The National Social Security Fund (NSSF) is on the spot over the treasury bonds flagged by the Auditor General’s report, which led to the loss of billions of shillings for being sold at a cheaper rate.
According to the Auditor General Nancy Gathungu’s NSSF report for 2023/24, the schedule of treasury bond purchases, sales and redemption and bank statements reflected bonds purchased at a nominal value of Sh5.1 billion were sold for Sh4.3 billion.
“This is below the bond’s par value by Sh789 million contrary to Section 2.1 of Fund Investment Policy Statement, 2020 which states that the Board has a responsibility to invest the NSSF Assets in a responsible and prudent manner. It was noted that some bonds recorded high capital losses and the yield rate was minimal and Management did not compare the high capital losses with the yield rate for each bond,” Gathungu said in her report.
But appearing before the Public Investment Committee on Social Services, Administration and Agriculture on Wednesday, NSSF CEO David Koros said that the Fund has outsourced the process of investment to fund managers who have a discretionary investment mandate but within the Fund’s approved Investment policy statement (IPS).
“Bonds are sold at a discount if the coupon rate is lower than the current market rate as investors will only purchase the bond at a price below its nominal value to compensate for the lower return,” he explained.
Koros revealed that NSSF sold the bonds which had lower yields, a situation that was aimed at deploying proceeds into higher yielding bonds so as to improve the returns for the Fund, which has been a challenge for a number of years.
“All bonds which were sold at a discount had significantly lower coupons compared to the prevailing market yields. It is not possible to have such bonds sold at nominal or prices above nominal as these are true market dynamics,” he said.
But Saboti MP Caleb Amisi who is also the committee’s vice chairperson and chaired the session regretted the decision, even as he wondered whether the bonds were a good option to take terming the investment as ‘huge’
“We are talking about billions of shillings involved in the bonds’ transaction. Was this choice of investment really and efficient way to handle public funds?” Amisi posed.
At the same time, audit verifications revealed that similar bonds purchased and sold during the year under review were purchased at a premium price, higher than the nominal price amounting to Sh79 million and sold at discounted prices amounting to Sh192 million resulting in a capital loss of Sh272 million.
“No satisfactory explanation was provided for the decision to purchase the bonds at a premium and sell at a discount within the same period. This contravenes Section 2.8 of the Fund Investment Policy Statement, 2020 which requires that investments shall be made with proper judgment and care under the circumstances prevailing which pursue prudence, discretion and intelligence exercise considering probable safety of the capital as well as the probable income to be derived.
To this end, Gathungu said the assets of the Fund might not have been invested prudently and safeguarded from decline in value.
But NSSF explained that the Fund Fund has outsourced the investment decisions to six fund managers for the period under review and each fund manager independently undertakes their investment decisions without reference to the other.
He said that on May 28, 2024, CIC sold bond instrument number FXD 1/2018/15YR of a nominal value of Sh170 million and also on the same date, Africa Alliance bought a similar bond instrument but with a nominal value of Sh500 million.
On May 30, he said Africa Alliance bought another similar instrument with a nominal value of Sh227 million.
“From this particular instrument it is noted that Africa alliance bought a total of Sh727 million worth of bonds for the two dates compared to the Sh170 million of similar instrument sold by CIC implying that African Alliance bought the instrument from the market in accordance with the investment strategy they were pursing which could be different from that of CIC,” the NSSF management explained.
The National Social Security Fund (NSSF) is on the spot over the treasury bonds flagged by the Auditor General’s report, which led to the loss of billions of shillings for being sold at a cheaper rate.
According to the Auditor General Nancy Gathungu’s NSSF report for 2023/24, the schedule of treasury bond purchases, sales and redemption and bank statements reflected bonds purchased at a nominal value of Sh5.1 billion were sold for Sh4.3 billion.
“This is below the bond’s par value by Sh789 million contrary to Section 2.1 of Fund Investment Policy Statement, 2020 which states that the Board has a responsibility to invest the NSSF Assets in a responsible and prudent manner. It was noted that some bonds recorded high capital losses and the yield rate was minimal and Management did not compare the high capital losses with the yield rate for each bond,” Gathungu said in her report.
But appearing before the Public Investment Committee on Social Services, Administration and Agriculture on Wednesday, NSSF CEO David Koros said that the Fund has outsourced the process of investment to fund managers who have a discretionary investment mandate but within the Fund’s approved Investment policy statement (IPS).
“Bonds are sold at a discount if the coupon rate is lower than the current market rate as investors will only purchase the bond at a price below its
nominal value to compensate
for the lower return,” he explained.
Koros revealed that NSSF sold the bonds which had lower yields, a situation that was aimed at deploying proceeds into higher yielding bonds so as to improve the returns for the Fund, which has been a challenge for a number of years.
“All bonds which were sold at a discount had significantly lower coupons compared to the prevailing market yields. It is not possible to have such bonds sold at nominal or prices above nominal as these are true market dynamics,” he said.
But Saboti MP Caleb Amisi who is also the committee’s vice chairperson and chaired the session regretted the decision, even as he wondered whether the bonds were a good option to take terming the investment as ‘huge’
“We are talking about billions of shillings involved in the bonds’ transaction. Was this choice of investment really and efficient way to handle public funds?” Amisi posed.
At the same time, audit verifications revealed that similar bonds purchased and sold during the year under review were purchased at a premium price, higher than the nominal price amounting to Sh79 million and sold at discounted prices amounting to Sh192 million resulting in a capital loss of Sh272 million.
“No satisfactory explanation was provided for the decision to purchase the bonds at a premium and sell at a discount within the same period. This contravenes Section 2.8 of the Fund Investment Policy Statement, 2020 which requires that investments shall be made with proper judgment and care under the circumstances prevailing which pursue prudence, discretion and intelligence exercise considering probable safety of the capital as well as the
probable income to be derived
.
To this end, Gathungu said the assets of the Fund might not have been invested prudently and safeguarded from decline in value.
But NSSF explained that the Fund Fund has outsourced the investment decisions to six fund managers for the period under review and each fund manager independently undertakes their investment decisions without reference to the other.
He said that on May 28, 2024, CIC sold bond instrument number FXD 1/2018/15YR of a nominal value of Sh170 million and also on the same date, Africa Alliance bought a similar bond instrument but with a nominal value of Sh500 million.
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On May 30, he said Africa Alliance bought another similar instrument with a nominal value of Sh227 million.
“From this particular instrument it is noted that Africa alliance bought a total of Sh727 million worth of bonds for the two dates compared to the Sh170 million of similar instrument sold by CIC implying that African Alliance bought the instrument from the market in accordance with the investment strategy they were pursing which could be different from that of CIC,” the NSSF management explained.
By Irene Githinji