The collateral damage of rising interest rates on pension funds

23 Schemes were covered in the Z-CASS Survey in the third quarter of 2023, and the assets under management covered by the survey were at K Shs 1.028 trillion.

By Steve UMIDHA On Nov 21, 2023

By Victor MUJIDU

Kenyan government is overpaying to borrow from capital markets, while higher interest rates hikes (as seen recently) has only made things worse for pension funds according to Zamara Consulting Actuaries Schemes Survey (Z-CASS) conducted for a quarter period ended September 2023.

During the quarter, Retirement Schemes’ median return was -3.0% down from 0.2% in June 2023.

The third quarter performance was affected by lower fixed income performance due to rising interest rates, which had a negative impact on bond valuations.

Fixed Income performance during the quarter was -1.5% down from 0.8% in June 2023. The average allocation for Fixed Income was 79%, showing a slight increase from 78% in the previous quarter.

The survey profiles schemes into categories based on their asset allocation. Aggressive schemes (schemes with a higher proportion of assets invested in Equity and Offshore asset classes) had a median return of -2.6% compared to a -2.8% return for schemes with a lower allocation (schemes with a conservative risk profile).

We have noted a steady reduction in the number of aggressive Schemes over the past few years because of a preference for Fixed Income allocation among the participating Schemes.

The Offshore performance was 1.6%, 48.4%, 9.4% and 13.8% for the quarter, 1 year, 3 year and 5 year respectively. This year there has been a positive performance in the Offshore asset class on account of the strengthening of the dollar against the shilling.

Participating Retirement Schemes recorded a decline in performance with a median return of 0.4% over the one year ending 30 September 2023 compared to 0.5% in September 2022. The decline was driven by the negative bond valuations and poor equity market performance.

Participating Retirement Schemes recorded an annualized median return of 5.0% over the three years and 7.2% over the five years. In contrast to a similar period, this average has exhibited a downward trend due to the continuous negative equities performance and high interest rates, which has resulted in negative Fixed Income returns.

Schemes were only able to beat inflation over the 5 years, with inflation at 7.0% over the three years and 6.3% over the five years.