NAIROBI, Kenya -- The government is on the brink of introducing radical reform to the 120 billion Kenyan shilling ($1.6 billion) pensions industry.
The new regulations, to be published this month and expected to be passed into law at the end of the year, will require pension funds to appoint an actuary, a professional asset manager and a custodian independent of the money manager.
The new law also will set limits on all asset classes and is expected to put a 10% limit on international investing and a 60% limit on holdings of domestic fixed income.
Industry sources further expect the regulations to:
* give fund trustees greater fiduciary responsibilities and make them accountable to plan participants;
* force trustees to have the pension fund audited every year;
* require trustee boards to include at least one employee representative, and issue statements to participants every year.
The expected reform is attracting a host of international custodians and money managers hopeful of taking a slice of what is expected to become a $5 billion to $10 billion market.
"There is a yearning need for professional fund management in Kenya," said Charles Ogalo, managing director for Nairobi-based Genesis Kenya Investment Management Ltd.
Most of Kenya's 1,400 pension funds now have in-house managers with little investment experience, and there is no segregation between the money manager and the custodian. Once the new legislation comes into force, sources expect there to be a shift to external fund management.
South African money managers Old Mutual Asset Managers and Stanbic Investment Management Services recently set up shop in Nairobi, and compete with Barclay Trust Investment Management Services Ltd. in Nairobi and emerging-market specialist Genesis Kenya, which has been actively managing Kenyan assets since 1996.
All four money managers plan early next year to set up competing pooled investment vehicles for pension funds that are too small to be managed as segregated funds, those averaging 400 million to 500 million Kenyan shillings.
Both SIMS' parent, Stanbic Bank Kenya, and Barclay Trust dominate Kenya's custody operations, but local sources say international banks with local branches such as ABN AMRO Bank NV, Amsterdam, Netherlands, are considering applying for licenses to set up custody operations in Kenya. An ABN AMRO spokesman confirmed the group had a banking license in Kenya, but said there were no concrete plans to launch custody services there.
Even employee benefit consultants such as South Africa's Alexander Forbes Financial Services Pty. Ltd., Johannesburg, have been considering new business opportunities in this east African country.
Until now, Kenya's pension industry has been completely unregulated, leading to widespread fear of mismanagement in the 60 billion Kenyan shilling state-run National Social Security Fund in particular.
Sources close to the Retirement Benefits Authority, the government body drawing up the new legislation, say growing concern over management of the NSSF was one of the main reasons the government decided to introduce better regulation of the pension funds.
"Because trustees were not accountable there was a lot of mismanagement in other pension funds besides the NSSF," said Wanjiru Kirima, general manager at Stanbic Investment Management Services East Africa Ltd.
Kenyan pension funds invest less than 5% of their assets internationally, said Jonathan Stichbury, chief executive of Old Mutual Asset Management Kenya. But he would like to see Kenyan funds able to invest at least 10% abroad as this would allow them to diversify their portfolios and reduce some of the market risk in the fund.
"Offshore investment offers the opportunity to improve real returns as the Kenyan currency has been relatively weak of late," Mr. Stichbury said.
But an upper limit on offshore investment comes as no surprise, as one of the objectives of the new pension law is to stimulate domestic economic development, Ms. Kirima said.
The typical Kenyan pension fund has up to 50% of its assets in government Treasury bills, which have yielded more than 20% annually over the last five years, Mr. Stichbury said.
Kenyan pension funds also have large exposures to property, typically investing up to 40% of their portfolios in this asset class, and as a result many funds have limited exposure to domestic equities. Mr. Stichbury is concerned many of the property assets are overvalued.
It is unclear what limits will be imposed on equity and property investments.
Trustees under pressure
The new regulations will put increased pressure on pension fund trustees to ensure the funds are managed properly and both SIMS and Genesis have started running trustee workshops.
Banks offering both custody and asset management will be forced to separate these services, and might struggle to maintain market share in a more competitive environment, according to Mr. Ogalo.
He expects certain multinationals will be required to outsource their fund management and expects to pick up new mandates as a result. "I would be quite comfortable managing 20 billion Kenyan shillings in assets, and that is my ambition over the next five years," he said.
Genesis has third-party assets under management of 1.4 billion shillings, split between domestic equity and fixed income.
Offices in Nairobi
Both Old Mutual Asset Managers and SIMS opened offices in Nairobi in early 1998. OMAM Kenya has 4 billion Kenyan shillings in assets under management invested offshore and in domestic equity and fixed income, according to Mr. Stichbury. The offshore assets are managed by Old Mutual Asset Managers (UK) Ltd.
SIMS has some 860 million Kenyan shillings in assets under management, Ms. Kirima said. SIMS is owned by Stanbic Bank, which also runs a custody operation in Kenya, but the two businesses operate between Chinese walls, she added.
Barclay Trust Investment Management is believed to have assets under management in Kenya of 20 billion shillings.