Prudent shift to alternative assets will unlock higher value for retirees

Pension schemes by their nature are long-term investment vehicles designed to provide a source of income to retirees. FILE PHOTO | SHUTTERSTOCK

Pension schemes by their nature are long-term investment vehicles designed to provide a source of income to retirees.

Therefore, the obvious investment goal of a pension scheme is to achieve long-term capital growth and the selected strategy should ultimately meet this goal.

By now, pension schemes should have seriously considered deepening their investment portfolios in alternative assets to weather the value shedding we have seen in the Nairobi Securities Exchange — a traditional investment avenue for local schemes.

I believe the key question all investment managers share is how to select the best strategy suited to their investors.

An even more time-conscious concern is how to beat the current market performance and rising inflationary pressures.

The Retirement Benefits Authority investment guidelines allow schemes to diversify their investments in assets such as real estate investment trusts (REITs), private equity and venture capital, infrastructure, and offshore investments among others, but all these remain largely untapped as schemes continue to put a heavy focus on government securities and listed equities.

It is time pension scheme trustees adopted prudent investment strategies that align with the future retiree’s investment goals.

The selection of strategy is determined by several factors, including the size of a fund, the time horizon of the investment, and most importantly, the risk tolerance of trustees and members.

As a risk management strategy, schemes have to look out for assets that have lower volatility compared to equities so as to provide a degree of stability to their portfolio.

Assets with a low correlation to the broader financial markets can help to offset the impact of market downturns and enhance risk-adjusted returns.

While some may argue that alternative investments come with higher risk, they often have the potential to generate higher risk-adjusted returns over the long term compared to traditional investments.

Investments such as private equity buyouts, early-stage companies or real estate projects provide access to unique opportunities which may deliver substantially higher growth potential.

The writer is the CEO KenGen Staff Retirement Benefit Schemes and a Governance Trainer.