Budget plan on pensions not strong enough, says firm

Published on 18/06/2009

By Luke Anami

A proposal by Finance Minister Uhuru Kenyatta for pension schemes that receive statutory contributions to exclusively invest in Government securities has been criticised.

Alexander Forbes, a leading provider of financial services, said the decision by Kenyatta overlooks the liabilities of the such schemes.

“The proposal disregards the need to ensure that members’ funds are protected against inflation through investment portofolios designed to secure real rates of return in excess of inflation,” said Mr Sundeep Raichura, the Managing Director of Alexander Forbes Financial services said.

In his 2009/10 Budget, Uhuru proposed to amend the Retirement Benefits Act to provide for the schemes — such as National Social Security Fund (NSSF), Local Authorities Retirement schemes, and the proposed new funded scheme civil servants — to invest only in Government securities and infrastructure bonds issued by public institutions.

“The unintended consequence would be that members of such schemes would have insufficient funds when they retire,” he said.

Raichura warned that the proposal could have far reaching ramifications for scheme members, capital markets and the economy.

“Through this amendment, the Government would effectively create demand for its own securities and bonds and could in doing so influence the interest rates, thereby reduce its borrowing costs and translate to low returns for members of retirement schemes,” he said.

He cautioned that using retirement savings as a ‘pawn’ although unintentionally is unlikely to be consistent with the objective of safeguarding the savings of the pensioners.

“Pension schemes such as NSSF should be allowed to diversify their investments if they so wish instead of tying them in Government securities,” Raichura said.

The amendment is likely to affect the proposed superannuation scheme for civil servants.

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