Investments in the infrastructure are worthwhile for pension funds

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Investments in the infrastructure are worthwhile for pension funds


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  • While Kenya’s infrastructure has shown robust growth recently, the growing debt portfolio and growing public outrage over continued borrowing could threaten the pace of infrastructure development and hurt investor confidence.
  • The entire annuity industry has over Sh1.319 trillion in assets under management, which, according to the CBK, account for up to 13.31 percent of GDP in June 2021.

Kenya’s annual infrastructure funding gap is more than Sh 203 billion. ($ 1.8 billion). The World Bank estimates that the country will have an annual spending rate of Sh453 billion over the next ten years. ($ 4 billion) is needed to fill this infrastructure finance deficit.

While Kenya’s infrastructure has shown robust growth recently, the growing debt portfolio and growing public outrage over continued borrowing could threaten the pace of infrastructure development and hurt investor confidence.

This has prompted the Kenyan government to look for alternative forms of financing from the private sector through public-private partnerships (PPPs).

The entire pension industry, on the other hand, has assets under management of over Sh1.319 trillion, which according to the CBK will account for up to 13.31 percent of gross domestic product by June 2021.

The sector plays an important role in the economy in relation to major transmission channels, particularly the financial and labor markets.

Thus, a stronger participation of the pension sector in the infrastructure expansion automatically reduces the public credit needs of the country; Affect the economy positively by reducing its vulnerability and promoting its growth.

In contrast to commercial banks and development finance institutions, which have a short to medium-term investment horizon, the long-term nature of infrastructure projects for the Kenyan pension industry is striking. The public infrastructure is monopoly, hence the attractive and predictable returns.

The most recently launched infrastructure bond offered a tax-free return of 10 percent per year, which was impressive compared to a 10.4 percent loss on publicly traded stocks, the Actserv Survey Report reported in 2020.

This extreme uncertainty in stocks has opened the eyes of many mutual funds as they have had to reassess their asset allocation.

In addition, public projects are less affected by business cycles and therefore exhibit low volatility compared to other financial asset classes. Government projects have shaken off the negative effects of the pandemic and have seen gains over the past two years.

This is despite the low interest rate environment and the poor or unstable performance of other asset classes such as stocks.

In an environment where fund managers are looking for better returns, the trustees closely monitor the performance of the system in order to provide their members with a good retirement plan.

In addition, the fixed income industry is proactively looking for portfolio diversification opportunities, and so infrastructure investments are rapidly growing in importance.

With the expansion of the permitted investment categories by the Rentenversicherungsanstalt in October, infrastructure was introduced as an independent investment category in the investment regulations of the pension funds.

The move enabled pension funds to invest up to 10 percent of their portfolio directly in the asset class, freeing up around 140 billion shred to be allocated to the asset class.

Infrastructure projects are capital-intensive, require expensive structuring and due diligence fees, and make it difficult for individual pension funds to explore this asset class.

To address these challenges, various pension systems and other industry stakeholders came together to explore optimal channels for sustainable alternative investments, leading to the creation of the Kenya Pension Fund Investment Consortium with the support of the US Agency for International Development and the World Bank.

This was followed by a letter of intent with the Capital Markets Authority and the Nairobi Securities Exchange to strengthen pension fund activities in the capital markets through infrastructure projects and alternative investments.

The consortium aims to expand access to critical infrastructure for Kenyans, improve the profitability of retirees and reduce Kenya’s reliance on Chinese debt. It also sends an important signal to investors around the world that Kenyan pension funds are good local partners.

With the 2022 elections approaching, businesses are getting nervous and starting to take cover. Pension funds are no different. While annuity players cannot avoid some systemic risk, it is important for fund managers to have a balanced portfolio on a risk / return basis to ensure they are delivering high returns to their members while receiving their contributions.

Ongoing training for trustees and other stakeholders on alternative investments such as infrastructure will help the programs increase their portfolio diversification.

When benchmarking performance against comparable pension systems in 2022, it will be of great interest to analyze the performance of those who have given the alternative asset class heavily and have long-term diversified portfolios.


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