2019 Annual Report & Financial Statements 2 TABLE OF CONTENTS

Scheme Information 3 About the Fund 4 Fund Structure 5 Fund Highlights 6 - 9 Chairman’s Report 10 - 13 Ripoti ya Mwenyekiti 14 - 17 CEO & Trust Secretary’s Report 18 - 20 Taarifa ya Mkurugenzi Mkuu na Katibu Mdhamini 21 - 23 Board of Trustees 26 - 29 Management Team 30 - 32 Statement of Corporate Governance 34 - 42 Corporate Social Responsibility 43 - 44 Human Resources 45 - 46

STATUTORY INFORMATION Statement of Trustees’ Responsibilities 49 Independent Auditor’s Report 50 - 51 Statement of Changes in Net Assets Available for Benefits 52 Statement of Net Assets Available for Benefits 53 Statement of Changes in Members’ Funds 54 Statement of Cash Flows 55 Notes to the Financial Statements 56 - 105

Annual Report & Financial Statements | 2019 1 2 Kenya Power Pension Fund | Defined Benefits SCHEME INFORMATION For the Year Ended 31 December 2019

Trustees Sammy A. Oduori - Chairman Kairo Thuo Jared Othieno - Retired on 30th January 2020 David Monandi - Retired on 30th January 2020 Ambrose Lamaon - Retired on 30th January 2020 Imelda Bore Ernest N. Nadome Kosgey C. Kolil Benard Ngugi - Joined on 30th January 2020 Cecilia Kalungu - Joined on 30th January 2020 Mohamed Somo - Joined on 30th January 2020

Ag. CEO & Trust Secretary Edwin Ruttoh

Registered Office Retirement Benefits Scheme Trustees Stima Plaza Annex Kolobot Road, Parklands P. O. Box 1548 - 00600, Nairobi

Investment Managers Principal Legal Advisors ICEA Lion Asset Management Limited Kaplan & Stratton Advocates P. O. Box 48231 46143 - 00100, Nairobi P. O. Box 40111 - 00100, Nairobi Sanlam Investments East Africa Limited P. O. Box 67262 30550 - 002100, Nairobi

Custodians Auditor Standard Chartered Securities Services Kenya Ernst & Young LLP P. O. Box 40984 - 00100, Nairobi Certified Public Accountants Stanbic Bank Limited Kenya Re Towers, Upperhill Off Ragati Road P. O. Box 30550 - 00100, Nairobi P.O. Box 44286 - 00100, Nairobi

Bankers Actuary Co-operative Bank of Kenya Limited Zamara Actuaries, Administrators & P. O. Box 48231 -00100, Nairobi Consultants Limited P. O. Box 52439 - 00200, Nairobi Standard Chartered Bank Kenya Limited P. O. Box 30003 - 00100, Nairobi

Annual Report & Financial Statements | 2019 3 ABOUT THE FUND

The Kenya Power & Lighting Company Limited Staff Retirement Benefits Scheme (‘the Fund”) was established on 1st January 1970. The Fund is a defined benefit occupational pension fund and was formed for the employees of The Kenya Power & Lighting Company Limited (‘the Sponsor’), then known as East Africa Power and Lighting Company Limited. The Fund is governed by a Trust Deed and Rules which has been approved by the Retirement Benefits Authority (RBA). The main purpose of the Fund is to provide lump sum benefits and pension to members upon attainment of the retirement age, and where applicable, benefits for dependants of deceased members.

The Fund is approved by Kenya Revenue Authority for income tax purposes and is treated as an ‘exempt scheme’ under Income Tax (Retirement Benefits) Rule No. 4.

To be the best-in-class occupational pension scheme in Africa

Vision

Mission

To deliver value and quality of life Core Values in retirement for • Integrity our members • Accountability • Courtesy • Efficiency • Stewardship

4 Kenya Power Pension Fund | Defined Benefits ABOUT THE FUND

MEMBERS date. A member who leaves before normal retirement date can elect to receive 50% of their accrued benefits The members of the Fund comprise of retirees, deferred or transfer to another pension Fund. Where a member members, beneficiaries and in-service employees of the dies in service, the eligible beneficiaries are entitled to a Sponsor as at June 2006. lump sum and monthly pension benefits.

FUND BENEFITS FUND STRUCTURE

The Fund is a defined benefit scheme which was closed The Fund is established under a Trust managed by to new members and ceased receiving contributions a Board of Trustees as required by the Retirement with effect from 30th June 2006. Members who retire on Benefits Act. The day to day running of the Fund is normal retirement date receive a pension calculated as carried out by the Secretariat that supports the Board 1/400 of final pensionable emoluments for each complete in meeting its objectives. The Secretariat headed by the month of pensionable service to 31 December 1999 and Trust Secretary works in liaison with the Fund service 1/600 of final pensionable emoluments for each month of providers that include fund managers custodians, pensionable service from 1 January 2000 up to closing actuaries, lawyers and auditors.

CUSTODIAN AUDITORS

MEMBERS FUND MANAGERS BOARD (In service members, OF TRUSTEES deferred members, retiree pensioners, beneficiary pensioners)

SECRETARIAT ACTUARY

Annual Report & Financial Statements | 2019 5 ABOUT THE FUND

FUND HIGHLIGHTS

Return on Investments 12% 10.60% 10.53% 10% 9.40%

8% The Trustees have adopted an 6.54% Investment Policy which outlines the 6% strategies for maximizing the long- % Return 4% 3.55% term return on investments while mitigating short-term volatility. The 2% investment framework takes into consideration the maturity profile 0% 2015 2016 2017 2018 2019 of the Fund to ensure that liquidity Year requirements are met.

Increase in Net Assets

900 785.09 648.37 700 508.12 500 300 171.17 The assets of the Fund grew by Ksh 100 508.12 million during the year (2018: -100 2015 2016 2017 2018 2019 -503.07 million). The increase in growth as compared to the previous -300

Assets Value (KShs. million) Assets Value year was attributed to better return -500 503.07 on invested assets and in particular -700 Year quoted equities.

Fund Growth

20 19.48 19.47 The growth of the Fund is the net 18.96 19 18.69 movement of investment returns and pay outs of the retirement benefits to 18.04 18 members. Despite the increasing out flows owing to the aging membership,

Fund Value (KShs. billion) Fund Value 17 steady growth has been registered 2015 2016 2017 2018 2019 over the years which can be attributed Year to good returns on investments.

