NSSF Eyes Eurobond for Cushion on Weak Shilling

The National Social Security Fund (NSSF), which seeks to protect its portfolio from further erosion owing to the weakening shilling, is thinking about diversifying its investment in government securities by adding dollar-denominated assets.

The Sh303 billion pension fund claims that investing in sovereign issuances like Kenya’s Eurobonds would assist support the return provided for pensioners. 

Currently, 56% of the fund’s assets are invested in state securities.

Kenya presently has six Eurobond issuances with maturities spanning 2024, 2027, 2028, 2032, 2034, and 2048 in the market.

Kenyan shilling exchange rates to the US dollar currently stand at 126.6 units, down 2.6 percent from the beginning of 2023, according to official data. Bank data, however, suggests a parallel system where the local unit is traded for the US dollar at values between 132 and 134.

“It’s very important to note that the Kenya shilling has taken a beating against the US dollar and some of these bonds we are holding are shilling-denominated. I am encouraging management to speak to the fund managers and see whether we can increase our threshold of dollar-denominated bonds like Eurobonds for example. That way we hedge against the shilling and its devaluation,” said NSSF chairman Anthony Munyir.

The Retirement Benefits Authority Investment Guidelines limit investments in East African Community government securities and infrastructure bonds to a fund’s assets under management to a maximum of 90%. 

At the moment, government securities make up the majority of the assets managed by the NSSF (56%) followed by listed stocks and immovable property (24%) and 16%, respectively.

In a move that it claims will assist the fund in providing investors with consistent returns, NSSF is looking at holdings of dollar-denominated bonds. The board of trustees of the NSSF approved a 10% interest rate on investor funds for the fiscal year that ended June 30, 2021.

“The board doesn’t give investment direction to fund managers but it is a suggestion that I have been talking to management to convey to the investment managers since it is important to hedge with dollar-denominated bonds because that way you can realise a stable return unlike taking a hit on the continuous revaluation of the shilling,” says Munyiri.

After a seven-year impasse, the NSSF Act 2013 was reinstated by the Court of Appeal on February 3, 2022, resulting in increased contributions from employers.

According to a progressive scale, the NSSF Act of 2013 increased monthly deductions for salaried personnel from Sh200 to Sh600 for the lowest earning and from Sh320 to Sh1,080 for the highest income. Every year, upper limits must increase.