Home ECONOMY Proposal to freeze interest payments on Govt debt papers opposed by AKI

Proposal to freeze interest payments on Govt debt papers opposed by AKI

by biasharadigest

A proposal by the Government to defer interest payments on its debt papers held by insurance firms in the form of pension funds has drawn sharp criticism from the powerful lobby Association of Kenya Insurers (AKI).

In its submissions to the Retirement Benefits Authority (IRA), AKI warns that this proposal, which is planned to last for a period of between one and two years, will have serious implications on the pension and insurance industry as well as the financial sector as a whole.

AKI argues that an Insurance Company has no authority at all in relation to the proposed moratorium on interest payments on pension scheme funds. Any decision to defer interest payments will require the written approval of each scheme’s board of Trustees which may ultimately require approval by scheme members through Special General Meetings.

This is not a decision where Insurance companies may have discretion. Insurance companies are service providers contracted by Scheme Trustees to invest and manage the scheme funds in a guaranteed fund. These funds belong to scheme members and insurance firms can only act on the express directive of the scheme trustees.

Schemes typically rely, to a large extent, on interest payments from government bonds for liquidity to pay out retirement benefits to retiring members as well as redundancy and other routine payments.

AKI submits that other investment vehicles such as properties and equity market investments cannot be relied on for payment of regular obligations because of their illiquid nature and volatility of equities market.

It has warned that a freeze of interest payments on instruments held by these pension schemes could cause them serious financial problems with some being unable to meet their obligations of paying those members whose retirements fall due. This will greatly affect scheme members who will be retiring within the stated moratorium period.

Annuity Funds are invested in Government bonds. Annuitants are paid their regular pension payments from the interest earned by the bonds. Deferring interest payments on existing government bonds, says AKI, will greatly affect the insurance company’s obligations to retirees who are drawing their monthly pension payments from existing annuity contracts.

The lobby adds that deferring interest on Government bonds will force insurance companies to immediately amend the Deposit Administration Policies to remove any form of guarantee on both the Capital and declared rate of return. This change could severely affect the income of those who invest long term.

At present, Insurance companies give a guarantee on capital and a minimum rate of return to schemes invested in guaranteed funds. Guaranteed funds invest heavily in government bonds because of the security they provide in order to meet the guarantee given to deposit administration policyholders.

AKI mentions that there is no clarity if these debt instruments will be trading on the basis of the new terms and whether the government of Kenya will pay interest for the delayed period.

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