Pension Assets increase by 25.9 billion in 2015

Transcription

1 JUNE 2016 VOLUME 6 ISSUE 1 Pension Assets increase by 25.9 billion in 2015 Eldoret International Show Inside Industry Brief Report Life Begins at Retirement Capital markets to craft pension s PE investing rules The power of 1%

2 Service Delivery Charter Vision A dynamic and secure retirement benefits sector Mission To develop and safeguard the retirement benefits sector in Kenya through excellent service delivery Quality Policy Developing and Safeguarding the Retirement Benefits Sector through: 1. Commitment to continued excellence in service delivery. 2. Upholding Professionalism, Integrity and sensitivity to stakeholder interests. 3. Operating a quality management system within the framework of ISO 9001: 2008 standards. 4. Continual improvement of the quality management system. Core Values 1. Firm and Fair 2. Transparency and Accountability 3. Innovation and Dynamism 4. Proficiency in quality service delivery 5. Integrity Service and Standards We aim to: To ensure that people are aware and have access to channels for saving for retirement and are not subject to any form of discrimination. Educate the public, trustees, members and sponsors on their rights and responsibilities Protect the interests of members and sponsors Supervise the industry in accordance with the Retirement Benefits Act; Contribute to the development of the industry through research and from inputs received from our stakeholders through public participation. Promote and support the welfare of people in retirement. Our standards Identification Whenever you contact us, the person you deal with will give you his or her name. When you meet a member of our staff, they will wear a name badge. Our Service 1. Complaint Handling When you file an official complaint or dispute with regards to the running of the retirement benefits scheme, we shall acknowledge your complaint within 2 working days and aim to reply within 10 working day. These services will be offered free of charge. 2. Training This comprises member education, trustees training and pre-retirement training. We aim to reply to training requests within 7 working days. Our training services are free of charge. 3. Registration and Licensing The Authority registers retirement benefits schemes and also issues licenses to the service providers of the schemes. Schemes and Service providers are required to submit the relevant application forms for registration and licensing, which can be downloaded from our website. The cost of licensing of the service providers ( Fund Manager, Custodian and Administration is Ksh. 50,000 each). Registration process is required to be completed within 90 days upon receipt of all documents. 4. Enquiries on Retirement Benefits Industry When you phone us: We aim to answer calls and enquiry lines within 3 rings. If we cannot deal with your enquiry immediately, we will arrange to return your call at an agreed time. When a client visit our offices If you come without an appointment, we will try to see you within 10 minutes. If you have an appointment, we aim to see you within 5 minutes of your appointed time. Other arrangements If you cannot come to our offices, in certain circumstances, we can arrange to meet with you at your convenient place and time. 2 When a client writes to us When you contact us by letter, fax or e- mail, we will reply to any request for information within seven working days from the date we receive your communication. We shall inform you in good time if we cannot deal with your letter, fax or e- mail fully within 7 working days. Addressing Complaints referred by the Commission on Administrative Justice Acknowledgement of correspondence: s: within 2 working days. We aim to respond to complaints within 10 working days. Commitment to Courtesy and Excellence in Service Delivery Any service that does not conform to the standards herein or any officer who does not live up to the commitment of courtesy and excellence in Service delivery should be reported to: 1. The Chief Executive Officer Retirement Benefits Authority 14 th Floor, Rahimtulla Tower, Upper Hill Road P. O. Box Nairobi, Kenya Telephone: info@rba.go.ke Complaints: complaints@rba.go.ke 2. The Chairman The Commission on Administration of Justice Office of the Ombudsman 2nd Floor, West End Towers Waiyaki Way, Westlands P. O. Box Nairobi, Kenya info@ombudsman.go.ke Complaints: complaints@ombudsman.go.ke OUR SERVICES ARE FREE