6 Kenya Power Pension Fund | Defined Benefits Membership Movement (In service & deffered)

4,200 4,000 4,022 3,800 3,856 3,684 3,600 3,437 3,400 3,185 The Fund was closed to new entrants 3,200 Total Number Total from 30th June 2006 and hence a 3,000 continued drop in membership is 2,800 2015 2016 2017 2018 2019 expected as members exit from the Year Fund.

Business Highlights/KPIs

Net returns on investments Increase in Net Assets Net Surplus from dealing KShs 1,907.92 m KShs 508.12 m with members 2018 Kshs 846.39 m 2018 Kshs (503.07) m KShs (1,243.17) m 2018 Kshs (1,186.75) m

Active Members Benefits Payable Fund Value 3,010 KShs (1,243.17) m KShs 19,469.35 m In 2018 3,242 2018 Kshs (1,186.75) m 2018 Kshs 18,961.23 m

Deferred Members Pensioners Return on Investments 175 4,257 10.53% In 2018 195 In 2018 4,148 In 2018 - 3.55%

Annual Report & Financial Statements | 2019 7 ABOUT THE FUND FUND HIGHLIGHTS

Administrative Expenses % 1.20% 1.03% 1.00% 0.87% 0.80% 0.69% 0.69% 0.56% % 0.60%

0.40%

0.20% The Fund has put in place financial management measures to ensure 0.00% that the administrative expenses 2015 2016 2017 2018 2019 are below 1% of the total fund Year value.

Actuarial Valuation Results

119.90% 115.00% 120% 111.70% 100% 100.20% The level of funding (the ratio of the fund assets to accrued liabilities) 80% 77.00% 65.10% was 111.7% in 2019 which was 60% above the minimum requirement of 45.90% 49.20% 100% prescribed in the Retirement

Funding Level 40% Benefits Regulations. The reduction 20% in the funding level from the previous valuation was mainly due 0% 2002 2004 2006 2008 2010 2013 2016 2019 to the low investment performance registered in 2018 after the equities Year prices declined sharply.

8 Kenya Power Pension Fund | Defined Benefits DEFINED BENEFITS 5 YEAR SUMMARY

YEAR 2015 2016 2017 2018 2019 Statement of changes in Net Asset KShs' 000 KShs' 000 KShs' 000 KShs' 000 KShs' 000 Contributions receivable - - - - - Benefits payable (868,742) (847,987) (922,276) (1,186,748) (1,243,170) Net surplus from dealing with members (868,742) (847,987) (922,276) (1,186,748) (1,243,170)

Returns on investments Investment income 1,159,356 1,632,740 1,876,436 878,316 1,954,888 Investment management expenses (24,593) (22,433) (35,452) (31,931) (46,965) Net returns on investments 1,133,788 1,610,307 1,840,984 846,384 1,907,923 Other Income 7,072 14,454 1,486 32,231 12,150

Administrative expenses (100,944) (128,401) (135,100) (194,945) (168,783) Increase in net assets for the year 171,175 648,374 785,095 (503,078) 508,119

Statement of Net Assets Assets Equipment 781 4,769 6,122 5,399 333,651 Intangible assets 30,304 30,483 29,574 23,535 20,783 31,086 35,253 35,695 28,934 354,434 Investments Investment property 5,805,864 7,878,233 6,921,397 6,974,559 5,980,880 Investment property - WIP 21,656 30,404 66,894 303,480 1,383,981 Government securities 4,701,185 5,437,041 5,653,184 6,091,824 6,618,005 Short term deposits 767,577 435,577 715,528 351,218 596,650 Corporate bonds 1,043,517 955,497 885,434 716,071 377,594 Investment in quoted equity 2,846,022 2,447,639 2,871,034 2,491,706 3,073,534 Investment in unquoted equity 273,862 280,468 385,494 484,406 542,342 Commercial paper - - - - - Offshore Investments 1,299 - - - - 17,137,042 17,464,860 17,498,965 17,413,265 18,572,985 Current assets Bank and cash balances 5,866 1,135 6,632 9,613 20,367 Due from related parties 1,926 7,527 15,252 12,347 74,929 Other receivables 1,126,645 1,351,548 2,101,162 1,695,193 679,980 1,134,467 1,360,211 2,123,046 1,717,152 775,276 Total assets 18,302,595 18,860,323 19,657,706 19,159,352 19,702,695

Liabilities Benefits payable 2,468 - - - - Due to related parties 16,671 9,814 6,712 61,150 - Other payables, provisions and accruals 238,943 157,623 173,015 136,973 233,346 Property deposits - - - - - Total Liabilities 258,082 167,438 179,727 198,123 233,346

Trust fund 18,044,513 18,692,886 19,477,980 18,961,229 19,469,349

Annual Report & Financial Statements | 2019 9 CHAIRMAN’S REPORT

The total market value of the Fund’s assets increased by Kshs 0.50 billion from Kshs 18.96 billion to close at Kshs 19.46 billion at the end of the reporting period. The increase in the net assets was due to the good performance registered from the quoted equities asset class.

Sammy Oduori Chairman

Dear Members, During the year inflation was 5.8% compared to 4.7% in 2018 majorly as a result of by high food and fuel prices It is my privilege to present to you the Annual Report and according to data by the Kenya National Bureau of Financial Statements for the year ended 31st December Statistics (KNBS). The Kenya shilling strengthened by 2019. 0.5% against the USD in 2019. The strengthening was mainly supported by strong forex reserves, agricultural ECONOMIC HIGHLIGHTS exports and increased diaspora remittances in the year.

Kenya has made significant political, structural and The quoted equities market was on an upward trend, with economic reforms that have largely driven sustained the performance benchmark indices registering positive economic growth, social development and political growth, compared to the year 2018. The all-inclusive NSE gains over the past decade. The gross domestic product All Share Index recorded a 17.2% gain while the NSE 25 growth (GDP) was subdued during the year, estimated Share Index was up 15.5%. The NSE 20 Share Index was at 5.7% in 2019 compared to 6.3% in 2018. This was down 6.3%. During the year there was increased foreign attributed to low agricultural output as caused by erratic investor participation. and unexpected weather patterns as well as weak private sector investment during the year. The interest In the year under review, the bonds turnover edged up rate caps prevailed for a larger part of the year which 15.8% to settle at Kshs. 1.3 trillion from Kshs. 1.1 trillion contributed to slow private sector credit growth. recorded previous year due to increased reallocation of funds to fixed income assets. The Bond Market turnover

