’ involvement in pension management and governance.
Mr. Wafubwa says tax exemptions are offering great incentives for growth of disposable income for formal employment. But a lot more is required in this space.
There is little growth in business from the informal sector, however this is presenting an opportunity for market players to innovate, present to the market tailored products which will enable them create, and respond to demand.
Enwealth’s personal pension plan, for instance, allows members to join with flexible payment terms – as little as Kshs 500, plus the added incentive of exemption. Returns for this offering are good, according to the youthful, but unassuming CEO of the company. He discloses that in the year 2017 Enwealth made 18% return on investment.
“We have grown by maintaining a strong commitment to adding value to our clients’ pension schemes through the various services that we provide, and in this way guarantee them a secure future,” he says.
Enwealth Financial services is a market leader in the pension administration service segment providing Pension Schemes Administration Services, Retirement Benefits Consulting services, Retirement Planning Training Services, Trustees Training services and Retirement Consulting services.
With relentless innovation and dedication to efficiency Enwealth has recorded impressive growth to currently manage portfolio in excess of Kshs.62 billion, 50% of which comprises government bonds, 25% stocks, and the balance scattered in offshore ventures, a clientele of 120 within 8 years. There is a smattering of property investment, explained by the reality that despite the boom witnessed in the real estate sector over the last decade; supply has outstripped demand.
Wafubwa says that the Pensions sector, just like insurance, has huge untapped potential, which could be harnessed if both the regulator and industry became more proactive in addressing some of the bottlenecks.
Kenya’s saving culture is peculiar, as witnessed in the millennial age group. The online loans craze has distorted saving habits, where increasing loan limits is the sole motivator, rarely or never giving a thought to security after employment. Changing the perception from this group with regard to retirement is crucial to unlocking the potential of a crucial segment of the market.
Catching the tech-savvy group’s attention requires creativity and in-depth research into their habits and uncovering ways on how to walk with them in their search for identity in the global economy. It requires going to them, and making them understand the wisdom of saving and investing for retirement.
Artificial intelligence is the next frontier that will affect the RB industry. Wafubwa calls on the regulator to facilitate faster investment in technology in the sector.
Increased mechanization and deployment of technology is going to be the game changer in employment market, subsequently the retirement benefits arena.
“Robots are already being seen in newsrooms, on the domestic scene, factories, and farms, while self-driven automobiles are now a reality,” says Wafubwa.
“A robot will not ask for a raise, sick-off, maternity leave, health insurance, tea-break etc.” If you compare that to the human counterpart, the machine presents an irresistible advantage, says Wafubwa. Where does that leave humans, and the pensions industry?
He avers that Enwealth plans to remain relevant in the innovation agenda. Research is key, but we believe that optimal value is no longer in research, but in fore-search. And so we look into the future and work now, and respond to the trends and emerging needs,’ says Wafubwa. Enwealth has partnered with Strathmore University and IHRM to do periodic publications on social security, surveys and research.
The firm intends to continue expanding its product offering with intentions to grow its footprint into the African region. Enwealth Uganda is already operational; The Company’s unique post- retirement healthcare Funds for Retirees (ANAYA) a medical cover for retirees over 90 years, conjured in partnership with APA Insurance, is already a hit, with the post-retirement medical fund for expatriates and Kenyans in the diaspora doing very well.
“On the system front, we have innovated an online portal that allows members to have a view of their contribution credits, benefits, and projections, generate their statements and benefits quotations. We also upgraded it to a mobile app so that members can access it wherever they are,” he discloses.
“As we embark on the next phase of this journey, we expect to roll out more ICT driven innovations targeting the SME market with the underlying objective of driving our market share from 5% to 20%,” said Mr. Wafubwa.
“Whether with just 5 employees or more, they don’t need to struggle to set up the pension fund. They will join our umbrella at no fee, but still enjoy the benefits of having a scheme for their employees, and they can contribute depending on their financial ability.”
“We thank God who has made it possible for us to serve, rising to top 4 in a highly competitive market, spurred on by a strong board of directors, loyal clients and a 40-strong passionate team of dedicated professionals, who have cultivated a sustained a high culture of innovation in the processes, systems, products that support sustainable customer service, delivering the promise in an assured way for the customer,” concludes Afubwa.