3 Message From The CEO What s Inside 3 Message From The CEO Industry Performance Report 6 Capital markets watchdogs to craft pension s PE investing rules I take this opportunity to welcome you to the June 2016 edition of The Pensioner. There is a lot of optimism in the country. Last year we witnessed a remarkable growth in retirement benefits assets. Returns from retirement funds grew by 6.8 Billion a 0.8 percent rise of assets under management from Kshs Billion reported in June Over the one year period the total Industry assets grew by 3.3 percent, which was a 25.9 billion increase for a turbulent 2015 characterized by significant currency instability and an aggressive bout of monetary tightening. Also during the first half, we saw the introduction of new regulations expanding pension scheme asset classes by allowing pension schemes to invest up to 10 per cent of their assets in private equity funds and venture capital funds as licensed by the Capital Markets Authority (CMA). CMA expects to finalise the regulations on licensing of private equity funds by the end of the year, paving the way for pension schemes to invest freely in the sector. As we embark on the second half of 2016, I am encouraged by the rise of alternative investments such as REIT s, which are more liquid compared to direct real estate investments. This means that industry players have an opportunity to achieve the kind of return and diversification that they cannot afford to miss in order to keep their promises to the retirees. The industry has seen the development of new innovative products in the recent past. I am encouraged by the introduction of new tailor-made products by industry service providers, like the post-retirement health insurance. These new products will encourage greater pensions savings uptake and reduce the financial obligations of the Government and family members who would otherwise be required to take care of retirees whose retirement benefits are not sufficient enough to afford them proper health care in retirement. As we begin a new financial year, we look forward to consolidating the gains we have made as we move towards building a stronger future. I wish you a happy reading. 7 Bringing on Alternative Investments at the center of Alexander Forbes Annual Retirement Conference 8 What s New 10 Life Begins At Retirement 12 Pictorial 13 The power of 1% Upcoming Events: Intercontinental Hotel, Nairobi Retirement Training Seminar 27th May 2016 Intercontinental Hotel, Nairobi Retirement Training Seminar 24th June 2016 The Pensioner is Published By: Dr. Edward Odundo, Ph. D., MBS 3 Corporate Communications Department Retirement Benefits Authority P.O. Box Nairobi Kenya Telephone: communications@rba.go.ke

4 2015 PENSION INDUSTRY PERFORMANCE REPORT Pension Assets increase by 25.9 billion in 2015 I n the half -year period, from June to December 2015 the assets under management have grown by 6.8 Billion a 0.8 percent rise of assets under management from Kshs Billion reported in June However, over the one year period the total Industry assets have grown by 3.3 percent from Billion reported in December 31st 2014 to Kshs billion as at December 31st This is a 25.9 billion increase for a turbulent 2015 characterized by significant currency instability and an aggressive bout of monetary tightening. Specifically the bourse market has been fluctuating in value with most of the counters recording poor returns and some of the corporate bonds not performing as expected. Out of the Kshs billion, fund managers and insurance issuers held majority of the assets at Kshs billion, Kshs.38.2 billion internally administered by the National Social Security Fund (NSSF) and an additional Ksh billion of property investments that are directly managed by trustees. The assets under fund management include Ksh billion of NSSF funds managed by 5 contracted fund managers. The internal assets that are managed by NSSF are in immovable property, that is either commercial or residential, unquoted securities and other assets. Schemes continue investing heavily in traditional assets such as government and quoted securities with the two assets contributing to 52.7 percent of the total assets under management. Other assets that schemes have continued to invest heavily on are property and guaranteed funds representing 18.5 percent and 12.2 percent respectively. The year also saw the introduction of a new asset class category, Private Equity and venture capital, which fund managers invested into at Ksh.170 million of the total assets under management. The table below provides more details on how investments were made in the different asset classes. 1 Government Securities Overall Industry Investment Portfolio (Billions) June 2014 December 2014 June 2015 December 2015 Change Dec Dec Kshs % Kshs % Kshs % Kshs % % Change Quoted Equities Immovable Property Guaranteed Funds Fixed Income Fixed Deposits Offshore Cash Unquoted Equities Private Equity U Classified/Others TOTAL