10 Kenya Power Pension Fund | Defined Benefits for quarter 4 2019 stood at Kshs. 106.46 Billion, compared Composite Property Sales Index, residential properties to Kshs. 118.17 Billion registered in quarter 4 2018, prices fell by 3.4%, which was a consecutive quarter registering a 9.91% decrease. decline after falling by 3.2% in quarter 2 2019. These declines were as a result of the continued credit crunch The yields on the 91-day, 182-day and 364-day T-bills along with hash economic times which negatively declined by 0.14%, 0.86% and 0.12% to close at 7.2%, impacted the purchasing power of buyers. Apartments 8.15% and 9.83% in 2019, respectively. continued to gain more popularity than detached units due to their affordability and high returns. 2019 delivered robust and sustained growth in the African PE ecosystem, as highlighted by the latest fundraising, On a global scale, the year recorded its slowest pace deals and exit figures released by the African Private ever since the global financial crisis. Rising trade Equity and Venture Capital Association. Private equity barriers, associated uncertainty weighed on business activity on the continent picked up in terms of deal sentiment and activity globally especially in China and volume and fundraising compared to 2018, while the other emerging economies. The global economic growth exits landscape remained stable. The number of exits continued its gradually slowing path as U.S. - China recorded in 2019 remained stable compared to 2018. trade tensions persisted and Brexit issues remained unresolved. The monetary easing by several major The total deal volume in Africa reached its highest since central banks did not have much effect on stabilizing and 2014, at 198 PE deals with a value of USD 3.4 billion, strengthening global economic activity. The Sub-Saharan indicating that activity on the continent continues to be African region remained on a recovery path growing encouraged by investors’ interest in and commitment to by 2.4% during the period under review compared to a Africa’s growth. Exits to Trade Buyers represented the growth of 3% in 2018. most common exit route in 2019 (44%), a shift from the two previous years where exits to PE and other financial PENSION INDUSTRY AND buyers was the most common exit route. Kenya attracted REGULATORY ENVIRONMENT Venture Capital deals worth Kshs. 74.3 billion in the past five years, second highest in Africa after South Africa. The Retirement Benefits Authority, (RBA) is responsible for regulation and supervision of the retirement benefits Private Equity and venture capital industry continues to sector. The Authority regulates the establishment grow exponentially, and it is expected that 2020 will be and management of retirement benefits schemes, better despite global macroeconomic headwinds. development of the industry and advise the government on matters relating to retirement benefits. The real estate sector recorded an average growth of 4.8% in the first three quarters which was 0.3% points higher than the same period in 2018, as per the Kenya LEGISLATIVE CHANGES DURING THE YEAR National Bureau of Statistics (KNBS). This was attributed The Budget Statement for the Fiscal Year 2019/2020 to positive demographic growth as well as continued was read on 10th June 2019. Various amendments were enhancement of infrastructure which positioned introduced to the Occupational Retirement Benefits Nairobi as an economic hub, hence attracting foreign Schemes. These changes to the Retirement Benefits direct investments. However, the average total return (Occupational Retirement Benefit Schemes) Regulations, was 2.2% lower than what was recorded in 2018. The 2000 were subsequently gazetted. Below is a highlight of slowdown was due to reduced property transactions as the changes: a result of rapid changes in the operating environment; change of currency, increased dependency ratio, a. Schemes shall allow members to make additional reduced disposable income, inflation, low productivity in voluntary contributions for purposes of funding a agricultural and manufacturing industry and unstable job medical scheme to be accessed after retirement. market among other factors. b. The medical funds shall be segregated and invested The residential property market continued to decline and as per the investment policy of the fund for this was characterized by a falling demand and increasing purpose oversupply. The average rental yield declined by 0.4% compared to 2018. According to quarter 3,2019 Hass Annual Report & Financial Statements | 2019 11 CHAIRMAN’S REPORT

c. The scheme rules shall provide that a member may and regulatory requirements as well as the Trust Deed transfer a portion of his/her benefits to a medical- and Rules. During the year, the Board set in motion a cover provider where the member has been unable comprehensive enterprise risk management framework to build a post-retirement medical fund from additional with a view of aligning it to the current operating voluntary contributions. environment. Consequently, a more robust framework was developed that aligned risk management to the The Fund has established an elaborate compliance tool established international standards and best practices. which tracks the compliance levels against the legislative The Fund’s corporate governance, risk management and regulatory requirements. In addition, it continues to structures and processes are detailed on pages 34 to 42 monitor processes to ensure that all the changes are of this report. adhered to while taking advantage of the improvements in the operating environment. AWARDS AND RECOGNITION FINANCIAL PERFORMANCE During the year, the Fund participated in the Financial Reporting (FiRe Awards) and emerged the first Runners I am pleased to report that, the Fund delivered a good Up in the Not-For-Profit category. The awards seek performance, challenges notwithstanding. The Fund to promote integrated reporting through enhancing achieved an annual return on investments of 10.53% for accountability, transparency and integrity in compliance the year ended 2019. with appropriate financial reporting framework and other disclosures on governance, social and environmental The total market value of the Fund’s assets increased by reporting by private and public sectors domiciles in East Kshs 0.50 billion from Kshs 18.96 billion to close at Kshs Africa. The annual FiRe Awards are organized by the 19.46 billion at the end of the reporting period. The increase Public Sector Accounting Standards Board (PSASB), in the net assets was due to the good performance Capital Markets Authority (CMA), Nairobi Securities registered from the quoted equities asset class. Exchange (NSE), and the Institute of Certified Public Accountants of Kenya (ICPAK). The Board of Trustees endeavors to prudently invest available funds in an optimized portfolio that yields favorable returns as well as mitigate against market volatility. This is done to ensure that the existing funding OUTLOOK levels are sustained. The long-term investment objective is to achieve return on investments in excess of inflation Kenya’s gross domestic product (GDP) is projected to slow by ensuring a diversified portfolio and enhanced down substantially in 2020 to approximately 1.0 percent performance monitoring mechanisms. due to the negative impact of the COVID-19 pandemic. Economic growth projection remains highly uncertain and the outcome will depend on the policy actions taken CORPORATE GOVERNANCE to mitigate the situation internationally and within Kenya. Our responsibility and priority as a Fund, is to safeguard the health of our members, employees as well as The Board strives to maintain the highest level of contributing to the protection of the society as a whole. corporate governance standards in the management of We will leverage on digital technology as we endeavor to the Fund. To promote effective governance across the offer seamless service to our members. Fund’s operations, the Board has a governance framework

which maps out the external and internal processes. This The Trustees will continue to implement strategies as is achieved by implementation of policies, procedures and outlined in the 2016-2020 Strategic and Operational systems to ensure full compliance with all the legislative Strengthening Plan, as it pursues its vision of becoming

12 Kenya Power Pension Fund | Defined Benefits the best-in-class occupational scheme in Africa. made to the sustainable growth of the Fund. Finally, to Among the key areas of focus in the year will include the CEO and Trust Secretary with his team, receive my the enhancement of member offerings, execution of sincere gratitude for your relentless effort in managing alternative investment and the leveraging of ICT as the the Fund’s operations. key enabler in pursuit of the Fund’s strategic and business objectives. God Bless you all.

