The Pension Industry: Lessons from the Pandemic

Fred Waswa, Group Chief Executive at Octagon Africa.

By Fred Waswa

2019 was a recovery year for the pension industry having been adversely affected by the prolonged electioneering period in 2017 and the unpredictable climate in 2018 that affected the stock markets. According to Pension Investment Management Survey (PIMS) carried out by Octagon Consultants, Ruparelia Consultants and Riscura Consultants, pension schemes that invested in fixed income and equities made an average return of 12.5% in 2019. 2020 was forecasted as a good year for the pension sector, before the coronavirus pandemic, due to the stable operating environment. Predictions by Retirement Benefits Authority indicated that the industry was optimistic about growing the total national fund from KES 1.1 trillion to about KES 1.25 to 1.3 trillion.

When the country registered the first COVID case in March, the stock and offshore markets experienced a rapid fall in returns by the end of the first quarter. By Q2’2020, we had slight recovery of the markets attributable to measures by the Government of opening up the country after the lockdown. However, we had a flat growth rate in the first half of 2020 because in Q1’2020 we registered -4 per cent decline in earnings while in Q2’2020 we grew by 4 per cent.

As we look forward to closing H2’2020 in the next three months, what can the pension sector learn from this pandemic?

Diversify investment of assets

One of the major lessons that we as an industry must learn from this pandemic is not to have all our eggs in one basket. As trustees, we must not take high-level risks during this uncertain period and make sure we are diversifying the funds into private equity too. As a country, we also need to learn how to invest in our healthcare system to build the resilience of the industry like the Western nations.

Invest in property cautiously

Over the last four years, we have had about 10 to 11% of our pension schemes investing in properties, a stagnant asset class. Moving forward pension schemes should approach residential properties with caution because the Government is coming up with 500,000 housing units at a cheaper price compared to the market prices.

With the adoption of a work from home culture, which is set to continue in the future, pension schemes must start looking at how they can restructure their property portfolios and bring them into Real Estate Investment Trusts (REITs) and then invest them into the stock market. We must look beyond brick and mortar and own shares in companies that own properties.

Monitor the local and international markets consistently

In 2020, COVID affected the industry and 2021 is anticipated to begin with the heat of the Kenyan politics meaning we will experience more flight of offshore investors. America will also have conducted their elections and most people will begin to invest in America, meaning a further flight of offshore investors in Kenya. Therefore, pension schemes must look ahead and anticipate the changing operating environments and those with heavy investments in equities should begin shedding off, say 20% and carefully choose stable stocks  and opt for more stable asset classes, say 60 to 70% investment in bonds and fixed income to avoid a huge hit between now and 2022-2024.

Automate end-to-end services

The need for automation to provide end to end services for our members has also been clear during this pandemic, especially with the social distancing requirements. Members must be able to sign up for a pension plan, view statements, and even apply for their benefits electronically.

Encourage unions to move away from gratuities

As a nation what cannot be underscored is the importance of saving, especially for the working class. Those surviving through this pandemic are those with some savings for emergencies. We encourage unions to move away from gratuities in which money sits on balance sheets of companies and when times are hard, such as this pandemic, companies struggle to pay off their employees. The union fraternity should opt for pension scheme savings such that when one is laid off, then one will get their money and be able to plan and survive for the coming days.

The author is the Group Chief Executive at Octagon Africa.