Nairobi — The industry-wide adoption of the revised accounting practices on bond valuations is expected to provide pension funds with a more accurate depiction of their financial health.
The regulations that came into effect on December 31, 2023, are designed to instill confidence among stakeholders in the pension industry.
Speaking on Friday at the Enwealth Financial Services Pension Stakeholder Briefing, the Deputy Manager, Supervision Department, Retirement Benefits Authority, Dennis Oluoch, said pension funds have faced challenges in accurately reflecting the true value of their bond holdings, which could potentially lead to misleading financial statements and investment reports.
The new accounting practices address this issue by amending the requirements for the valuation of the scheme fund.
These changes aim to ensure a more precise reflection of the value of bonds in pension fund portfolios.
By using the amortized cost method, fund managers can avoid declaring losses attributed to inflation, thus providing a more realistic representation of bond values based on their intended maturity date.
"The timing of these changes is crucial, given the backdrop of rising inflation since the previous year, which has adversely impacted the value of bonds. Income generated by bonds has struggled to keep pace with the eroded purchasing power caused by inflation," Oluoch said.
Fund managers, in particular, are optimistic about the positive impact on their bottom line as they navigate the challenges posed by inflation and ensure a more precise reflection of the value of bonds in their portfolios by using the amortized cost method.
By doing so, they can avoid declaring losses attributed to inflation, ensuring a more realistic representation of the bonds' value, given their intended maturity date.
Other legal changes affecting the pension industry discussed during the briefing include the introduction of income drawdown regulations under the law.
These regulations are seen as a safeguard for retired workers, streamlining the management of funds and securing retirees in the long term.
"The regulations safeguard members and give them flexibility. Transfers from one IDD to another will be allowed after a membership of 5 years, effective November 2023, where all transfers shall be done in a lump sum and no provision for partial transfers of funds," Orpah Wanyama, the Manager of Legal & Compliance at Enwealth Financial Services, said.
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"This gives members choice and flexibility in case their scheme is not performing as desired," she added.
Previously, the Income Drawdown Funds were run under Individual Pension Schemes regulations as Income Drawdown Prudential Guidelines (2012), but the new regulations, Retirement Benefits Regulations (Income Drawdown Funds) 2023, were introduced effective November last year.
There are also amendments for withdrawals from 15 percent to 12 percent per annum of the member's outstanding account balance in the Income Drawdown Fund, ensuring longer-term access to regular income for members.
"To ensure liquidity, the funds are not allowed to invest in immovable assets. The law now provides for the establishment of a trust fund under IDD where in case of death of a member, the beneficiaries can continue receiving the regular income," added the Enwealth representative.