APPRECIATION

I wish to deeply thank the members for their goodwill, my fellow Board Members for their support and all other stakeholders for their contributions during the year Sammy Oduori towards attainment of the Fund’s objectives. I also wish to Chairman acknowledge the Sponsor for the immense contribution

Annual Report & Financial Statements | 2019 13 RIPOTI YA MWENYEKITI

Jumla ya thamani ya soko ya Hazina iliongezeka kwa shilingi ya kenya bilioni 0.50 kutoka shilingi ya kenya bilioni 18.96 na kufunga kwa Kshs. bilioni 19.46 mwishoni mwa kipindi kinachoripotiwa. Ukuaji wa mali ya Hazina ulitokana na utendaji mzuri uliosajiliwa kutokana na uongezeko la hisa.

Sammy Oduori Mwenyekiti

Wapendwa Wanachama, Katika mwaka huo, mfumuko wa bei ya bidhaa ulikuwa Ni furaha yangu kuwasilisha Ripoti ya Kila Mwaka na 5.8% ikilinganishwa na 4.7% mwaka wa 2018 hasa Taarifa za Kifedha za mwaka uliomalizikia tarehe 31 kutokana na bei za juu za chakula na mafuta kulingana Disemba 2019. na data kutoka Shirika la Kitaifa la Takwimu la Kenya (KNBS). Shilingi ya Kenya iliimarika kwa 0.5% dhidi MAELEZO MUHIMU YA KIUCHUMI ya Dola ya Marekani mwaka wa 2019. Kuimarika huko kulisababishwa hasa na uwepo thabiti wa fedha na Nchi ya Kenya imefanya mabadiliko makubwa ya kisiasa, mali ya kusawazisha uchumi, mauzo ya bidhaa za kilimo kimfumo na kiuchumi ambayo yamesababisha ukuaji katika nchi za ng’ambo na kuongezeka kwa kiwango cha endelevu wa kiuchumi, maendeleo ya kijamii na kupiga pesa zilizotumwa nchini na Wakenya wanaoishi ng’ambo hatua kisiasa katika mwongo uliopita. Ukuaji wa (GDP) mwaka huo. ulididimia katika mwaka huo, ikikadiriwa kuwa 5.7% mwaka wa 2019 ikilinganishwa na 6.3% mwaka wa 2018. Soko la hisa nukuzi liliimarika, huku vipengee Hii ilitokana na mapato ya chini yanayotokana na kilimo, vinavyoashiria utendaji vikisajili ukuaji, ikilinganishwa hali iliyosababishwa na mitindo isiyotarajiwa ya hali na mwaka wa 2018. Kiwango cha Hisa Jumla la soko la ya hewa pamoja na udhaifu katika uwekezaji kwenye hisa la Nairobi (NSE all share index) kinachojumuisha sekta ya kibinafsi mwaka huo. Vikomo vya viwango vya kila kipengee kilisajili ukuaji wa 17.2% huku Kiwango riba vilitekelezwa kwa sehemu kubwa ya mwak,a jambo cha hisa cha 25 (NSE 25 share index) ikikua kwa 15.5%. lililochangia kujikokota kwa ukuaji wa mikopo katika Kiwango cha hisa cha 20 (NSE 20 share index) kilipungua sekta ya kibinafsi. kwa 6.3%. Katika mwaka husika, kulikuwa na ongezeko la shughuli za uwekezaji wa kigeni.