5 2015 PENSION INDUSTRY PERFORMANCE REPORT management as at December However, there has been a gradual decline of total investments in government securities, from 33 percent reported in December The industry total holdings in government securities increased by Kshs.3.4 billion from Kshs reported in December 2014 to Kshs billion reported in December The slow growth in the asset class can be attributed to managers preferring to divest the assets in other shorter term investments such as corporate bonds and fixed deposits. Assets held by Funds Managers and Insurance Issuers 17 fund managers and 5 insurance issuers submitted 1218 scheme reports with a total fund value of Kshs billion. This is a 3.5 percent decrease of the total fund value from the Kshs billion registered in December The decline in the growth of the industry assets can be attributed to the poor performance of the bourse and the changing interest rates in the market that have affected the debt instruments. The decrease in the value can also be attributed to the reduction of schemes in the report. From the reported 1297 schemes in December 2014, the year has seen them reduce by 79 schemes to stand at 1218 schemes as at December Assets under NSSF Total assets of NSSF rose by Kshs.14.9 billion from Kshs billion in December 2014 to Kshs billion in December 2015 representing a 10.5 percent growth in the total fund. Of this amount, Kshs.53.9 billion7 was managed inhouse and Kshs billion managed by registered fund managers. The externally managed funds continued to increase over the period with a noted increase of Kshs.22.8 billion from Kshs.79.6 billion reported in December 2014 to Kshs billion in December Government Securities Government securities accounted for the largest portion of overall investments at 30 percent of the total assets under Quoted Securities The investment the second largest with the total investments accounting for 23 percent of the total assets under management. In the 1 year period there was a noted reduction of 9.6 percent which saw the total investments in equities stand at Kshs billion as at December Corporate Bonds This asset class marked a marginal increase of 3.37 percent for the 1 year period from the Kshs billion reported in December 2014 to Kshs billion reported in December This marks a total representation of 6 percent of the total assets under management. Similar to the year 2014 where the asset class saw the issuance of various debt instruments such as EABL, C.I.C, Britam, UAP, and Centum Investments that attracted more than Kshs.20 billion of pension funds, the year 2015 saw the issuance of Imperial Bank and Chase Bank corporate bonds that had many fund managers investing in the offering due to the attractive returns the bonds offered. Individual Retirement Benefits Schemes Sector The membership and assets of individual retirement benefits schemes continued to grow considerably. The membership grew from 127,475 members in December 2013 to 144,680 and 162,882 members in December 2014 and December 2015, respectively. In the one year period the assets have grown from Kshs.22.9 billion to Kshs.28.8 billion representing a 26 percent asset growth. Industry exposure to offshore securities The offshore asset class saw the largest drop over the one year period with total investments in this asset class amounting to Kshs.7.1 billion in December 2015 marking a 51 percent drop from the Kshs.14.8 billion reported in December 2014.This represents a total exposure of 1 percent to other markets other than the East African community. 5

6 Capital markets watchdog to craft pensions PE investing rules IN SUMMARY The Capital Markets Authority (CMA) expects to finalise the regulations on licensing of private equity funds by the end of the year, paving the way for pension schemes to invest freely in the sector. Dr. Edward Odundo, the Retirement Benefits Authority chief executive, said that the pensions regulator had already co-opted the PE segment as a fullyfledged investment class for the industry players, with the CMA licensing of funds the only remaining aspect. Acting CMA chief executive officer Paul Muthaura Thursday said CMA can put out a draft of the licensing regulations by the end of 2016, but not in the fiscal year ending June due to the length of the process of approval of regulations. T he Capital Markets Authority (CMA) expects to finalise the regulations on licensing of Private Equity (PE) funds by the end of the year, paving the way for pension schemes to invest freely in the sector. In the budget speech for the 2015/16 fiscal year Treasury CS Henry Rotich introduced new regulations expanding pension scheme asset classes by allowing them to invest up to 10 per cent of their assets in private equity funds and venture capital funds as licensed by the CMA. Dr. Edward Odundo, the Retirement Benefits Authority Chief Executive Officer, said last week that the pensions regulator had already co-opted the PE segment as a fully-fledged investment class for the industry players, with the CMA licensing of funds the only remaining aspect. Acting chief executive officer Paul Muthaura on Thursday said CMA can put out a draft of the licensing regulations by the end of 2016, but not in the fiscal year ending June due to the length of the process of approval of regulations. Association and RBA to put together the registration framework. It is still however under development and not yet finalised, said Mr Muthaura. We will decide whether it will be operationalised as a policy guidance note under our principles-based approval powers under Section 12 of the CMA Act or as a gazetted guideline or regulation. Until last year, private equity investment was carried under the other assets category with a limit of 10 per cent of total assets and, the schemes were required to get a no objection approval from the RBA when investing in this class. The private equity space in Kenya and the East Africa region as a whole has been growing at a brisk pace as the region continues to outperform the rest of sub-saharan Africa in average economic growth. The sector is likely to grow faster if it is able to attract the investments from pension funds, which are characterised by long-term outlook and backed by an asset base that is projected to hit Sh1 trillion this year (thus a potential Sh100 billion war chest under the 10 per cent limit). Retirement Benefits Authority Chief Executive Dr. Edward Odundo. In their 2016 private equity outlook, Cytonn Investments said that the abundance of global capital looking for opportunities in Africa is a key driver for the PE investment class, with the key focus sectors being financial services, healthcare, education and ICT. The pensions asset base is projected to hit Sh1 trillion mark by end of 2016 We have been working with private equity players in Kenya, the Eastern Africa Venture Capital This article appeared in Business Daily, April 21, 2016

