For many years, retirement benefits schemes have predominantly allocated their investments towards traditional assets, such as government securities and the equities market. As of 2023, these traditional assets comprised an average of 58.0% of the total investments, leaving a mere 42.0% for other asset classes.
Notably, alternative investments, including immovable property, private equity, and Real Estate Investment Trusts (REITs), accounted for an average of only 15.4%, despite the regulatory allowance of up to 70.0%.
This conservative allocation comes in spite of the numerous benefits offered by alternative investments. For instance, REITs provide low-cost exposure to real estate and offer tax incentives, which can lead to potentially higher returns. Despite these advantages, the adoption of such investments has been limited, partly due to bureaucratic hurdles and a lack of sufficient expertise in these areas.
The financial year 2023 signalled signs of a slight shift in this trend. Investments in REITs surged by an extraordinary 3871.4%, rising to KES 11.1 billion from KES 0.3 billion in the previous year.
Similarly, private equity investments increased by 61.2%, reaching KES 5.7 billion from KES 3.6 billion in FY’2022. This increase indicates a growing recognition of the value that alternative investments can bring to retirement benefits schemes.
Alternative investments encompass a broad range of assets that are supplemental to traditional investments in equities, bonds, and cash. They include immovable property, private equity, and REITs, and are characterized by their complexity, liquidity, and regulatory frameworks. Despite the regulatory allowance for up to 70.0% exposure, schemes have historically allocated only an average of 6.1% to alternative investments from 2014 to 2023. Specifically, investments in immovable property have averaged 17.8% during this period.
The limited allocation to alternative investments has been attributed to various factors, including bureaucratic processes and a lack of adequate expertise and experience required for these types of investments. Additionally, asset classes such as listed REITs have faced numerous challenges and underperformed over time. Currently, there is only one listed REIT on the Nairobi Securities Exchange, which is restricted, further complicating investment efforts.
Going forward, we hope retirement benefit schemes continue in this diversification efforts and drive up investments in Real Estate Investment Trusts and other forms of alternative investments. The schemes can definitely better leverage these assets to improve their overall performance and provide greater benefits to their members.
