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THE CONTRIBUTION OF PENSION FUNDS TOTHE CONTRIBUTION OF PENSION FUNDS TOCAPITAL MARKETS DEVELOPMENT IN KENYACAPITAL MARKETS DEVELOPMENT IN KENYA

Presentation By Edward Odundo, Chief Executive

Retirement Benefits Authority Kenya, During The NSEGolden Jubilee Conference and 8th African Stock Exchanges

Association (ASEA) Conference, 23-26 November 2004


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AGENDA1. RETIREMENT BENEFITS INDUSTRY I

KENYA

2. KENYAN PENSION REFORM

3. PERFORMANCE SINCE REFORM

. PENSION REFORM AND CAPITA

MARKETS


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BACKGROUND The Kenyan economy had stagnated since 1997, growth in GDP ha

averaged about 1.3% per annum upto 2002. Some recovery in 2003 an2004

Percentage of the population living in poverty increased from 51% i1997 to over 56% in 2002.

Savings and Investment have been low and declining. Gross investmenand savings as proportion of GDP fell below 10% between 2000 and 200Increased to 13.4% and 9.78% respectively in 2003.

Public expenditure as a share of GDP is high but falling. As a resulKenya mobilizes a higher level of tax revenue to GDP than the averagof Sub Saharan Africa.

The fiscal deficit has been rising; in 2002/03 Kenya recorded a deficit o3.91% of GDP.

The Kenyan stock of public debt has now increased to 70% of GDP.


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BACKGROUND IIAging population; the percentage of population aged overin less developed countries is forecast to rise from aroundper cent today to nearly 15 per cent by the year 2050

Resignation of individuals from the family unit occasionibreak-down of family-based retirement provision as a resulturbanization and social changes

Dependency ratios are on the increase

Low saving rates, low income and wealth,

Pension crises


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Subject toSubject to RBASubject to

RBA

Exempt

from RBA

ulation

fundedfundedfundedNon-fundedding

individualsformal/info

sector join

voluntarily

formal sectorworkers in

companies that

have schemes

formal sectorworkers in

companies

with 5+

all civilservants

bership

Trust DeedTrust DeedAct of

Parliament

Act of

Parliament

alcture

Individua

Schemes

Occupational

Schemes

National

SocialSecurityFund

Civil

ServiceScheme


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HE RETIREMENT BENEFITS INDUSTRY INTHE THREE EAST AFRICAN STATES ACOMPARATIVE ANALYSIS

Kenya Uganda Tanzania

NSSF$ 641m 142m 103m

Public Sector

PensionScheme

Unfunded

Non contributory

Unfunded

Non contributory

Funded

Contribut

Occupational

Schemes

1300

Assets US$ 900

Few None

IndividualSchemes

Few None None


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IN KENYA ASSETSUS $ 1.8 bn

20% of GDP

Occupational

Retirement

Benefits Schemes61%

National Social

Security Fund

38%

Civil Service

Pension Scheme

0%

Individual

RetirementBenefits Schemes

1%


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IN KENYA- MEMBERSHIP

Coverage = 15% of Labour Force

Civil Service

Pension Scheme

22%

National Social

Security Fund

67%

Occupational

Retirement BenefitsSchemes

11%

Individual

Retirement Benefits

Schemes

0%


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KENYAN PENSION REFORM AGENDA

To set out the objective of pensions as that of provision of econosecurity to beneficiary and dependants

Creation of strong links between contribution to and benefits fr

pension arrangement

Generation of long-term savings that will serve to develop financand capital markets that will in turn increase pension benefits

Ensure proper regulation and supervision of pension administratand investment of pension schemes funds by putting in place

necessary legal framework to safeguard workers benefits.

Reforms that put in place distinct separation of roles and checks abalances within the pensions sector


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ROLE & OBJECTIVES OF THE REGULATORYAUTHORITY (RBA)

RBA

Regulate and supervise establishment andmanagement of retirement benefits scheme

Protect the interest of members and Sponsof retirement benefits schemes.

Promote the development of the retiremenbenefits industry.

Advise the Minister for Finance on thenational policy to be followed with regardto the retirement benefits industry.

Implement all government policies relatingto the retirement benefits industry


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REFORM SUPERVISORY APPROACHTo initially enhance public confidence in Kenya pension sector, t

approach has been within a framework of prudential regulatiosupervision is therefore both proactive and reactive,

RBAs supervisory approach is consultative, and consistent and

line with international best practice. The supervision strategyimplemented by coordinating and undertaking supervisiactivities. The main activities conducted are:

1. Initial registration

2. on-site visits;

3. prudential consultations;

4. analysis of quarterly statistical returns lodged by funds

5. analysis of annual statistical data lodged by all funds;

6. specific analysis; and

7. reaction to whistle blowing


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THE REFORM ACT AT A GLANCE (II)

Schemes must ensure submission of quarterly contributioand investment reports.

