Governance key for retirement schemes

August 10, 2010
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, NAIROBI, Kenya, Aug 10 – All retirement benefit schemes in the country have been advised to start developing and adopting a formal governance strategy that will ensure that they comply with the new risk management regulations.

Alexander Forbes Managing Director Sundeep Raichura said as the Retirement Benefits Authority (RBA) embarks on its risk based supervision, the onus will be on the board of trustees to ensure that they incorporate measures that can assess critical risks to their schemes as well as those that can mitigate them.

“Pension schemes trustees and their providers will need to look at their control environment, their investment policies and even their financial reporting and performance assessment,” he suggested but acknowledged that it would initially be a huge task for the schemes.

This is because the governance strategy would have to include a Code of Practice and Conduct or a Trustee Charter and a risk management framework that would among other things spell out the board’s composition and competencies. Rigorous training of the board members would also need to be undertaken.

The risk-based approach, which will replace the current compliance-based model, was adopted by the RBA to enable it to increase surveillance and gain a better understanding of the quality of management in these funds some of which have been grossly mismanaged while others have lost millions of shillings invested in ‘get-rich-quick’ schemes.

Such strategies however would increase transparency in the running of pension schemes and enable them to achieve their fundamental objective of providing adequate income to members when they retire, Mr Raichura argued.

The shift to the new principles-based model will focus regulatory attention to those funds that are deemed to be more at risk instead of just relying on information such as whether they have complied with the various rules and regulations.

The regulator has developed indicators which it will use to identify pension schemes that are at risk and which will inform the supervisory response to be taken.

“For each indicator, a score of zero is given if the outcome is satisfactory and a score of between 0.25 and one for an unsatisfactory outcome depending on the indicator and the degree of breach,” Mr Raichura explained adding that an aggregate score per risk category would then be computed.

An overall rating of below 0.5, means that no action is warranted in the scheme while that of 3.5 to four, calls for the regulator’s intervention which would include demand for additional funding, reduced benefits, interim administration or closure of the scheme.

The MD said doing so would not only save pensioners billions of shillings from being lost but also help unlock the potential of the industry whose asset base is estimated to be over Sh220 billion.

The retirement benefits sector has over the last one decade grown significantly from Sh45 billion to the current Sh250 billion, which excludes contribution from the National Social Security Fund (NSSF).

“If we include the NSSF, we are talking about Sh350 billion which is close to 14 percent of the GDP. It is not surprising that there is a lot of focus on the regulation of this sector by policy makers,” he remarked.

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