Risks of spending pension on infrastructure

By Jackson Okoth

Treasury’s plan to use pensions to fund Government spending on infrastructure is still sailing in stormy waters, even as it seeks more cash to fill empty coffers.

This is happening as power utility firm KenGen seeks Sh15 billion through an infrastructure bond, whose sale closes on September 29.

KenGen’s sale follows Treasury’s Sh18.5 billion infrastructure bond, which received a huge participation by the pension industry.

Experts are warning that benefits of members belonging to statutory pension schemes could lose out if their funds are locked 100 per cent in infrastructure bonds.

"The pension industry is most uncomfortable with this ‘compulsory acquisition’ of member’s statutory contribution," said Mr Lazarus Muema, Chairman of Association of Retirement Benefits Schemes (ARBS).

Beginning January next year, schemes, which receive statutory contributions, will be required to invest only in Government securities or infrastructure bonds. This is if the Finance Bill 2009 is passed.

To be affected are funds held under the civil service pension scheme, local authorities pension trust, local authorities provident fund and the National Social Security Fund.

The threshold amount for which a scheme can invest 100 per cent in Government securities is to be increased from Sh5 million to Sh100 million.

The implication of this change in the Finance Bill 2009 is that schemes with total assets below Sh100 million may invest exclusively in Government securities.

Protect contribution

"We need a mixture of bonds for stability and equities for growth. This is to ensure that retirement benefits are in excess of inflation," Muema told FJ.

While the Government’s move is informed by the need to protect members’ contributions from being squandered by statutory bodies, ARBS is not buying this argument.

Muema says locking away 100 per cent of statutory contributions in bonds will result in low returns in the long run. Besides, this could affect growth of the domestic capital markets. "The reason why there has been imprudent management of funds by some statutory schemes is lack of training," said Muema.

Treasury’s entry into the pension sector follows past troubles at the various statutory schemes.

For instance, NSSF is still recovering from an estimated Sh2 billion, invested in collapsed stockbroker Discount Securities Limited.

structured training

ARBS argues it is the governance issues facing statutory schemes, which should be sorted.

At the moment, there is no structured training for trustees, fund managers, administrators and actuaries. A curriculum for training of trustees has been forwarded to the Retirement Benefits Authority for review.

"RBA has referred us to the Ministry of Higher Education for accreditation. We shall soon be looking at identification of a person, group or institution to implement the programme with support from ARBS Council," said Muema.

This training and accreditation programme for trustees is expected to set out minimum standards for professionals to run a scheme.

ARBS’s certification programme is a comprehensive study checklist and a quality assurance mechanism, which will work once it is recognised in law.