7 Bringing on alternative investments at the center of Alexander Forbes Annual Retirement Conference T he funds' managers prudently manage assets in a method meant to ensure that retirees receive promised benefits. For many years this meant that funds were limited to investing primarily in government securities, investment-grade bonds, and investment in property. Kenyans highly regard investment in property. Schemes view it as an important asset for pension funds due to its investment characteristics of high quality, income producing, and its low risk and portfolio diversification benefits. Investment in real estate has been shown to reduce risk, enhance returns, act as a hedge for inflation and deliver strong cash flows to the investor. But investing in real estate is illiquid and requires large sums of funds said the RBA CEO, Dr. Odundo during the Alexander Forbes Annual Retirement Conference 2016, at Diani, on April 14, Changing market conditions and the need to maintain a high rate of return have resulted in pension plan rules that allow investments in most asset classes. In this regard the government in 2013 allowed schemes to invest in Real Estate Investments Trusts, (REITs) which are more liquid compared to direct real estate investments said Dr. Odundo. Pension plans in Kenya have been increasing their allocation to alternative investments such as Real Estate Investment Trust (REIT s) and private equity. Dr. Odundo told the conference that he is keenly following deliberations on private equity and venture capital. However, these investments are also less mature than their traditional counterparts (stocks and bonds), hence expertise and resources in the industry are still scarce. Altogether, the alternatives industry is maturing swiftly and this is an opportunity for pension funds to achieve the kind of return and diversification that they cannot afford to miss in order to keep their promises. ALTERNATIVE INVESTMENTS Alternative investments are characterised by properties that distinguish them from traditional investments, such as: the application of innovative financial products and derivatives, the use of extensive leverage, illiquidity of underlying investments, a greater reliance on the skill of the manager and the absence of a meaningful benchmark. At this stage, a non-exhaustive list of commonly agreed types of alternative investments would typically include: hedge funds, private equity, securitised real estate investments, etcetera. The different characteristics of alternative investments have implications for their risk profile. Key issues that are typically more relevant for alternative investments and that may need to be addressed in a pension fund s risk management are e.g.: liquidity risk, integrity risk, operational risk, limited transparency, valuation weaknesses, control issues and conflicts of interest. 7

