Kenya pension schemes are gearing up to undertake major infrastructural work, taking advantage of a growing need for capital both by government and the private sector.
While most of the capital generated in Kenya for infrastructural development is often obtained in the form of concession loans, pension schemes have been utilized mainly in real estate as well as government bonds.
However, under a new outfit called Kenya Pension Fund Investment Consortium (KEPFIC) plans are underway to form a partnership with pension funds in the United States, South Africa and the United Kingdom to facilitate KSh25bn (US$229.6 million) in investments in infrastructure, real estate and affordable housing over the next four years.
The US through Kenya’s Ambassador Kyle McCarter, together with representatives from the World Bank and American advisory firm MiDA Advisors, have launched the outfit. KEPFIC will enable pension schemes to jointly make sustainable long-term infrastructure and alternative asset investments in the region.
The consortium, supported by the US government through USAID’s Kenya Investment Mechanism, Power Africa, the World Bank Group, and MiDA Advisors (in partnership with USAID INVEST), provides an opportunity for beneficial collaboration between Kenyan and American pension funds and other institutional investors.
“The United States government is pleased to support a Kenyan institution that presents an innovative approach to infrastructure investment in Kenya as it follows recent changes to the Retirement Benefits Authority guidelines allowing pension funds in Kenya to invest up to 10% of their assets in infrastructure, potentially unlocking over KSh100 billion ($917 million),” said Ambassador McCarter.
“Launching KEPFIC is a huge milestone, not just for pension schemes, but also for the country,” said Sundeep Raichura, KEPFIC Board Chairperson. “With national and county governments facing a growing budget deficit and competing needs, pension funds through KEPFIC will be well-positioned to help bridge the infrastructure funding gap.”
Infrastructural funding gap in Kenya
Kenya’s annual infrastructure funding gap currently stands at more than KSh200 billion ($1.8 billion) presenting private investors with numerous opportunities in sectors including power, transportation and urban development.
Pension funds are the ideal funding partners for infrastructure projects due to their longer return on investment horizons and significant role in financing infrastructure projects in many countries, including the United States. However, individual pension funds in Kenya frequently lack the capacity to venture into big-ticket infrastructure projects on their own.
KEPFIC offers a solution to this challenge. By pooling resources from individual funds, KEPFIC intends to mobilize more than KSh25 billion ($229 million) over the next five years for infrastructure investment.
KEPFIC’s membership includes highly regarded pension funds such as the Kenya Revenue Authority Staff Pension Scheme, Safaricom Staff Pension Scheme, KenGen Staff Retirement Benefits Scheme, and Kenya Pipeline Company Retirement Benefits Scheme; the consortium’s investment pipeline includes opportunities across the energy, transport and telecommunication sectors.
Last year, Kenya hosted over 30 representatives of major US pension and asset management funds on an initial mission to evaluate the investment potential and opportunities in infrastructure projects. The US delegation was led by Mobilizing Institutional Investors to Develop Africa’s Infrastructure (MiDA), a partnership between the US National Association of Securities Professionals (NASP) and the United States Agency for International Development (USAID) to increase private sector capital in infrastructure investments in Sub-Saharan Africa.
During the mission, executives from the US pension and asset management funds will discuss opportunities with KEPFIC and its membership of 12 Kenyan leading fund managers, which currently manage KSh200 billion in assets.
Projects to be financed under this partnership would include roads, water and sanitation, energy and affordable housing—an initiative that will go a long way in supporting achievement of the Big Four Agenda for national development. Since 2017, MiDA members have closed on new deals totaling close to US$800 million (KSh80.6 billion) focusing in Africa and other emerging markets.
The World Bank and NASP signed a partnership in 2017 to build the capacity of Kenyan institutions in understanding the risks, requirements, and rewards for private sector investments in infrastructure through a series of workshops held in Nairobi.
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The Retirement Benefits Industry plays a huge role in the economy. According to the Organization for Economic Co-operation and Development (OECD) in 2017, assets in Retirement Benefits Schemes totaled 50.7% of GDP in the OECD countries and 19.7% of total GDP in the non-OECD jurisdictions.
In Kenya, the Retirement Benefits Assets as a percentage of GDP stood at 13.4%, compared to more developed markets like the US at 84.1% and the UK at 105.3%. Over the last decades, there have been reforms and education initiatives by the Retirement Benefits Authority (RBA) to educate people on the importance of saving for retirement.
The industry has registered great growth from both member contributions and good performances leading to the assets under management growing to KShs1,166.6bn in 2018, from Kshs 287.7bn 10 years ago, translating to a compound annual growth rate of 14.3% over the last 10 years.
According to IFC, South African Retirement Benefits Schemes whose combined Assets Under Management amount to $500.0bn take up roughly 40% of the assets on the Johannesburg Stock Exchange. In Kenya, local currency bill and bonds prevail—this is despite the regulation allowing for a 10% and 30% allocation to Private Equity and REITs respectively.
Available data indicate that few pension funds in Africa are relatively large. When ranked by their assets as a share of GDP, pension funds in South Africa (87.1 percent), Namibia (76.6 percent), and Botswana (47.3 percent) rank among the four largest in a sample of 38 emerging economies. Kenya (18.3 percent), which has the fourth-largest African pension system compares well with the average sample size of 17.0 percent of GDP. The relatively small size of the Nigerian pension assets (7.8 percent) compares favorably to pension assets in a number of emerging markets such as India (0.3 percent).
