THE KENYAN PENSION FUND MARKET

Presentation by: Nzomo MutukuManager, Research & Development Retirement Benefits Authority

Stanbic Bank, International Investors Seminar,Nairobi January 29, 2007

OUTLINE

This presentation will cover:

! Retirement benefits scheme regulations;

! Retirement benefits scheme investments;

! Future opportunities; and,

! A Question and Answer session

RETIREMENT BENEFITS SCHEME REGULATIONS

All retirement benefits schemes in Kenya must:

! Be registered with RBA;

! Appoint a fund manager;

! Appoint a custodian (segregated funds); and,

! Appoint a Board of Trustees to manage scheme affairs.

In order to eliminate conflict of interest, these institutions must be independent companies.

RETIREMENT BENEFITS SCHEME REGULATIONS - II

To ensure transparency in scheme management, schemes are required to:

! Keep and submit annual accounts to RBA;

! Submit an investment policy at least once in every 3 years;

! Submit contribution returns within 10 days of the end of each quarter; and,

! Submit investment returns after every quarter.

INVESTMENTS

Each scheme should submit an investment policy that has been prepared by Trustees with assistance of an investment advisor. The policy should:

! Adhere to RBA investment guidelines;

! Give the scheme’s investment objectives for the relevant period;

! Consider the scheme’s age profile;

! Specify the fund manager’s discretionary limits; and,

! Be revised every 3 years.

INVESTMENTS GUIDELINES

100Guaranteed funds5Other investments

30Immovable property15Offshore investments

5Unquoted equity70Quoted equity70Government securities30Fixed income (private)30Fixed deposits

5CashMAXIMUM (%)MAXIMUM (%)INVESTMENT CLASSINVESTMENT CLASS

OTHER INVESTMENT GUIDELINES

" Allowance for temporary violations of the maximum

" Max of 30 percent of fund in a particular equity

" Limit of 3% investment in the sponsor (10% for quoted equity of sponsor)

" Investment in “any other asset” requires prior approval of the Authority following application by the scheme.

" Offshore investments limited to bank deposits, government securities, quoted equities, rated corporate bonds and offshore collective investment schemes reflecting these assets.

GROWTH IN ASSETS UNDER MANAGEMENT

Pension Assets Under Management

-

50,000

100,000

150,000

200,000

250,000

Q42

001

Q12

002

Q22

002

Q32

002

Q42

002

Q12

003

Q22

003

Q32

003

Q42

003

Q12

004

Q22

004

Q32

004

Q42

004

Q12

005

Q22

005

Q32

005

Q42

005

Q12

006

Q22

006

Period

Val

ue o

f Ass

ets

(KSh

s M

illi

on)

0

200

400

600

800

1000

1200

Sche

mes

Und

er M

anag

emen

t

Total

Schemes

REASONS FOR GROWTH

Growth of the industry has been influenced by:

! Increasing awareness of the need to save for retirement and of rights of scheme members;

! Trustees’ awareness of their roles and responsibilities;

! Research and best international practice based pension reforms geared at development of the industry;

! Professional management of assets;

! Independence of service providers, which increases accountability;

KENYA’S PENSION FUND ASSET ALLOCATIONS

0%

20%

40%

60%

80%

100%

Q22

002

Q32

002

Q42

002

Q12

003

Q22

003

Q32

003

Q42

003

Q12

004

Q22

004

Q32

004

Q42

004

Q12

005

Q22

005

Q32

005

Q42

005

Q12

006

Q22

006

Period

Ass

et A

lloc

atio

ns

Cash Fixed Deposits Fixed Income Government SecuritiesQuoted Equity Unquoted Equity Offshore Investments Immovable PropertyGuaranteed Funds Other Investments

UK PENSION FUND ASSET ALLOCATIONS

COMPARISON OF ASSET ALLOCATIONS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UK KENYA

Other Investments

Guaranteed Funds

Immovable Property

Offshore Investments

Unquoted Equity

Quoted Equity

Government Securities

Fixed Income

Fixed Deposits

Cash

COMPARISON UK AND KENYA

! UK – increase in property and offshore decrease in UK fixed income

! Kenya – Increase in equity, decrease in property and deposits.

! Maximum recommended property investment curtailed by:

# Incongruent property pricing market in Kenya

# Relatively dormant property market

! Kenyan-based investment strategies for the majority of Trustees

AREAS OF OFFSHORE INVESTMENTS

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Shillings, Billion

Collective Investment Schemes

Quoted Equities

Bank Deposits

Government Bonds

Corporate Bonds

As at December 2005

AVERAGE SCHEME PERFORMANCE

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

AFCASS M in AFCASS M ax AFCASS Average Inf lat ion 1-year Tbond Rate

Source: Alexander Forbes Financial Services Scheme Survey

Annual Return to September 2006

ASSET CLASS PERFORMANCE - EQUITY! Increasing holdings due to the market’s current bullish

run

! Increased confidence in the market

! Response to the vibrancy of the market through numerous IPOs, splits and rights issues over the past 1.5 years – Kengen, E. A. Cables, Diamond Trust etc

ASSET CLASS PERFORMANCE – GS & FI

! Increasing investment in Government Securities with the introduction of longer-term bonds

! Declining treasury bill rates due to increasing liquidity

SECURITIES YIELD CURVE

Source: Central Bank of Kenya

EXPECTED OPPORTUNITIES - EQUITY

Increasing investment in this asset class as:

! Investors’ confidence continues to grow;

! Pension assets continue to multiply;

! New schemes are registered; and,

! New stocks are introduced into the Kenyan, Ugandan and Tanzanian stock markets

EXPECTED OPPORTUNITIES – GS & FI

! Increased investment as more and longer-term government bonds are introduced;

! New investment opportunities in government securities such as infrastructure bonds

! Introduction of new corporate debt instruments on the public market

EXPECTED OPPORTUNITIES - PROPERTY

Increased activity in the property market with:

! Introduction of the greatly anticipated asset backed securities and property unit trusts;

! Development of the Kenya Real Estate Index (KREX), which is expected to lead to more congruent pricing of property

EXPECTED OPPORTUNITIES – OTHER INVESTMENTS

! Greater investment in this category as more companies issue private debt instruments; and,

! New products are introduced due to the increasing need for investment opportunities for institutions

CONCLUSION

A promising future for the Kenyan Retirement Benefits Sector due to:

! Increasing awareness of the need to save for retirement;

! Focused supervision ad regulation of the sector; and,

! Continued reform aimed at developing the sector.

THANK YOUTHANK YOU

www.rba.go.kewww.rba.go.ke