8 What's New Government appoints new RBA Board Chairman M r. Victor R. Pratt was appointed Chairman of the Mr. Victor Pratt Dublin, Ireland. Retirement Benefits Board of Directors for a period of three years with effect from 31st May, Mr. Pratt is a graduate in Business Administration from Fairleigh Dickinson University, USA and has undertaken post graduate studies in Industrial Development at the Irish Management Institute in Mr. Pratt has worked extensively in Africa, in the 1970 s with Citibank, Liberia and the African Development Bank (ADB) in Abidjan. Since the early 1980 s, Mr. Pratt has been promoting small business development, founding the Kenya Management Assistance Programme (K-MAP) in He has led numerous international 8 business promotion initiatives under the auspices of United Stated Agency for International Development (USAID), Young Presidents Organisation (YPO), United Nations Industrial Development Organisation (UNIDO), Commonwealth Secretariat, Center for International Private Enterprise (CIPE) and United National Development Programme (UNDP). He is the founder of Continental Management Consultants Ltd. based in Nairobi, Kenya and African Management Associates (AMA). He has been retained as a Business Development Adviser by International Companies in the Transport and Telecommunications, Energy, Urban Development, Housing and Agricultural sectors. He has previously served as Chairman of Kenya Reinsurance Corporation. RBA establishes Market Conduct Department To enhance the RBA's role in the supervision of the retirement benefits industry, the Authority has established a Market Conduct Department which will be rolling out guidelines on the following: - Fair Treatment of Customers particularly on matters related to timely payment of their benefits and adequate disclosure of the determination of these benefits; Conducting business with integrity, skill, due care and diligence related to trustees and administrators of schemes (Fund Managers and Custodians have the CMA and the CBK as their primary regulator respectively, which will share information with the RBA); Managing conflicts of interest particularly related to conduct by trustees and administrators; the Authority will focus on any conflicts arising in the hiring of service providers by Trustees, the choice of investments for the schemes and other areas of potential conflict; Disclosure of relevant and appropriate information to customers by ensuring continued member education, regular holding of annual general meetings and other ways to reach members with adequate information on their schemes; and, Protecting customers against fraud and misuse of their funds; this includes the charging of excessive fees and unnecessary expenditures by trustees and administrators. I take this opportunity on behalf of the Board, Management and staff to congratulate and welcome Mr. Pratt to RBA and assure him of our support - Dr. Odundo, RBA CEO. The ICT Department rolls out Risk Based Supervision System On the ICT front, the RBA has released the Risk- Based Supervision System (RBSS) to the pensions industry, after a period of testing. This platform provides a web-portal that the industry s service providers use, to among other things, lodge applications for scheme registration, and submit investment returns and contribution returns. Once such documents are submitted, the Authority then uses the internal component of the RBSS to process the applications and to regulate and supervise the industry. The system will create efficiencies in the industry on two fronts: (i) by enabling the fast, reliable and cost-effective online submission of documents; and (ii) by supporting the risk-based supervision paradigm that the Authority adopted in 2010, which allows it to focus scarce resources where they are critically needed.

9 What s New Now Kenyans can save for Medicare in retirement E RBA activates Kulegalega pension awareness campaign R mployees can now save for medical costs they will incur in retirement. This is after financial service provider Alexander Forbes launched a Post-Retirement Medical (PRM) plan that will see employees aged between 18 and 55 years contribute funds for medical purposes in their sunset years. Employers will subscribe under the umbrella scheme dubbed Ngao Milele. According to the CEO of Alexander Forbes Kenya Sundeep Raichura, healthcare is much more expensive for the older population, yet there is no medical Studies show that 60 scheme designed for this category of per cent of an individ- people. ual s medical costs are AON Kenya Insurance Brokers incurred in his reltd and UAP Intirement age surance Company also unveiled a new product that allows someone to save towards funding health costs after retirement. The product dubbed 'Afya Akiba' will allow someone save as low as Sh1,000, which can be remitted monthly, quarterly, or annually with members' contributions also divided into savings and life assurance portions. The contributions can be used as collateral for mortgages. The aim of the schemes is to help employees spread the cost of medical care so that it becomes manageable in their retirement age. Contributors will take year-on-year medical insurance cover from a panel of selected insurers. If employees want to move to another scheme, they can do so by giving 90 days notice. The schemes are designed on a defined contribution basis meaning contributions are allocated to individual members accounts where they receive returns earned on the underlying investments. BA is committed to steering the industry to greater prosperity as the economy still provide huge opportunities for growth. As part of this commitment, the authority has recently activated a pension education campaign dubbed Kulegalega on TV, Radio and social media platform to compel Kenyans to confront themselves and come to a realization that they will need a back up plan after their land has been sold and the children have deserted them. Kulegalega, meaning dillydally, is a Shock Therapy thought provoking campaign that educate Kenyans on the importance of saving for retirement and communicate the consequences of not having a fall-back plan, thus urging them into taking up a pension cover. The campaign compels Kenyans to confront themselves and come to a realization that they will need a back up plan after their land has been sold and the children have deserted them. The campaign targets formal and informal sector workers, employers, members of pension schemes, young Kenyans and general public. The authority has also revamped the corporate website to enhance the communication and sharing of information with stake- 9.

