Kenya. Retirement: Strategic partnerships critical in growing pension savings
Retirement benefits accumulated by Kenyan workers over the years hit an estimated total of Sh2.3 trillion last year, equivalent to nearly 15 per cent of Kenya’s GDP, underscoring the importance of this critical sector.
With the inflation always competing to erode workers’ savings, retirement benefits service providers are under pressure to preserve their clients’ wealth.
The industry’s assets under management have recorded a 10.7 per cent compounded annual growth rate in the past ten years, from Sh800 million in 2015. This growth could be enhanced through more creative asset management strategies.
Strategic partnerships between private retirement benefit providers and alternative asset managers have flourished in developed markets.
In the US, over 90 percent of the top 20 non-mutual annuity writers have a partnership with an alternative asset manager.
These collaborations, when well executed, have proven to be powerful levers, creating significant value for a broad range of stakeholders for both industries.
Notably, nearly a third of life insurance assets in the US are allocated to private credit, underscoring the scale and strategic importance of these partnerships. Developing economies have an opportunity to emulate this trend to accelerate the growth of retirement savings.
The logic for combining the capabilities of retirement benefit providers with those of asset managers is not a novel concept. This thesis can be traced to 1967 when Warren Buffett acquired National Indemnity Insurance Co. to drive capital formation for Berkshire Hathaway.
This model has since gained significant traction as alternative asset managers have continued to be drawn to the affordability and long-term nature of insurance funds, which makes them amenable to asset managers’ illiquid strategies.
Similarly, insurance firms have sought to benefit from the above-average returns and diversification benefits offered by alternative assets – especially in low-interest rate environments. Retirement benefit providers carry liabilities that correspond to the expected future policyholders’ claims which are long-tailed with an expected term of more than 20 years.
Prudent risk management requires that these liabilities are matched with similarly long-tailed assets that can generate sufficient risk-adjusted returns. From the perspective of asset managers, the long-term nature of retirement funds provides a stable source of long-term funding compared to conventional sources of funding such as limited partner funds which are redeemable within 7-10 years on average.
Also, the return hurdle on retirement products is lower compared to return expectations of limited partner funds. These alliances are structured using various models – from the more traditional client-investment service provider relationship to outright consolidation on one extreme, and other intricate models in between.
The collaborations have yielded significant benefits for a wide range of stakeholders for both retirement benefit providers and asset managers. Insurance companies have capitalised on attractive investment returns from alternative asset allocations, bolstering their profitability and ability to offer competitive insurance products.
For instance, leading US asset managers have delivered investment spreads of up to 400 basis points over US. Treasuries for their insurance clients by leveraging alternative asset strategies.
As a result, clients of retirement benefit providers have enjoyed attractive returns on their retirement products. Shareholders of insurance companies and asset managers have also benefited.
The increased profitability as well as the clamour for insurance assets by asset managers has enhanced valuations for insurance companies.
Reinsurance transactions with asset-manager-affiliated reinsurers have also enabled insurance companies to divest complex legacy liabilities and de-risk their balance sheets – a strategic priority for insurers in developed markets.
For asset managers, the benefits of the partnerships are equally clear – access to affordable, long-term capital to fund various asset strategies, particularly in a fundraising environment that is increasingly tepid.
The best-in-class asset managers have leveraged the partnership model to transform their business models and orient them towards more recurring, capital-light fee income, which the capital markets have rewarded with premium valuations.
The benefits of these partnerships have percolated to the broader economy. By leveraging the vast pools of capital held in insurance assets, asset managers have channeled funds into private credit markets, providing financing to mid-sized businesses, infrastructure projects, and other sectors that are underserved by traditional bank financing.
This has stimulated economic activity, enhanced capital efficiency and contributed to the deleveraging of the financial services industry.
While capital markets in emerging economies may face challenges in replicating the more intricate partnership structures seen in developed markets, there is an opportunity to start with more straightforward collaborative models such as modest allocation of insurance and retirement assets to alternative strategies.
For the partnership to truly succeed, there must be strategic alignment and equitable arrangements between both parties. There should also be a shared understanding of how asset managers can add value to insurers’ existing strategies and vice versa.
Similarly, insurers should seek to understand the risk-return profiles of alternative asset strategies and the broader capabilities that asset managers offer. Asset managers will also need to be responsive to insurers’ regulatory and risk management constraints.
Ultimately, the sweet spot is where the partnership creates a virtuous cycle, where robust insurance platforms drive asset strategies for asset managers, generating strong risk-adjusted returns that, in turn, support insurance distribution and profitability.
By closing ranks through potential partnership models, insurers and alternative asset managers can strengthen their capabilities and better position themselves for the challenges and opportunities in their respective industries.
With closer collaboration between retirement benefit service providers, regulators and asset managers, Kenyan workers can grow their retirement nest egg multiple times, while generating wider benefits to the economy.
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