Thursday, March 13, 2014


Last week National Social Security Fund (NSSF) released their half-year results in which they showed a 26.5% jump in profits.

These are figures their counterparts in the financial industry will be envious of. The expectation is that bad loans affected the banking industry last year that the results will not be as rosy as they usually are. We will know by the end of April.

But on closer scrutiny one can see that NSSF is not doing a good job, a function of a small economy, political interference and inadequate managerial capacity.

NSSF collects member savings over the length of their working lives with the promise that they will provide them a soft landing in the evening of their days.

They seek to fulfill this promise by investing the monies in a way that they grow over time. They have to display enough investment skill that the funds weather the occasional losses, ever present inflation and the cost of managing the money.

So if for instance If I deposit sh100,000 with NSSF at the beginning of my career I would expect that his has grown faster than inflation during the say 20 years of my career at least. For ease of calculation assume an average annual inflation of seven percent that means prices will have quadrupled during my career and my initial sh100,000 would have lost 75 % of its value.

The government's has a five percent inflation target, we are only just recovering from double digit inflation. The drought might however see us struggling to keep it in single digits for the rest of the year.

In addition any long term investor knows they will make some bad bets during their career not to mention some years you will not manage a better than inflation return on your investments. And of course there are costs involved in managing this money -- salaries, rent, bank charges among others.

Given these parameters one would expect that NSSF is making more than double digit returns on their asset base year-to-year to cover inflation costs at least. But getting a return on investment is not entirely in the management's hands. What is more in their control is the costs of operation, these have to kept to a bare minimum.

Given the information in the press NSSF falls short on giving us the annual returns required to make them a worthwhile investment proposition. Even if one adds in depreciation costs--the annual amount fixed assets like buildings lose value for accounting purposes, the return on invested capital barely makes five percent.

They seem to be managing costs better, with a two percentage drop in the ratio of cost to income compared to the previous year.

Then clearly there are not investing our savings for the most optimal return.

When one looks at what they are invested in one begins to see the problem. 

Eight in every ten shillings the fund has at its disposal is in fixed income assets -- fixed deposits, treasury bills & bonds. This is not so bad given that yields on bills and bonds with a maturity of more than ten percent, but these are the safest investments on offer meaning there are other investments that promise a higher return.

Of course these are workers' savings and managers can not be trigger happy with them.

The unbalanced portfolio is a function of a lack of investment opportunities and managers who were content to pile money into government debt, for fear of getting unwanted attention by sticking their head out on more lucrative but riskier investments.

To cut a long story short for the workers to get a better deal the Fund's portfolio has to be rebalanced with more funds going to real estate and shares, the last two management's had recognized this and were making efforts to redress this imbalance.

But it's like turning a huge ship around, it takes time. For instance if we were to pare the fixed income assets to half of the total portfolio you would have to look for investments equivalent to 20 Workers' Houses.

The challenge is that NSSF has outgrown this economy. It has to either look abroad for investments, which while safe may not meet the criteria of double digit returns, or create its own investments here. That too is tricky because the market for commercial property is fast getting saturated and the returns on residential accommodation are thin, their immediate options.

As workers we shouldn't compromise on how much we demand for NSSF holding our money, what it means is that the managers at the Fund must justify the top salaries we are paying them, with real returns for us.


  1. ha ha ha ha. I always read your articles. But this one seems to be personal. I urge you to start your own fund and put some of these ideas into place. I believe you can do it. Then NSSF can borrow a leaf. Otherwise, they will continue to reap the HUGE salaries and we shall continue to get peanuts as returns.

  2. What we need to do is support the liberalisation of the sector so we have more competitive options of where to put our retirement money

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