10 Life Begins at Retirement R where I worked until my retirement in I was etirement, the world over, has often been earning a salary of Kshs. 148 gross which was KSHS. associated terms: 128 after tax. This was a lot of money at the time. poverty, frailty and dependence. At a Immediately after I got employed, I went back to cocktail I attended recently, I brought up this rather school as I needed to obtain my secondary school awkward subject and an acquaintance was quick to education. I joined Kenya Continuation School where I ask why I wanted to discuss this at 7p.m. when he was studied Accounting and Typing but only managed to enjoying his Margarita. attend form 1 and 2. During this time, I had a bit of with stereotypical This negative perception has been a challenge in both disposable income as I was working so I developed a developed and developing in as far as sensitising the drinking problem. As a result, I dropped out of school. public on why it s important to save for retirement is Could you please expound on the drinking problem. concerned. How did it get there? For 71 year old Danson (Chuckles) Well, I had a Njihia, life in retirement bit of money. Not much, has been far from the but doom and gloom that it is recklessly. It was just the purported to be. The irony folly of youth. Between for him is that he is living a 1968 and 1974 I almost better life in retirement as can t compared to when he was employed. Mr. and Mrs. Njihia at their farm in Kabete, Kiambu His story has been told many times before to enough to account drink for anything meaningful I did with my life. You were employed for 34 years. For how many thousands of people who attend our training seminars. years did you save towards your retirement? Still, we can t get enough of it. It is as inspiring as it is a 26 years. I started saving money towards the end of jolt from slumber for those who are still struggling to 1974 through Nairobi City Council Housing Company wrap the idea of retirement around their heads. (NAHOCO) and NACICO Savings and Credit Society. I So Mr. Njihia, what s your story? Where did it all used to save KSHS. 20 per month for each of the Sacco. begin? I also joined a Chama with 6 of my neighbours and we I was born in 1945 in Kabete, Kiambu County where embarked on a savings scheme where we used to I still live today. My father was a drunkard so he didn t contribute Kshs. 20 per month. So in total I was putting encourage me to excel in school. I failed my standard 4 away Kshs. 60 every month. Saving Kshs. 60 per month examination in 1957 and almost gave up on education was no mean task but I was prepared to make the until my mother encouraged me to resit the sacrifice. examination in I eventually completed my What prompted you in this direction? primary education in 1963 with just average results It was in 1974 when I was involved in a physical but it was better than nothing. confrontation during one of my drinking sprees. I beat When did you get your first job? up someone who ended up in a coma in hospital. I got my first job in 1966 at Nairobi City Council 10