14 Kenya Power Pension Fund | Defined Benefits Katika kipindi cha mwaka husika, mapato ya vifungo mwaka huu wa 2020 utakuwa mwaka mwingine mzuri vya hazina yailifikia asilimia kumi na tano nukta nane licha ya changamoto za uchumi duniani. (15.8%) kufikia shilingi za Kenya 1.3 trilioni ikilinganishwa na shilingi za Kenya 1.1 trilioni iliyosajiliwa mwaka Sekta ya mali isiyohamishika ilisajili ukuaji wa kiwango uliotangulia kutokana na kuongezeka kwa uwekezangi wastani wa 4.8% katika vipindi vya robo tatu za mwaka kwa rasilimali zisizohamishika. Mapato ya vifungo vya ambao ulikuwa ni wa pointi 0.3% zaidi kuliko kipindi hazina robo nne ya mwaka wa 2019 ilifikia shilingi za sawia cha mwaka wa 2018, kulingana na Shirika la Kitaifa Kenya bilioni 106.46, ikilinganisha na shilingi za Kenya la Takwimu la Kenya (KNBS). Hii ilichangiwa pakubwa bilioni 118.17 zilizosajiliwa kwenye robo nne ya mwaka na ukuaji wa kidemografia pamoja na uimarishaji wa wa 2018; ikisajili kupungua kwa asilimia tisa nukta tisa miundo mbinu ambao iliweka Nairobi kama kituo kikuu 9.9%. cha Kiuchumi, huku ikivutia uwekezaji wa moja kwa moja wa kimataifa. Hata hivyo, uwastani wa matokeo ya jumla Mapato ya siku 91, siku ya 182 na siku ya 364 ya bili ya ulikuwa ni 2.2% chini ya ule uliosajiliwa mwaka wa 2018. T (T-bills) zilipungua kwa asilimia sufuri nukta moja nne Upungufu huo ulitokana na kupungua kwa miamala ya (0.14%), asilimia sufuri nukta nane sita (0.86%) na asilimia nyumba za makazi ikiwa kama matokeo ya mabadiliko sufuri nukta moja mbili (0.12%) ili kufikia kwa asilimia ya haraka katika mazingira ya utendakazi; mabadiliko ya saba nukta mbili (7.2%), asilimia nane nukta moja tano sarafu, kuongezeka kwa uwiano wa utegemezi, kupungua (8.15%) na asilimia tisa nukta nane tatu (9.83%) mwaka kwa mapato, mfumko wa bei, kupungua kwa uzalishaji wa 2019 mtawalia. kwenye sekta ya kilimo na viwanda pamoja na soko tete la kazi kati ya hali nyinginezo. Mwaka wa 2019 ulionyesha ukuaji kwa mfumo wa ikolojia ya hisa binafsi katika bara Afrika, kama ilivyo Soko la makazi liliendelea kupungua, hii lilisababishwa thibitishwa na michango, mikataba na tarakimu za na kupungua kwa uhitaji na kuongezeka kwa nyumba. mwisho zilizotolewa kupitia kwa African Private Equity Mapato wastani ya kodi yalipungua kwa 0.4% and Venture Capital Association. ukilinganisha na 2018. Kulingana na Faharisi Kamili Shughuli za uwekezaji kwenye sekta ya kibinafsi katika ya Hass ya Mauzo ya Nyumba, ya robo ya 3 ya mwaka bara hili ziliimarika katika sehemu ya mikataba na wa 2019, bei za nyumba za makazi zilipungua kwa 3.4%. michango zikilinganishwa na mwaka wa 2018, huku Huu ulikuwa upunguaji wa 3.2% kwa robo ya pili ya mipango ya kuondoka ikibaki shwari. Idadi ya kuondoka mwaka wa 2019. Upunguaji huo ulitokana na matatizo kwa mikataba iliyorekodiwa mwaka wa 2019 ilibakia ya mikopo yanayoendelea pamoja na hali ngumu ya thabiti ikilinganishwa na mwaka wa 2018. kiuchumi ambayo iliathiri pakubwa uwezo wa kununua nyumba. Nyumba za ghorofa za makazi ziliendelea kupata Idadi ya jumla ya mikataba barani Afrika ilifikia kiwango umaarufu kuliko nyumba za makazi za kivyake kutokana cha juu kabisa tangu mwaka wa 2014, hadi mikataba ya na uwezo wa kuzinunua, pamoja na mapato mazuri ya hisa binafsi 198 iliyo na thamani ya Dola ya Marekani kifedha. bilioni tatu nukta nne, ikionyesha kwamba shughuli hapa barani zinaendelea kuhimizwa na mahitaji ya wawekezaji Kimataifa, mwaka husika ulisajili mapato madogo zaidi pamoja na uwajibikaji kwenye ukuaji wa bara la Afrika. tangu kutokea kwa kipindi kile cha shida ya kifedha Uondokaji wa wawekezaji uliwakilisha njia inayotumika duniani. Kuongezeka kwa vikwazo vya kibiashara sana ya kuondoka mwaka wa 2019 (44%), tofauti na na utatanishi pia ukaathiri biashara na shughuli za miaka miwili iliyopita ambapo uondokaji huo wa hisa kilimwengu, hususan huko Uchina na uchumi zingine binafsi na wanunuzi wengine wa kifedha ilikuwa ndio sawia. Ukuaji wa uchumi ullimwenguni uliendelea kuinuka njia kuu ya kuondoka. Kenya ilivutia mipango ya mtaji pole pole wakati ambapo migongano ya kibiashara ya wa kuanzia biashara iliyokuwa na thamani ya Shilingi za Marekani na Uchina ulipoendelea na masuala ya mataifa Kenya Bilioni 74.3 katika miaka mitano iliyopita, ya pili ya ulaya(Brexit) kubakia tata. Usahilishaji wa kifedha kutoka kiwango cha juu barani Afrika ikifuata Afrika Kusini. kwa Benki Kuu za mataifa mengi duniani haukuwa na athari kubwa katika kusawazisha na kuimarisha shughuli Shughuli za hisa za kibinafsi na sekta ya kuanzisha za uchumi wa kilimwengu. Eneo la Kusini mwa Jangwa biashara inaendelea kukua na tunatarajia kwamba la Sahara Barani Afrika lilibakia kwenye hali ya kuinuka

Annual Report & Financial Statements | 2019 15 RIPOTI YA MWENYEKITI

huku likionyesha ukuaji wa 2.4% wakati wa kipindi ya kila mwaka yanayotokana na uwekezaji ya 10.53% kwa kinachotathminiwa ukilinganishwa na ukuaji wa 3% mwaka ulioisha wa 2019. mwaka wa 2018. Jumla ya thamani ya soko ya Hazina iliongezeka kwa shilingi ya kenya bilioni 0.50 kutoka shilingi ya kenya SEKTA YA PENSHENI NA bilioni 18.96 na kufunga kwa Kshs. bilioni 19.46 mwishoni MAZINGIRA YA UDHIBITI mwa kipindi kinachoripotiwa. Ukuaji wa mali ya Hazina ulitokana na utendaji mzuri uliosajiliwa kutokana na uongezeko la hisa. Mamlaka ya Manufaa ya Uzeeni (RBA), inawajibikia usimamizi na udhibiti wa sekta ya manufaa ya uzeeni. Bodi ya wadhamini inajizatiti kuwekeza fedha zilizopo Mamlaka inadhibiti Hazina na kusimamia mipango ya kiaminifu katika potifolio iliyoboreshwa ambayo inaleta manufaa ya uzeeni, maendeleo ya sekta pamoja na faida mzuri pamoja na kujilinda kutokana na hali tete kuishauri serikali kuhusu masuala yanayohusiana na ya soko. Hii inafanywa ili kuhakikisha kwamba viwango manufaa ya uzeeni. vilivyopo vya fedha vinadumishwa. Lengo la uwekezaji Mabadiliko ya Kisheria katika Mwaka Husika wa muda mrefu ni kufikia pato litokanalo na uwekezaji linalozidi mfumuko wa bei kwa kuhakikisha upanuzi Taarifa ya Bajeti ya Mwaka wa Kifedha wa 2019/2020 na uanuwaishaji wa potifolio na kuboresha taratibu za ilisomwa mnamo tarehe 10 Juni 2019. Mabadiliko kadhaa ufuatiliaji wa utendaji. kwenye Mipango ya Manufaa ya Kikazi ya Uzeeni yalianzishwa. Mabadiliko haya kwenye Manufaa ya Uzeeni (Mipango ya Manufaa ya Kikazi Uzeeni, 2000) yaliingizwa katika gazeti rasmi la serikali. Yafuatayo ndiyo UTAWALA WA KIUSHIRIKA mabadiliko hayo: Bodi inajizatiti kudumisha viwango vya juu zaidi vya a. Hazina itawaruhusu wanachama kufanya michango utawala katika usimamizi wa Hazina. Ili kuhimiza utawala ya ziada na ya hiari kwa ajili ya kusimamia mpango wenye ufanisi katika utendakazi mbalimbali wa Hazina, wa bima ya afya baada ya kustaafu. Bodi imeweka utaratibu wa kiutawala unaoramanisha michakato ya nje na ya ndani. Hii inafikiwa kupitia b. Fedha hizo za bima ya afya zitatengwa na kuwekezwa utekelezaji wa sera, taratibu na mifumo ili kuhakikisha kulingana na sera ya uwekezaji wa hazina hiyo utiifu kikamilifu wa taratibu yote ya kisheria pamoja na Makubaliano na Kanuni za Hazima. Katika mwaka huu, c. Masharti ya Hazina yataruhusu kuwa mwanachama Bodi ilianza kutekeleza utaratibu mpana wa udhibiti wa anaweza kuhamisha sehemu ya akiba yake kwa hatari wa biashara ikitazamia kupatanisha na mazingira ya mtoaji wa huduma ya bima ya afya ikiwa mwanachama sasa ya kuendesha biashara. Kutokana na hayo, utaratibu huyo ameshindwa kuandaa hazina ya kimatibabu ya mpana zaidi uliundwa ambao ulipatanisha udhibiti wa baada ya kustaafu hatari na viwango vilivyopo vya kimataifa na jitihada bora zoefu ulimwenguni. Utawala wa shirika, miundo ya Hazina imeweka chombo cha uzingatiaji ambacho udhibiti wa hatari na michakato ya Hazina imeelezwa kwa kinakagua viwango vya uzingatiaji dhidi ya taratibu kina kwenye ukurasa wa 42 wa ripoti hii. za bunge pamoja na yale ya kiudhibiti. Zaidi ya hayo, itaendelea kukagua michakato ili kuhakikisha kwamba mabadiliko yote yanafuatwa huku kukizingatiwa TUZO NA UTAMBUZI maboresho ya mazingira ya kikazi. Hazina pia ilishiriki katika Tuzo za Ripoti ya Fedha (FiRe Awards) na kuibuka ya pili bora kwenye kitengo cha Isiyo UTENDAKAZI WA KIFEDHA kwa minajili ya Faida (Not-For-Profit category). Tuzo hii hutafuta kuhamasisha mfumo wa utoaji ripoti wa pamoja Ninafurahi kuripoti kwamba, Hazina yetu ilifanya vyema kwa kuimarisha uwajibikaji, uwazi na uaminifu kwa licha ya changamoto zilizokuwepo. Hazina ilipata mapato kufuata mfumo sahihi wa taarifa za kifedha na maelezo mengine juu ya utawala, taarifa za kijamii na ripoti kuhusu

