Pension funds not only provide social security, they play a major role in driving various activities that can stimulate economic growth.
It is this understanding that has seen the call of unlocking pension funds to drive various economic activities including private equity and real estate development among others.
Housing is a global challenge and rapid urbanisation is pushing up demand for housing, especially affordable housing. As populations grow, there is a need to bring on board multiple agencies including governments, non-government organisations (NGOs), private sector and individuals to address this issue.
It is estimated that Africa’s population will hit 2.4 billion by 2050, thus exacerbating the current housing shortage. Kenya’s housing shortage stands at about two million units, Nigeria 17 million units and South Africa two million. This is a huge gap that needs to be addressed. The solution is in providing affordable housing for this growing population, especially in urban centres.
Though various stakeholders have rolled out initiatives to address the shortage, more still needs to be done, more so as Africa’s population continues to grow. Governments need to put in place policies that make housing finance accessible and affordable.
The World Bank notes that only three per cent of sub-Saharan Africa’s population can afford a mortgage. Part of the issue is investors focusing on higher value housing mainly due to higher returns and availability of supporting infrastructure.
Private capital and investment funds are rarely directed towards the mass housing market and usually focus on the commercial real estate segment. This locks out a high percentage of people.
Lower income earners can barely afford this kind of housing, as the cost is prohibitive. Pension funds can play a role in addressing this situation. They have a long-term horizon compared to depository institutions.
Investing a section of their assets in housing would not only help address the housing shortage, but also help them diversify their portfolio thereby achieving favourable risk adjusted returns.
Pension funds in Kenya have traditionally invested in property, equities and debt instruments but there has been agitation to unlock them to drive more social and economic growth.
One of the solutions proposed is to allow members of pension funds to use their accumulated benefits as security for their mortgages.
A regulated housing finance institution would offer the mortgage at agreeable interest rates. In Mauritius, pension schemes can allocate up to 26 per cent of their assets for housing loans to members.
The Pension Fund Act in South Africa allows a retirement fund to grant a member a loan that should not exceed 90 per cent of the value of the property or the accumulated benefits of the member.
Kenya made strides by amending Section 38 of the Retirement Benefit Authority to enable pension members to attach up to 60 per cent of their accumulated benefits to secure a mortgage. This allows members to acquire land or a house, pay for stamp duty, valuation fees and legal fees among other transaction fees. The 60 per cent is only a guarantee to get a mortgage.
The uptake, has however, been extremely low with trustees wary of managing the risk due to many grey areas in implementing this while mortgage institutions have failed to respond with more favourable terms.
There have been calls to review the law to ensure Kenyans can use their retirement funds to secure homes.
Two more options may be explored by both policy makers and pension funds trustees. One would be financing one of the government’s Big 4 Agenda; namely, creation of 500,000 new homeowners through facilitation of affordable housing.
With Kenya’s spiralling debt, it would be prudent to rally institutional investors such as pension funds to support domestic resource mobilisation hence cushion the government against the inherent currency risk in Eurobonds and any foreign currency indexed debt.
Property investments have helped pension funds achieve stable returns in the past when other conventional assets had a downturn. Although there is scanty information on how the low cost housing project will be operationalised, trustees of pension funds can dive right in if the investment can earn them reasonable returns.
Securitising the debt for liquidity and tax incentives would go a long way to whet the appetites of trustees to invest a section of the sector’s billions in the project. The Zamara Pension Performance Watch, a survey of schemes whose assets total to Sh677 billion (about 70 per cent of the country’s pension assets), indicates that just about four per cent of the schemes’ assets had been invested in immovable property as at December 2017.
Retirement benefits regulations allow schemes to invest up to 30 per cent of their assets in property.
Second, the policy makers may consider borrowing a leaf from the Singaporean Social Security System where retirement savings may be accessed to cater for medical, housing and education expenses.
Erick Omondi, Pensions Consultant at Zamara Actuaries, Administrators and Consultants.