11 Life Begins at Retirement I was arrested but released later when the victim dropped the charges. After this episode, I decided to turnaround my life for good. I divorced all my drinking friends and vowed never to drink alcohol or smoke a cigarette in my life again. I have kept that promise to date. I was also spending money recklessly and I realized the need to change my course. My wife and I wrote down a plan on how we were going to start supplementing the household income. We started up poultry and cattle farming. How did the farming work out? Did it supplement the income as you had desired? It was a rather difficult start up. We didn t have enough capital to invest so we did not inject enough cash into the business. We were raising our children so we had some bills like education to look after. Let s just say the business got us by. How much did you retrieve at retirement out of your savings? I received a total of Kshs. 1.2.million in 2000.I can also proudly state that I am one of the co owners of 2 buildings in the CBD as part of the investment through NAHOCO and NACICO. We bought 2 plots in Mwiki with my Chama and developed rental houses in That provides me rental income every month. I also independently own 2 plots in Syokimau worth 3 million shillings each. How did you invest the cash you received? I made a colossal mistake. One of the biggest mistakshs I have ever made in my life. I invested half of it into a matatu business. Eventually the business collapsed and I walked away from it less Kshs. 500,000. Why did you get into a matatu business? It was the fad at the time. It always seems like a good idea when a lot of people around you are doing it until you get into the thick of things. This is why I strongly advise people not to invest into a business in which they don t understand or have no passion for. I got myself into an unfamiliar territory and paid dearly for it. I regret this decision to date but it was a learning curve. What did you do with the other half of your pension fund? I invested it into poultry farming. This strategy worked and has been fruitful to date. Do you have friends or peers who didn t follow the same path? How would you describe their life post employment. Yes I have many miserable friends who I abandoned in the alcohol dens in I employ some on the odd day just to help them get by. I feel sad to see them wallowing in poverty so I try to help where I can. The younger generation today think they are too young to be saving for retirement. What would be your advise to these people? If you take home money and spend it all without saving it, you are shortening your lifespan. I would strongly advise people to start saving as soon as they have an employment contract. So Mr. Njihia, what s next on your agenda? Where do you go from here? My next project is to acquire property in Runda and build a house. That is the residential place of my dreams and it is where I want to enjoy my last days. 11

12 Pictorial Alex Mugambi assists a customer to fill in a form at Eldoret International Show in March RBA stand at Eldoret International Show We work hard and play hard. Sports day held in March Kisii County Entrepreneurship Summit, February 2016 Left, Meru County CEC for Trade, Cooperatives and Tourism, Mr. Ntoitha M'Mithiaru opens RBA's informal sector sensitization clinic at Slope Hotel on June 23,

13 The Power of 1% The Magic of Compounding Interest W e all constantly hear about the need to save: Save for a rainy day, save for your children s education, save for your retirement. However, in today s world of consumerism and instant gratification, it is easy to get tied up in the here and now and to believe that the future will work itself out. As soon as that time machine is up and running, Future You will be coming to give Present You a piece of their mind! For those of us that do save regularly, it can be challenging to know how much to save, or where to invest our savings. Too often our primary focus is on the fees we pay for investment services, when we should really be focusing on the value we get for the fees we pay. For example, if investment manager A consistently delivers 1% more in returns each year than manager B (net of fees and expenses), then what does it matter how much more expensive manager A is? You are getting more in returns and they are worth every penny. The power of 1% stems from the magic of compound interest. Compound interest, in simple terms, is where your interest earns interest. In other words, after the first year your savings will have grown with interest. In the second year, the first year s interest is part of your savings and hence will also earn interest in the second year hey Presto! Compound interest. To show you the impact of compound interest, lets use a simple numerical example. Let s assume you save a fixed amount of Ksh. 1,000 every month for 30 years. The table below shows you your savings balance after 30 years, applying different net investment returns. Ksh 1,000 per month and earning an annual net return of: 10% 11% 12% Balance after 30 Years Ksh 2,062,843 Ksh 2,506,390 Ksh 3,052,013. The table above should illustrate the power of 1%. Another point to note from the table above is just how much of your balance is made up of interest. Remember, in all three examples above, your own capital is only Ksh 360,000 (Ksh 1,000 x 30 x 12). That means that over 80% of your balance is actually investment income and not your contributions! Equipped with a better understanding of compound interest and the power of 1%, let s try and illustrate the importance of saving early and maximising your returns in the form of an example. Let s take a new graduate, Patricia, who is starting out her career at the age of 20. Patricia would like to secure her financial well-being and decides to immediately start saving 10% of her salary every month. If we assume that Patricia s salary goes up 8% every year, and that her savings earns net interest of 10% every year, when she reaches the ripe age of 60, her savings account will be 6.1 times her annual salary at that time. What if Patricia had procrastinated on her savings plan and not actually started saving until she was 30? Now she is saving for 30 years instead of 40 years, but that is still a long time to save and she should still build up a large savings balance, right? Wrong! Instead of having a balance equal to 6.1 times her annual salary, her balance will only be 4.2 times her salary. She would have to save nearly 15% every month, Instead of the originally planned 10% simply because she started saving later to reach the same goal. Let s go back to the pro-active Patricia who saved for 40 years, and let s see the power of 1%. Remember, Patricia has saved up a balance that is equal to 6.1 times her final salary, by saving 10% of her monthly salary (and assuming she earns 10% a year on her savings while her salary grows 8% each year). If Patricia can earn an extra 1% return on her investments (a return of 11% per year), her savings balance at 65 will be 7.6 times her annual salary, instead of 6.1 times her salary. Her savings balance is 25% larger, simply because she earned 1% more each year! When you start saving early, and you save aggressively, a little can go a long way. In today s economic environment, to retire comfortably at 60 you would want to have savings equal to about 8 to 10 times your annual salary immediately before retirement. This should allow you to secure a lifetime pension that replaces at least 70% of your pre-retirement income and allow for some modest annual increments to help protect you against inflation. In 40 years time, you will probably need even more to replace that level of pre-retirement income even more reason for you to save early and aggressively! This article was written by Adil Suleman of Alexander Forbes 13

