Pension contributors are staring at a major erosion of their savings after annual returns on investments in 2023 by pension funds shrunk below the rate of inflation.

A periodic pension industry survey done by fund administrator Zamara shows that pension schemes made a weighted average return of 1.4 percent in 2023, which was lower than the 1.7 percent return recorded in 2022.

At the same time, Kenya’s average inflation stood at 7.7 percent in 2023, meaning that the average saver lost value in real terms. This was the second straight year of pensions failing to beat inflation after the 2022 return trailed the 7.64 percent average increase in cost of living.

The returns from investments determine the interest that pension funds pay savers on their contributions each year, after factoring in administrative and other fund management expenses.

Zamara said the sub-par returns last year were caused by an underperforming equities market, as well as fair value losses on bond holdings after a sharp increase in yields caused prices to retreat in the secondary market.

“This decline was driven by negative bond valuations and poor equity market performance,” said Zamara in a commentary on the schemes’ performance.

The 412 funds surveyed by Zamara —with a total fund value of Sh1.042 trillion— had by the end of last year, allocated an average of 12.4 percent of their total assets to equities, down from 21.8 percent in 2022.

Fixed income and offshore investments accounted for 80.3 percent and 5.5 percent of total assets respectively, up from 76.5 percent and 1.53 percent in 2022.

The weighted average returns from equities stood at negative 22.9 percent in the year, weighed down by share price erosion on blue chip counters at the Nairobi Securities Exchange on foreign investor selling.

Pension funds normally invest in large, stable blue chip stocks at NSE, seeking better security against loss of savers funds while generating steady returns from dividends and potential long-term capital gains.

In the fixed-income segment, schemes opt for low-risk, long-term local government bonds to guarantee the stability of funds. While offshore investments often offer high returns, they come with high risks.

These bonds, while offering stable returns in terms of interest, saw price erosion last year following a rise in yields in the secondary market.

Bond yields and prices tend to move in opposite directions in the market, depending on the risk rating that investors assign to government debt at that particular point.

Yields went up last year, pushing some bond prices to as low as Sh70 per Sh100 unit in the NSE. Financial firms report these losses on their balance sheet, although they do not translate into actual losses on the profit and loss statement unless the bonds are sold.

Read more @businessdailyafrica