There should be no assignments/attachment of membersbenefits for debt /loan, judgment or for any other form oimpropriety

Scheme rules should provide for immediate vesting omembers contributions and vesting of employers

contribution within a maximum of five yearsSchemes must ensure compliance with RBA InvestmenGuidelines


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NTERFACE BETWEEN TRUSTEES, MANAGEAND CUSTODIANS WITH REGARD TOINVESTMENTS

Managers

Custodians

Trustees

Develop the investment Policy

for managers appoint a registered manager

and custodian

sign agreements with

custodians and managers monitor the actions and

investments of the manager

and the custodian

evaluate the performance

of manager and custodian


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CURRENT INVESTMENT PORTFOLIO

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Cash Fixed

Deposit

Fixed

Income

Governemnt

Sec

Quoted

Equities

Unquoted

Equities

Offshore Property Guaranteed

Funds

Other

Holdin Max allowed


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INTERNATIONAL INVESTMENT PORTFOLI

8.1

35.8

11.4

30.9

2.1

11.7

4.9

19.6

34.2

7.0

26.5

7.8

4.7

22.7

53.1

1.9

11.1

6.5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Kenya Europe USA

Other

Offshore

Real Estate

Equity

Bonds

Cash &Deposits


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GROWTH OF PROFESSIONALLY MANAGEDINVESTMENTS

0

10

20

30

40

50

60

70

80

90

100

Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03

AssetsShsBillion

0

100

200

300

400

500

600

700

800

900

100

Assets Shs Bn Schemes under Management


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MARKET(KHS.BN) The Kenyan debt Market has over the years been dominated by govern

securities. The first corporate bond was in 1996.Shs

18136.5893.3839.2335.5659.2538.349.02TOTAL

8.556.81.11.050.270.540.82CORPORATE

1128.0386.5838.1334.5158.9837.88.2GOVERNMENT

22002200120001999199819971996


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GOVERNMENT DEBT INSTRUMENTS I The Kenyan government total public debt stood at 711 billion or

of the GDP at the end of 2003

301 billion, which is 29% of the GDP and 42% of the total publicis financed from the domestic financial markets

The key instruments for domestic borrowing by the governhave been treasury bonds and treasury bills.

Recently there has been a deliberate shift of emphasis fromterm borrowing in form of treasury bills to medium and longborrowing in bonds.

The upsurge in the bonds market is a very recent phenomenon gthat the government listed its first bond in the market in 1996.

This has by and large been made possible by the reforms withipensions industry

As a result the treasury bills rates are currently low


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GOVERNMENT DEBT INSTRUMENTS II

10100.0%100.0%100.0%100.0%TAL

0.0%2.9%4.7%5.4%thers

114.7%16.6%19.1%19.4%

on-interest bearing

asury Bills/ Bonds

0.6%0.7%1.0%1.6%ng-term Stocks

551.8%36.2%17.7%14.9%easury Bonds

232.9%43.6%57.4%58.7%easury Bills

2002200120001999

PERCENTAGES OF TOTAL DOMESTIC DEBT

-BILLS (2001 2004)


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BILLS (2001-2004)

Dec-01

Dec-02

May-03

Aug-03

Nov-03

Feb-04

May-04

Aug-04

Interest Rate


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ECURITIES BY PROFESSIONALLY MANAGEPENSION FUNDS

De c 2001 Ma r 2002 J un 2002 S e p 2002 De c 2002 Mar 2003 J un 2003 S e p 200


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NSION FUNDS AND THE CAPITAL MARKETEncourage greater saving for retirement thereby increasing t

country's savings rate from the current 8% to over 25% of Gleading to capital deepening and therefore accelerate econogrowth

Spur the expansion of the country's capital markets throuprudent professional investment of scheme funds. The pensioindustry in Kenya constitutes about 10% of the mark

capitalization of the Nairobi stock Exchange.Provides a base for the necessary shareholders activism to ensucapital markets regulations that impact on corporate governan

practices.The development of pension funds therefore influence capimarkets in three direct ways being through; enhanced investme

introduction of new regulations in capital markets with impactcorporate governance practices and thorough monitoring of conflof interest issues.


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The East Asian tigers achieved their double digit growths as result o

increased savings and investment at levels in excess of 30% of theiGross Domestic products, notably Singapore and Taiwan.

In Latin America the boost to savings and use of the funds in economi

infrastructure projects has been of great benefit to the Chilean economsince the outset of pension reforms in Chile.

It is instructive to note that South Korea per capita income in 1969 wa

lower than that of Kenya at the time. Today as a result of harnessindomestic resources and mobilizing saving, South Korea is a newldeveloped country while Kenya is still considered at best to bdeveloping.

While the classical theory that savings equals investment has long beedisputed, it is indeed true that in most countries there is a very closcorrelation between the two and the level of capital market

development

NSION FUNDS AND THE CAPITAL MARKET


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Provoke development of new capital market instruments throuthe diversification of pension schemes investment portfolio

Promote Foreign direct investments, thereby increasing -diversity and volumes - the supply of capital market instrument

Increase asset base of the retirement benefits industry throu

encouraging adoption of prudent management principles; thereincreasing the demand for capital markets products

Enhancement of the development of a yield curves within t

fixed income segment of the capital market by providing loterm funds

NSION FUNDS AND THE CAPITAL MARKETS


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Promote capital market integration by ensuring increparticipation of small scale investors through their pensi

schemes.

Acceleration of financial innovations

Finally an improved pension industry demand shift in emphaaway from development of banks per se, to development of capi

markets and other financial institutions along side banks

NSION FUNDS AND THE CAPITAL MARKETS


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FUTURE REFORM AGENDANSSF compliance and reform.Increase retirement benefits coverage through publeducation campaigns and lobbying government fgreater incentives.

Reform of Civil Service Scheme into a funde

contributory scheme and bring it under the RetiremeBenefits Act:

Collaborate with African and international institutionsas to ensure Kenyas retirement benefits industmaintains best international practice


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THANK YOU;

OPEN DISCUSSION!

Website: www.rba.go.keWebsite: www.rba.go.ke

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