Kenya is considering tapping into government's $9.6 billion pension schemes funds to finance infrastructure projects as it seeks to stop dependence on foreign debt.
The funds will go towards fulfilling President Uhuru Kenyatta's pledges under the Big Four Agenda: Manufacturing sector, food security, universal health coverage and affordable housing.
The government has identified several infrastructure projects that will act as catalysts but is facing a challenge as to where to source financing at a time when Kenya's foreign debt is suspected to be at an unsustainable level.
Revising asset classes
The EastAfrican has learnt that the government intends to overcome this challenge by revising the asset classes that pension schemes are allowed to invest in to include a public private partnership (PPP) class that will enable them to invest in infrastructure projects.
The Retirement Benefits Authority (RBA) has come up with guidelines for the PPP asset class which have been forwarded to the National Treasury.
"We are hoping to bring an asset class for PPPs so that pension schemes can support the government in infrastructure and housing financing," said Nzomo Mutuku, RBA acting chief executive.
He added that through the new category, which could be operationalised as soon as June when the government unveils its 2018/19 financial statement, pension schemes will fund the construction of some of the 500,000 housing units promised under the Big Four Agenda.
Mr Mutuku, however, would not divulge what percentage of pensions scheme assets will be up for investment in infrastructure projects.
Recently, the World Bank advised EAC governments to reform investment laws to enable them tap into the vast local resources at their disposal.
It is estimated that East Africa requires $100 billion over the next four years to invest in infrastructure, mainly in the energy and transport sectors. The region, however, continues to depend on foreign financing and commercial domestic borrowing, which is exerting pressure on public debt.
Although the pensions industry across the EAC boasts of assets under management to the tune of $16 billion, only Tanzania has experimented with allowing the schemes to invest in infrastructure projects.
Tanzania's National Social Security Fund invested $135 million in the construction of the 680-metre Nyerere Bridge in Dar es Salaam.
Kenya will be hoping that the PPP asset class will incentivise pension schemes to pump resources into projects which government intends to undertake over the next two years.
While the addition of the PPP asset class is seen as a significant step to broadening pension schemes' options for investment, the main test will be on the schemes' willingness to explore this new carrot given that they are highly conservative and mostly prefer investing in property, shares and government securities.
The RBA has rigidly ensured that schemes invest only in asset classes spelt out in the gazetted regulations that restrict investment limits per category, limiting the risk to which the scheme funds were exposed to.
"Pension schemes by their very nature are conservative with a low-risk appetite because their purpose is to pay benefits to members," said Mutuku.
Indeed it is possible that the new asset class could fail to resonate with pension schemes, particularly following the lukewarm reception towards the introduction of investment options such as derivatives, real estate investment trusts, private bonds and Commercial Paper issued by privately-held firms.
"Pension schemes should rethink their asset allocation based on value, return on investment and avoid having challenges of liquidity," said Geoffrey Odundo, the Nairobi Securities Exchange chief executive.
Industry experts reckon that diversifying investment classes for pension schemes will drive growth of the industry by netting more contributors and thus grow the funds under their management.