16 Kenya Power Pension Fund | Defined Benefits mazingira katika sekta binafsi na za umma katika eneo la la Afrika. Miongoni mwa maeneo muhimu ya kuzingatiwa Afrika Mashariki. Tuzo za kila mwaka za FiRe huandaliwa mwaka huu ni Pamoja na kuimarisha utoaji wa matoleo, na Bodi ya Viwango vya Uhasibu wa Sekta ya Umma utekelezaji wa uwekezaji mbadala na kusawazisha (PSASB), Mamlaka ya Masoko ya Mitaji (CMA), Soko la Teknolojia, habari na Mawasiliano (TEKNOHAMA) kama Ubadilishaji Hisa la Nairobi (Nairobi Securities Exchange kiwezeshaji au kichocheo muhimu katika kufikia na (NSE), na Taasisi ya Mahasibu wa Umma Walioidhinishwa kutekeleza malengo ya kimkakati na biashara ya Hazina. nchini Kenya (ICPAK).

SHUKRANI MTAZAMO Ningependa kuwashukuru sana wanachama kwa nia yao Uchumi wa Kenya (GDP) unakadiriwa kupungua pakubwa njema, wanachama wenzangu wa Bodi kwa msaada wao mwaka wa 2020 hadi takriban asilimia 1.0 kutokana na na washikadau wengine wote kwa michango yao katika athari hasi ya janga la COVID-19. Makadirio ya ukuaji wa mwaka huu ili kufikia malengo ya Hazina. Pia ningependa uchumi yanasalia kutotabirika na matokeo yatategemea kumtambua Mdhamini kwa mchango wake mkubwa hatua za sera zitakazochukuliwa ili kukabiliana na hali hii katika ukuaji endelevu wa Hazina. Hatimaye, Mkurugenzi ulimwenguni na nchini Kenya. Mkuu na Katibu wa Hazina na timu yake wapokee shukrani zangu za dhati kwa jitihada zisizotetereka za kusimamia Wajibu wetu na suala la kipaumbele kwetu kama Hazina utendakazi wa Hazina. ni kulinda afya ya wanachama, wafanyikazi wetu pamoja na kuchangia katika ulinzi wa jamii pana. Tutatumia Mungu awabariki nyote. teknolojia mbalimbali za kidijitali tukijitahidi kutoa huduma kwa urahisi kwa wanachama wetu.

Wadhamini wataendelea kutekeleza mikakati kama ilivyoainishwa katika Mpango wa Kuimarisha Mkakati na Uendeshaji (Strategic and Operational Strengthening Plan) wa 2016 hadi 2020 kadri inavyolenga kuafikia ruwaza yake ya kuwa mpango bora zaidi wa wafanyikazi kwenye Sammy Oduori kundi (best-in- class occupational scheme) katika Bara Mwenyekiti

Annual Report & Financial Statements | 2019 17 CEO & TRUST SECRETARY’S STATEMENT

Amongst our key quality management principles is Customer Focus and continuous improvement, which guides our efforts in working towards and exceeding the member’s expectations.

Edwin Ruttoh Ag. CEO & Trust Secretary

The results of 2019 were impressive despite the To assess the progress towards achieving expected challenging economic conditions witnessed in the results and identify the bottlenecks in investment and market we operate in and certainly the wider global portfolio management, the fund engaged the fund economy. managers through different platforms. These included day to day communication through the investment teams, In the past year, we made significant strides to drive to ensure that the team is informed. Equally, the fund growth across all our investments while reviewing every conducted monthly, quarterly, and annual structured aspect of our operations to improve efficiency, quality of meetings to ensure timely feedback and tracking of services and increase adoption of technology to deliver the rolling performance of the fund. For exemplary our mandate. The year also represented a significant performance, the fund managers fees incorporated a period with the near maturity of our 2016-2020 strategic bonus component as an incentive. plan which is anchored on four key pillars: optimizing performance, executing ‘project’ investments, enhancing Alternative assets are well known as an attractive member offering and strengthening the organization. way to diversify and enhance returns, but as market conditions change and investment options shift, the fund During the year, we continued to align our assets to the continuously reexamines its approach and questions strategic target levels as informed by the age profile of the longstanding assumptions. During this financial the fund membership. This was done to not only optimize period, the fund undertook several initiatives to expand the return on investment but also ensure an appropriate its territories in the alternative assets’ realm, majorly on level of liquidity was maintained to meet the retirement private equity and real estate. Though there were no new benefits obligations. private equity investments, the fund invested additional

