Pension scheme members to get an accurate depiction of their financial health with the regulatory changes on bond valuations

The introduction of Income Draw Down Regulations under the law will streamline the management of the funds and secure retirees in the long term.

The Income Draw Down Funds are funds established to reinvest retirement benefits for retirees to provide regular pension
income.

Pension industry stakeholders gathered at the Enwealth Financial Services Pension Stakeholder Briefing
today welcomed the new regulations as a safeguard for retired workers. Previously the Income Drawdown funds were run under Individual Pension Schemes regulations as Income Drawdown Prudential Guidelines (2012) but the new regulations as Retirement Benefits Regulations (Income Drawdown Funds) 2023 were introduced effective November last year.

According to Orpah Wanyama, Manager of Legal & Compliance, Enwealth Financial Services while discussing the regulatory changes: “The regulations safeguard members and give them flexibility.

Transfers from one IDD to another will be allowed after a membership of 5 years , effective November 2023, where all transfers shall be done in a lump sum and no provision for partial transfers of funds. This gives members choice and flexibility in case their scheme is not performing as desired”.

There are also amendments for withdrawals from 15% to 12% per annum of the member’s outstanding account balance in the Income Drawdown Fund ensuring longer-term access to regular income for
members.

“To ensure liquidity, the funds are not allowed to invest in immovable assets. The law now provides for the establishment of a trust fund under IDD where in case of death of a member, the beneficiaries can continue receiving the regular income,” added the Enwealth representative.
Other legal changes affecting the Pension industry discussed during the Enwealth Breakfast include the
implication of the regulatory changes on Bond Valuations.

The industry-wide adoption of the revised accounting practices on bond valuations is expected to provide pension funds with a more accurate depiction of their financial health.

According to Dennis Oluoch, Deputy Manager, Supervision Department, Retirement Benefits Authority, while speaking at the Stakeholder Briefing, pension funds have faced challenges in accurately reflecting the true value of their bond holdings, potentially leading to misleading financial statements and
investment reports, and financial statements.

The regulations that came into effect on 31st December 2023 will instill confidence among stakeholders in the pension industry.

According to Legal Notice No. 18 of 2024 amended the requirements for the valuation of the scheme fund, the value of debt instruments held to maturity shall be reported at amortized cost and the fair value method shall be used to determine the value of debt instruments that are available for sale, as well as equities.

The other changes are in Legal Notices No. 19 of 2024 (The Retirement Benefits (Occupational Retirement Benefits Schemes) Regulations, 2000), Legal Notice No. 20 of 2024 (The
Retirement Benefits (Individual Retirement Benefits Schemes) Regulations), 2000, Legal Notice No. 21 of 2024 ( The Retirement Benefits (Umbrella Retirement Benefits Schemes) Regulations, 2017) and Legal Notice No. 22 of 2024 (The Retirement Benefits (income Drawdown Funds) Regulations, 2023) which amended the provisions relating to the determination of net interest to be declared and credited to
members.

This means the net return declared and credited to members’ accounts shall exclude both unrealized
gains and losses arising from changes in the value of debt instruments (bonds) held by the scheme at the
end of the financial year.
The timing of these changes is crucial, given the backdrop of rising inflation since the previous year,
which has adversely impacted the value of bonds.

Income generated by bonds has struggled to keep pace with the eroded purchasing power caused by inflation. Fund managers, in particular, are optimistic about the positive impact on their bottom line as they navigate the challenges posed by inflation and
ensure a more precise reflection of the value of bonds in their portfolios by using the amortized cost method.

They can avoid declaring losses attributed to inflation, ensuring a more realistic representatio of the bonds’ value, given their intended maturity date.