14 OPEN RETIREMENT PLANNING SEMINAR 2016 FINANCIAL YEAR CALENDAR MONTH REGION VENUE DATE YEAR 2016 JULY Nyanza Kisumu 25 th July 2016 Nyanza Kisumu 26 th July 2016 Nyanza Kisumu 27 th July 2016 Nairobi Intercontinental Hotel 4 th August 2016 Mombasa Mombasa Region 22 nd August 2016 AUGUST Coast Taita taveta 25 th August 2016 Nairobi Intercontinental Hotel, 31 st August 2016 Kericho Kericho 10 th September 2016 Mt. Kenya Nanyuki 13 th September 2016 Mt. Kenya Nyeri 14 th September 2016 Mt. Kenya Nyahururu 15 th September 2016 SEPTEMBER Mt. Kenya Laikipia 16 th September 2016 Garissa Garissa 26 th September 2016 Wajir Wajir 27 th September 2016 Nairobi Intercontinental Hotel 29 th September 2016 Isiolo Isiolo 4 th October 2016 Meru Meru 5 th October 2016 Tharaka Nithi Tharaka Nithi 6 th October 2016 Embu Embu 7 th October 2016 Kitui Kitui 24 th October 2016 OCTOBER Machakos Machakos 25 th October 2016 Makueni Makueni 26 th October 2016 Kajiado Kajiado 27 th October 2016 Nairobi Intercontinental Hotel 28 th October

15 Kiambu Kiambu 1 st November 2016 Kiambu Kiambu 3 rd November 2016 Murang a Murang a 7 th November 2016 Murang a Murang a 8 th November 2016 Homabay Homabay 15 th November 2016 Migori Migori 16 th November 2016 NOVEMBER Nyamira Nyamira 17 th November 2016 Kisii Kisii 18 th November 2016 Nakuru Nakuru 24 th November 2016 Nairobi Intercontinental Hotel 25 th November 2016 Turkana Turkana 1 st December,2016 West Pokot West Pokot 2 nd December 2016 Samburu Samburu 3 rd December 2016 Kakamega Kakamega 5 th December 2016 Bungoma Bungoma 6 th December 2016 DECEMBER Kericho Kericho 7 th December 2016 Kisumu Kisumu 8 th December 2016 Nairobi Intercontinental Hotel 9 th December 2016 Narok Narok 14 th December 2016 Bomet Bomet 15 th December 2016 ANNE K. MUGO, MBS CHIEF MANAGER, MARKET CONDUCT NOTES TO TRUSTEES AND ADMINISTRATORS ON IN HOUSE SEMINARS: The Authority continues to conduct in-house training seminars for your scheme members in numbers not less than fifty (50) per session. Please contact the Authority for in-house training requests giving notice of at least two (2) weeksto allow for planning. All retirement Planning Seminars are offered free of charge by the Authority. 15

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