18 Kenya Power Pension Fund | Defined Benefits money in the existing private equity funds regarding the completion of the job evaluation exercise and review strategy implementation. It is with great pleasure to report of our human resource practices. In addition, we were that the fund has continued to realize income from private able to move operations to our new office block situated equity funds in form of dividend and interest distributions at Stima Plaza Annex which was developed to create from investee companies. adequate space for the Secretariat to effectively serve its members. It is our belief that adequate working space will On real estate front, the Fund has continued to realize not only contribute to smooth business operations, but secure rental income as well as moderate capital also increase staff productivity and foster a positive work appreciation arising from its investment properties. In environment. accordance with the key bearing in our strategic plan of using third party financing, the Fund started the initiative Information and Communication Technology (ICT) is a of leveraging on third party funds in its developments. The key function in driving business process automation at Fund is in the process of onboarding a financial investor the Fund. Implementation of the current ICT strategic towards redevelopment of Umeme property. plan is in high gear, to address opportunities and gaps evident in the day-to-day operations as outlined in the The critical need to empower our members through Fund’s Strategic plan. Incidentally, there have been key appropriate financial information and education is innovation areas that have tapped into the potential growing. To address this demand, the fund engaged of modern technologies, increased need to push self- the pre-retirement members in an awareness creation services to our members as the key stakeholders was program and conducted retiree meetings with the aim of well as ensuring seamless and valuable information to aid communicating the strategy, status and performance of in decision making is available. the Fund. Similarly, we installed service desks at various Kenya Power offices to address individual member Therefore, the Fund’s focus has been on integration of queries. This approach provided a more personalized systems, business intelligence, streamlining internal service to members and achieved a wider reach. processes, finalization of the transition from the Sponsor’s technology infrastructure and developing self-service The Fund organized union and human resource meetings e-channel products of bulk SMS, mobile app, USSD in Nairobi and Kisumu to update union officials on the services, while pushing for increased adoption of the Funds’ setup, strategic initiatives, stakeholder duties members portal. and responsibilities, customer service initiatives, Fund investments and communication. The reason behind these The Quality Management System (QMS) is at the core of meetings was to equip the union officials and HR officers the Fund’s operations which was derived from our first with appropriate Fund information to enable them to assist ISO 9001:2008 certification in 2014. There have been two their constituents, a majority of whom are members of the (2) three-year certification periods, in which the Fund Fund, on matters pertaining to the Pension Fund. was re-certified under the ISO 9001:2015 certification. The latest period ended in early 2020 and our certification To demonstrate the Funds’ commitment to providing partner has already been engaged to initiate another quality services to the members, the KPPF Customer re-certification cycle. The CEO’s office is charged with Service Week commenced on the second week of October direction and oversight of the Fund’s QMS under the care and several activities were undertaken, including a short of the ISO committee. staff training on customer service. The well-publicized initiative attracted several members to the Secretariat Amongst our key quality management principles is office. This gesture was expanded in different parts of the customer focus and continuous improvement, which country, as suggested in the previous financial year. guides our efforts in working towards and exceeding the member’s expectations. We have equally bolstered our Our commitment to nurturing the best in class staff with collaborations through internal management reviews up to date training is unswerving. We have increased the and partner involvement to strengthen our QMS. This has variety of core and non-core training courses that are subsequently and will continue to ensure that products necessary to our staff both at work and away from work. and services to our membership and stakeholders meet In 2019, we closed out on several roles that were created the set quality standards and excellence. or fell vacant due to internal transitions of staff following

Annual Report & Financial Statements | 2019 19 CEO & TRUST SECRETARY’S STATEMENT

As an organization, the Trustees and management are in year 2020. We will continue leveraging on technology cognizant of the importance of effective risk management. to enhance efficiency in all our internal processes as well As such, we have institutionalized risk management ensuring that our services remain uninterrupted. practices into our processes as this is important to the financial wellbeing of our members and the broader In conclusion, it is worth mentioning that the noteworthy economy. Risk management is about understanding the performance was because of the immeasurable support uncertainties facing the Fund, developing strategies to received from you, our sponsor, members and all minimize their impact or benefit from them while achieving stakeholders. I also take this opportunity to sincerely our objectives. During the year, the Fund performed thank the Board of Trustees for their valuable insights, quarterly risk assessments to determine the risks to support, and leadership as well as to all the employees which it is exposed and to determine the materiality of for their unwavering commitment to serving the Fund. I such risks with a view of addressing them. In addition, the look forward to our collective effort towards creating Fund completed the process of developing the business a sustained growth and a lasting impact across our continuity plan whose principal objective is to ensure stakeholders. service continuity within the Fund. God Bless you all. We are optimistic about the future as it offers a considerable upside for the economy and an opportunity for the Fund to accelerate the delivery of its strategic plan. We are prepared to take advantage of any opportunities that arise to generate sustainable and stable returns for our members. We continue to position ourselves for a Edwin Ruttoh digitized future and implementation of the ICT strategy Ag. CEO & Trust Secretary and the business continuity plan will remain a key focus

20 Kenya Power Pension Fund | Defined Benefits TAARIFA YA MKURUGENZI MKUU NA KATIBU MDHAMINI

Miongoni mwa kanuni zetu za usimamizi wa ubora ni Uzingatiaji wa Mteja pamoja na maendeleo endelevu yatakayosaidia kuongoza jitihada zetu za kiutendakazi na hata kuyapitisha matarajio ya wanachama wetu.

