Pension funds are poised to experience a surge in earnings for the financial year ending December 31, 2023, driven by industry-wide adjustments in the accounting and valuation of bonds.

This is after the Retirement Benefits Authority (RBA) issued directives that are expected to reshape how pension funds assets and report the value of their bond portfolios.

The directive from the RBA mandates pension funds to value bonds held to maturity using the amortised cost method, while bonds held for sale are to be valued using the fair value method.

This shift in valuation practices is aimed at providing greater transparency and accuracy in reporting while aligning the accounting methods with the specific characteristics of each category of bonds.

Member’s accounts

“Pursuant to the amendments, net returns declared and credited to the member’s accounts shall exclude both unrealised gains and losses from changes in the value of the instrument,” said RBA in a press statement.

A notable advantage of this directive is evident in how it will assist fund managers in dealing with bonds held to maturity.

By using the amortized cost method, fund managers can avoid declaring losses attributed to inflation, ensuring a more realistic representation of the bonds’ value, given their intended maturity date.

The timing of these changes is crucial, given the backdrop of rising inflation since the previous year, which has adversely impacted the value of bonds.

Income generated by bonds has struggled to keep pace with the eroded purchasing power caused by inflation.

As a result, pension funds have faced challenges in accurately reflecting the true value of their bond holdings, potentially leading to misleading financial statements. “There has been an outcry in the sector with pension funds reporting depressed returns. For instance, if someone will be in a scheme for 20 years. The scheme declares a loss yet if he were to stay at the maturity of the bond he will get the true value,” observed an RBA official who is not allowed to speak to the media told Business Hub on phone.

The industry-wide adoption of these revised accounting practices is expected to provide pension funds with a more accurate depiction of their financial health, instilling confidence among stakeholders.

Fund managers, in particular, are optimistic about the positive impact on their bottom line as they navigate the challenges posed by inflation and ensure a more precise reflection of the value of bonds in their portfolios.

Fair value losses

The size of Kenya’s pension fund assets rose by Sh127 billion last year to Sh1.7 trillion with a total of over 1,300 fund managers.

The growth in overall assets under management this year is in contrast with the 2.1 per cent contraction (to Sh1.515 trillion) seen in the first half of 2022, which was due to fair value losses on property, equities and government bonds.

The changes having gone through public participation have been approved and released by the National Treasury. –John Otini