Pension funds facing challenges in accurately valuing bond holdings amidst market fluctuations have received a reprieve through recent regulatory adjustments by the Retirement Benefits Authority (RBA).
Effective December 21, 2023, the RBA implemented amendments allowing pension schemes to exclude unrealized gains or losses from debt instruments when declaring net returns to members. This move addresses the impact of rising inflation on bond values, which have struggled to maintain purchasing power.
Last year’s surge in bond yields resulted in mark-to-market losses for pension funds as bond prices declined. Consequently, schemes were prompted to reassess their government securities holdings.
Under the revised guidelines, pension funds are now required to report debt instruments held to maturity at amortized cost and determine the value of debt instruments available for sale and equities using the fair-value method.
Collaborating with the Institute of Certified Public Accountants (ICPAK), the RBA has ensured that these guidelines only apply to reports prepared by trustees for members, allowing schemes to continue adhering to International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).
Despite market challenges, pension schemes have shown resilience, with total assets increasing by 8.09 percent from December 2022 to June 2023. Notably, retirement benefit schemes have increasingly turned to government securities as alternative asset classes, with government debt now accounting for 47.79 percent of total assets under management.
This strategic allocation underscores the prudent risk management strategies employed by pension funds amidst market volatility.
photo source: Google
By: Montel Kamau
Serrari Financial Analyst
February 26th, 2024
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