Pension schemes and provident funds investment portfolios in Kenya: implications of investment guidelines under retirement benefits act (1997) and regulations (2000)
With the level of attention being paid to the provision of adequate retirement benefits for workers around the world increasing, the idea of reforming the retirement benefits sector to deliver intended services to beneficiaries effectively has become a central issue. To be in tandem with global developments, the government of Kenya enacted the Retirement Benefits Act (1997) and the Retirement Benefits Regulations (2000). The main thrust of the Act was the establishment of the Retirement Benefits Authority for the regulation, supervision and promotion of retirement benefits sector and for connected purposes. These were the main missing links in the administration of retirement benefits schemes in the country, currently estimated to hold assets in excess of Ksh. 130 billions or 23% of the country's GDP (RBA n.d, p.15). Major transitions like this give a good reason to pause, take stock of where schemes have been, where they are and where they are headed. Retirement Benefits Regulations (2000) contain among others, investment guidelines that stipulates maximum investment ceilings in any asset class that schemes have to conform to by 8th October 2001. Prior to this, retirement benefits schemes were at liberty to set their own investment ceilings, as they deemed fit. This led to some schemes investing in a few asset classes or mainly one asset class, thus exposing schemes to diversifiable risks that could be eliminated through adequate diversification as per the rules of portfolio theory. The mam aim of this study was twofold. First, the study sought to identify the current investment portfolio composition of pension schemes and provident funds and on this basis determine the changes that they will have to make on their investment portfolios so as to conform to the investment guidelines. Secondly, the study sought to assess the problems that pension schemes and provident funds will encounter in their efforts to conform to the investment guidelines as stipulated in the Retirement Benefits Regulations (2000). In achieving the aforementioned objectives, a questionnaire was used to collect primary data from a sample of schemes and all fund managers that had been registered with RBA by end of May 2001, and Insurance companies that had life departments managing pension funds. It was found out that 70% of the schemes surveyed were not in conformity with investment guidelines and required making drastic changes to their investment portfolios so as to beat the set deadline. The main ways that schemes outlined to come into conformity with the investment guidelines included off-loading excessive investment in an exceeded asset class, postponing further investment in the over invested asset class and on the extreme, where no any other viable alternative exists, dissolving the scheme all together. All these measures had various major implications for schemes that included contending with a depressed property market, illiquidity of the equity market, unremitted contributions by sponsors and a narrow range of corporate instruments. With 70% of the surveyed schemes being not in conformity with investment guidelines, the study recommends that RBA should give a grace period of at least three years, before fully enforcing the .Retirement Benefits Regulations (2000). This grace period is important especially to those schemes that had over invested in immovable property and equity of quoted companies in East Africa. The importance arises from the fact that attempts to off-load excessive holdings in these asset classes currently will result into individual schemes realising excessive losses running into millions of shillings and billions of shillings for the entire retirement benefits sector.