The Kenya Association Insurers is breathing fire over a recommendation to freeze interest payment on pension assets for two years.
In a statement, the association claim the proposal is not well thought and apart from affecting payment to those, retiring in the next one to two years would see some pension schemes winding up.
This is in reference to a proposal made by the task force and submitted to The Insurance Regulatory Authority proposing that the government could freeze interest payments on Pensions Assets for a period of one to two years.
“Any decision to defer interest payments will require the written approval of each scheme’s board of trustees which may ultimately require an approval by scheme members through Special General Meetings. This is not a decision where Insurance companies may have discretion,”
“Further, guaranteed funds are invested in a pool and therefore all trustees of schemes would have to agree as the assets are held collectively for the entire pool.”
Arguing on the challenges that would make the proposal difficult to implement, the association says scheme funds belong to scheme members who appoint scheme trustees who then become the legal owners of the scheme funds and hold the funds on a fiduciary basis for the benefits of the members.
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It concludes that the Insurance Company would therefore have no authority at all in relation to the proposed moratorium on interest payments on pension scheme funds.
“AKI would like to submit its response to this proposal by looking at it in a two-pronged way; the Challenges and the Implications of the proposal.”
Challenges
1. Authority of Board of Trustees
Starting a retirement benefit schemes in Kenya is not mandatory but voluntary. Employers voluntarily start retirement schemes for the benefit of their employees. The scheme funds belong to scheme members who appoint scheme trustees who then become the legal owners of the scheme funds and hold the funds on a fiduciary basis for the benefits of the members.
Scheme Trustees then appoint various service providers to manage the scheme. Insurance companies are service providers contracted by Scheme Trustees to invest and manage the scheme funds in a guaranteed fund.
The funds belong to scheme trustees and members and the insurance company can only act on the express directive of the scheme trustees.
The Insurance Company would, therefore, have no authority at all about the proposed moratorium on interest payments on pension scheme funds.
Any decision to defer interest payments will require the written approval of each scheme’s board of Trustees which may ultimately require approval by scheme members through Special General Meetings.
This is not a decision where Insurance companies may have discretion.
Further, guaranteed funds are invested in a pool and therefore all trustees of schemes would have to agree as the assets are held collectively for the entire pool.
2. Liquidity and funding needs of the scheme.
Schemes typically rely, to a large extent, on interest payments from government bonds for liquidity to pay out retirement benefits to retiring members as well as redundancy payments and other routine payments.
Other investment vehicles such as properties and equity market investments cannot be relied on for payment of regular obligations because of their illiquid nature and volatility of the equities especially during this period of Covid-19 Pandemic.
Unfortunately, in the current COVID-19 environment, the increased retrenchment of workers as a result of low production due to shrinking markets has affected pension schemes.
Regular pension contributions have seriously been disrupted because many scheme sponsors are unable to continue remitting contributions.
The proposed deferment of interest payments would seriously affect the liquidity of schemes and will lead to many schemes winding up because of the inability to meet their obligations of paying members benefits when they fall due.
This will greatly affect scheme members who will be retiring within the stated period.
3. Annuity Funds are invested in Government bonds. Annuitants are paid their regular pension payments from the interest earned by the bonds. Deferring interest payments on existing government bonds would greatly affect the insurance company’s obligations to retirees who are drawing their monthly pension payments from existing annuity contracts.
Implications
1. Trustees of all the registered schemes would have to give written authorisation for the freezing of interest on scheme assets invested in government bonds. This is a decision that would require them to engage the individual scheme members for their approval.
Currently, there are about one thousand, three hundred schemes and also over a thousand schemes in Umbrella Schemes.
2. The schemes would suffer liquidity problems and would be unable to honour their obligations of paying retiring members their benefits within the statutory 30 days period set out in the Retirement Benefits Act and Regulations. This is likely to lead to massive scheme winding up.
3. Insurance companies give a guarantee on capital and a minimum rate of return to schemes invested in guaranteed funds. Guaranteed funds invest heavily in government bonds because of the security they provide to meet the guarantee given to deposit administration policy holders.
Deferring interest on Government bonds will force insurance companies to immediately amend the Deposit Administration Policies to remove any form of guarantee on both the Capital and declared rate of return.
4. In 2019, RBA allowed schemes to transfer out of DA within one year. What happens if a scheme decides to transfer and some of the interest due to the fund is still held up by the government. Who will take responsibility for this liability? Is it the scheme or the life office?
5. Purely from economics point of view, a request for government to defer payment of interest on its debt papers would mean domestic debt restructuring which may have
unintended consequences to the economy far detrimental than the benefits that would accrue from such measures. Was this considered?
This would also result in a downgrade of the government global credit rating impacting on subsequent bond issues on international markets.
6. This proposal may negatively impact the capital of life offices where bond assets supporting the DA funds are impaired due to postponement of interest on bonds.
This is due to the fact that it is not yet clear if these instruments will be trading on the basis of the new terms and whether the government of Kenya will pay interest for the delayed period. Clarity needs to be obtained from the life offices’ auditors on the treatment of this proposed deferment.
7. Deposit Administration class is the largest class of business in life the insurance business. Any negative effect on this class of business could lead to a lack of public trust on other long term products, the stability of life insurance companies and ultimately the insurance penetration.
In conclusion, an in depth impact analysis and position paper must be done first to properly evaluate the impact of such a decision not only on the pension and insurance industry but the whole financial sector.
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