How Kenya’s pension funds can help rebuild economy

Proposals made by various stakeholders on how the pensions industry can be mobilised to finance some of the interventions needed to mitigate the health and economic implications of the Covid-19 crisis have generated a lot of heat.

Healthy debate on the merits of proposals is welcome because it enables Kenyans to reflect on different viewpoints and refine and inform better solutions. Many a time some of the best ideas are killed (and as Kenyans we are notorious for this) because of not having full facts, an appreciation of the underlying rationale and the desire for stakeholders to help.

There can be no doubt that Covid-19 will take a heavy and implacable toll on our country economically and socially. As patriotic Kenyans and corporate citizens, the overriding objective must be to help our country overcome this crisis and build back better, even as we protect and seek concessions for our own industries and businesses.

In combating the economic impacts of Covid-19, our efforts must be informed by i) urgent responses to protect jobs, businesses (particularly MSMEs) and supply chains and ii) multi-stakeholder partnerships to stabilise and stimulate the economy.

Therefore, we commend President Uhuru Kenyatta for the measures that have been taken to contain the spread of the virus in the country and to cushion Kenyans against the adverse social and economic effects of the pandemic.

In our humble view, however, whilst the tax incentives enacted are welcome, the transmission mechanism in the economy is such that they are unlikely to create the immediate impact needed at this time. Further, to a government already under severe fiscal pressure, there will be additional strains from reduced tax collections as corporate taxes, PAYE, import duties and VAT all fall because of the lockdowns, supply chain disruptions and reduced economic activity.

The magnitude of the crisis requires faster, bigger and bolder measures and the government and all stakeholders to step up to the challenge and come up with innovative sources of funding.

This is where pensions funds, being key stakeholders in our financial sector, come in. By their very nature, pension funds generally have longer-term liabilities payable over many years into the future. Total pension assets in Kenya are estimated at Sh1.3 trillion and about 40 percent of these are invested in government securities.

Pension funds and other players in Kenya’s financial sector such as banks and insurance companies have already suffered significant erosion in value because of the market decline and this could further worsen unless the economic outlook of the country improves. Members of pension funds will risk seeing negative returns on their benefit statements and this could worsen if the situation deteriorates.

The point we are making it that it is in the interest of pension funds and their members to not just support but initiate measures to improve the health and outlook of the economy. It was with this in mind and recognising the long-term nature of pension funds, that The Actuarial Society of Kenya (TASK), the Association of Retirement Benefits Schemes (ARBS) and other industry associations made a raft of proposals to government.

These proposals included the possibility of individual pension funds on their own volition offering a deferral of interest payments on their existing holdings of government securities for a limited period and /or exchanging their interest payments falling over the next 6-12 month period in return for another shorter-term government treasury instrument.

Crucially, these proposals were clear that pension funds were not taking any haircut and that the mechanics of doing this would be valuation-neutral to pension funds (that is, in technical terms, the value of a bond before and after remains unchanged because any interest deferred is compensated for by additional interest for the time value of money resulting in no loss of value to a pension fund).

Another proposal was that the government issue a social impact bond with defined social outcomes or a zero-coupon bond. The proposals made would help to unlock funds that can provide a significant boost to the country’s arsenal to fight this pandemic

It is important to appreciate the proposals were made subject to a number of criteria in addition to valuation neutrality being met. Firstly, the mechanics for implementing any of these proposals must meet the laws and regulations governing pension schemes and ensure the interests of the members are not prejudiced in any way.

Secondly, any deferral of interest or exchange of coupons is limited to a short period. Thirdly, and importantly, any deferral or exchange of coupon proceeds with another treasury instrument applies to selected government bond holdings to enable each individual pension fund to manage its own risk profile and liquidity needs.

Defined benefit plans with sizeable cash flows or other schemes impacted by member exits from restructurings would not participate given their particular constraints.

Fourthly, the proposals once refined are subject to approval of pension funds’ investment managers as required under the Retirement Benefits Act.

Importantly, the proposals provided for ring-fencing of the funding raised to be applied purely for health financing, income and food security, protecting jobs and economic stimulus packages for manufacturers and MSMEs. The proposals provided for independent monitoring and reporting to pension funds of how the proceeds are being applied with penalties for breaches.

Clearly there is more work to be done and the devil is in the detail, but in our view the proposals made are sensible and are made to support the country and not the government. Any suggestions that these proposals were prompted by a cash-strapped government are manifestly false and dangerous.

Different countries have come up with their own stimulus packages, and in the absence of the fiscal space in our country, the measures proposed which limit the fiscal impact are innovative homegrown Kenyan solutions to help us tackle this pandemic.

It must be noted the Tax Laws (Amendment) Bill proposed to remove the tax exemption on the investment income of the National Social Security Fund and pension funds as well as remove the tax exemption on pension benefits for Kenyans aged above 65.

Thankfully proposals made by TASK and ARBS were accepted and this retrograde step that would have dealt a severe jolt to the pensions industry in Kenya and adversely impacted the retirement savings of Kenyans was rejected by the National Assembly.

The Covid-19 pandemic has shown that our fates are intertwined. Pension funds and other players in the financial services sector, including banks and insurance companies, are not immune from the rest of the economy.

As pension funds, we must find a way to limit the negative impacts whilst responsibly managing the assets of our members and future generations. That is why the ARBS and TASK are leading a coalition of the willing to stand ready to work collaboratively with all stakeholders to ensure we build back better and enable our economy to stabilise, grow and thrive.

Raichura is Chairman, Actuarial Society of Kenya Pension Working Party

Nyakundi is Chairman, Association of Retirement Benefits Schemes