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Poll jitters push pension funds to keep Sh1.14 trillion in 'safe assets'

By Dominic Omondi | July 21st 2021

Pension funds have increased their holding of government papers by Sh274 billion during the Covid-19 period.

This scenario points to a jittery market that has been aggravated by the impending General Election.

By July 9, pension funds held Sh1.14 trillion of government securities - Treasury Bills and Treasury Bonds, an increase of 31.8 per cent from Sh862.2 billion in March 2020 when the country recorded its first case of Covid-19, data from the Central Bank of Kenya (CBK) shows.

Liaison Head of Pensions Michael Mitau noted that this is not too strange when the country heads towards the elections with fund managers keen on putting pensioners’ cash in safe assets.

Government securities are said to be the safest asset with the assurance that the government will always pay its debts as long as there are taxes.

“There is a little bit of apprehension on other competing aspects of real estate and equities,” said Mitau.

He noted that for most schemes, in order to play safe, there is a conservative approach that fund managers are taking up to protect capital.

“And it is usually not too strange when you begin to get closer to the election cycle for most investment managers and trustees to feel that it is time to just hold to safer assets to lock in some gains,” he added.

Pension funds will also be looking at comparative returns that government securities offer as compared to the equities and other asset classes.

But it is the government appetite for borrowing that has lured pension funds, which are required to put a lot of their funds in cash and cash equivalent assets including Treasury Bonds, a long-term government paper that can easily be traded in the secondary market.

In the next financial year ending June next year, the government aims to borrow close to half a trillion from the public.

And the government, said Mutai, has been offering the bonds at a competitive rate than other assets.

This, said Ken Gichiga, an economist, has resulted in another form of crowding out where investors, rather than investing in the economy such as in real estate are forced to put the money in government papers.

The growth in the holding of government papers by pension funds was faster than that of banks which increased their possession by 14 per cent, or Sh227.5 billion.

In the end, the fraction of banks’ holding of government securities reduced 54.3 per cent to 50.7 per cent while that of pension funds went up 29 per cent to 31.11 per cent.

Normally, pension funds are required to hold a big chunk of their assets in cash and cash equivalents, and given that all the assets have been volatile, most of them have preferred putting their investments in government securities.

In December last year, National Treasury said there were plans to save close to Sh73 billion by requesting deferment of interest payments on government securities held by pension funds and insurance companies.

This, said the Exchequer, was part of the National Treasury’s debt restructuring plan aimed at consolidating more funds to spend on the economy at a time when tax revenues are dwindling.

“The deferred interest will be amortised and paid with the interest due to be paid in the subsequent years up to the maturity of the security,” said National Treasury in a report.

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