Pension schemes get approval to invest in derivatives

Pension schemes can now invest in exchange traded derivatives under fresh rules which coincide with the licensing of Kenya’s first ETF contract set to be listed on the Nairobi bourse.

The Retirement Benefits Authority has expanded the investment classes for pension schemes to also include income-earning real estate securities (Reits), private bonds and commercial papers approved by the Capital Markets Authority.

These new asset classes are now eligible for a slice of Kenya’s Sh1 trillion pension industry after Treasury secretary Henry Rotich through the Finance Act 2016 introduced a raft of amendments affecting retirement schemes.

The capital markets regulator on Friday announced that it had approved South African firm NewGold Issuer (RF) Ltd to list at NSE a commodity exchange traded fund whose underlying asset is gold. “The Retirement Benefits (forms and fees) Regulations investment guidelines… explicitly include real estate investment trust (Reits), exchange traded derivatives, and the separation of listed and unlisted corporate bonds and commercial paper approved by the Capital Markets Authority,” RBA said in a statement.

“Retirement schemes can now invest in all exchange traded derivatives contracts and all listed Reits incorporated in Kenya as long as they are registered with CMA.”

RBA chief executive Edward Odundo said the new investment guidelines are meant to unlock new opportunities for pension schemes with a view to generate higher returns to retirees.

The pensions’ industry regulator only allows schemes to invest their funds in asset classes spelt out in the gazetted regulations. The rules also spell out investment limits per category, to avoid over exposure. The ETFs and Reits will for the time being be included under the exposure cap for equities (which stands at 90 per cent of total assets).

Exchange traded derivatives are defined as securities which are contracts and may involve assets such as stocks, currency, commodities, and real estate. For example, the NewGold exchange traded fund will track the price of gold. It is a secondary listing given the security primarily listed on the Johannesburg Stock Exchange in 2004. Upon listing of NewGold at the Nairobi bourse, for example, pension schemes can now bet on the prices of gold to rally and grow the value of the fund.

Kenya’s sole listed real estate unit dubbed Stanlib Fahari listed on the NSE in November 2015, raising Sh3.6 billion against a target of Sh12.5 billion.

The poor uptake of Stanlib’s Fahari i-Reit was followed by the August 2016 collapse of Fusion Capital’s development financing real estate unit which sought to raise Sh2.3 billion to build a mall in Meru.

ABC Bank in mid-2014 raised Sh1 billion via an unlisted corporate bond, while ARM Cement last year shelved plans for a Sh10 billion private bond and opted to a sell 40.66 per cent stake to the Commonwealth Development Corporation (CDC Group).

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