Edwin Ruttoh Kaimu Mkurugenzi Mkuu na Katibu Mdhamini

Mwaka wa 2019 ulikuwa na ufanisi mkubwa kwani za umri wa uanachama wa hazina. Hatua hii ilichukuliwa hata Hazina hii ilikuwa na matokeo yakuridhisha licha sio tu kulinda mapato ya uwekezaji lakini pia kuhakikisha ya hali ngumu za kiuchumi zilizoshuhudiwa katika soko kwamba fedha za kutosha zinapatikana ili kufikia tunalofanyia kazi, na bila shaka katika soko pana la majukumu ya ufanisi wa kustaafu. uchumi wa kimataifa. Ili kufikia maendeleo ya kupatikana kwa matokeo Katika kipindi cha mwaka uliopita, tulijitahidi na yanayotarajiwa na pia kutambua vikwazo kwenye kufaulu kukua kwenye sekta zetu zote za uwekezaji uwekezaji na kusimamia shughuli za hazina, hazina huku tukitathmini vipengee vyote vya shughuli zetu ili hii iliwashughulisha mameneja wa hazina kupitia kwa kuimarisha utendakazi, ubora wa huduma na kuzidisha majukwaa mbali mbali. Hizi zilihusisha mawasiliano ya matumizi ya kiteknolojia ili kuyatimiza majukumu yetu. kila siku kupitia kwa vikosi vya uwekezaji, ili kuhakikisha Kadhalika, mwaka huo uliwakilisha kipindi muhimu kuwa kikosi kimewezeshwa. Hata hivyo, hazina ilifanya ikikaribia muda wa kukamilika kwa mpango mkakati mikutano rasmi ya kila mwezi, robo mwaka na hata wetu wa 2016-2020 uliowekewa mhimili wa nguzo kuu kila mwaka ili kuhakikisha imepata maoni kwa wakati nne: kuimarisha matokeo, ushughulikiaji wa ‘miradi’ unaofaa na kufuatilia utendakazi wa matokeo ya hazina. ya uwekezaji, kuboresha michango ya wanachama na Kwa matokeo mazuri, malipo ya mameneja wa hazina kuimarisha shirika. yaliingizwa kipengee cha bonasi kama posho.

Katika mwaka huo tuliendelea kupangilia rasilimali kwa Rasilimali mbadala zinafahamika vyema kama njia ya viwango vya malengo ya kimkakati kuambatana na sifa kuvutia ili kupanua na kuimarisha mapato, lakini kadri

Annual Report & Financial Statements | 2019 21 TAARIFA YA MKURUGENZI MKUU NA KATIBU MDHAMINI

hali ya soko inavyobadilika na machaguo ya uwekezaji ni wanachama wa Hazina, hususan kwenye masuala yanabadilika, hazina hii huendelea kutathmini upya yanahusiana na Hazina ya Pensheni. mtazamo wake na kudadisi dhana zilizopo. Katika kipindi hiki cha kifedha, hazina ilianzisha miradi mbali mbali ili Ili kuonyesha kujitolea kwa Hazina katika utoaji wa kupanua maeneo katika ulimwengu wa rasilimali mbadala, huduma bora kwa wanachama, Wiki ya Huduma ya hususan hisa zisizo na riba ya kudumu za kibinafsi na Wateja kwa KPPF katika wiki ya pili ya mwezi wa Oktoba biashara ya nyumba. Ijapokuwa hapakuwa na uwekezaji pamoja na shughuli nyingine nyingi zilitekelezwa, ikiwa ni mpya wa hisa zisizo na riba ya kudumu, hazina iliwekeza pamoja na mafunzo mafupi ya wafanyikazi kuhusu huduma fedha zaidi katika fedha zilizokuwepo za hisa zisizo na riba ya wateja. Miradi hiyo iliyopigiwa debe vizuri iliwavutia ya kudumu zilizohusiana na utekelezaji wa mkakati. Nina wanachama wengi na kuwafanya kufika kwenye Kituo furaha kuu kuwafahamisha kwamba hazina imeendelea Kikuu cha Hazina. Hatua hii ilipelekwa kwenye sehemu kupata mapato kutoka kwa fedha za mfuko binafsi za mbali mbali nchini, kama ilivyokuwa imependekezwa hisa zisizo na riba ya kudumu kwa njia ya hisa na mgawo katika mwaka wa kifedha uliotangulia. wa riba kutoka kwa kampuni zinazowashughulikia wawekezaji. Kujitolea kwetu katika kukuza maarifa bora kutoka kwa wafanyakazi wanaopata mafunzo ya kisasa zaidi Katika upande wa biashara ya nyumba, Hazina imeendelea darasani ni jambo la kuridhisha mno. Tumeongezea kupata mapato salama ya kodi pamoja na kuongezeka aina ya kozi za mafunzo muhimu na zile zisizo muhimu kwa mtaji wastani kutoka kwa mali yao ya uwekezaji. sana zinazofaa kwa wafanyikazi wetu wakiwa kazini Kuambatana na mwelekeo mkuu kwenye mpango mkakati na hata wakiwa nyumbani. Mwaka wa 2019, tuliondoa wetu wa kutumia mfadhili wa kifedha wa daraja la tatu, majukumu mengi yaliyokuwa yameundwa ama yalikosa Hazina hii ilianza mradi wa kusawazisha fedha za mfadhili umuhimu kutokana na uhamishwaji wa wafanyikazi wa daraja la tatu katika mipango yake ya maendeleo. kufuatia kukamilika kwa shughuli ya utathmini wa kazi Hazina hii iko kwenye mchakato wa kumuingiza mfadhili pamoja na ukaguzi wa taratibu zetu za usimamizi wa wa kifedha ili kuwekeza upya kwenye maendeleo ya wafanyikazi. Kwa kuongezea, tulihamisha shughuli zetu Uwekezaji wa Mali ya Umeme (Umeme property). kwenye jengo letu jipya lililopo kwenye Stima Plaza Annex lililokuwa limejengwa ili kutoa nafasi ya kutosha kwa Mahitaji makubwa ya kuwezesha wanachama wetu Kituo kikuu cha Hazina ili kuhudumia vyema wanachama kupitia kwa taarifa zinazofaa za kifedha pamoja na elimu wake. Tunaamini kwamba nafasi nzuri ya kufanyia kazi yanaendelea kuimarika. Ili kuyashughulikia mahitaji haitaimarisha tu utendakazi wa shughuli zetu bali pia haya, Hazina iliwahusisha wanachama waliokuwa karibu kuimarisha utendakazi wa wafanyikazi na kuboresha kustaafu katika programu ya kuwaandaa na kufanya vikao mazingira ya kazi. vya waliostaafu kwa lengo la kuwafahamisha kuhusu mkakati, hali na utendakazi wa Hazina. Pamoja na hayo, TEHAMA ni shughuli muhimu ya kuendesha mchakato tuliweka madawati ya huduma kwenye ofisi mbali mbali wa kibiashara kwa mfumo wa kiotomatiki kwenye Hazina. za Kenya Power ili kushughulikia masuala ya kibinafsi ya Kutekeleza mpango mkakati wa sasa wa TEHAMA wanachama. Utaratibu huu ulitoa huduma ya kabinafsi unaendelea kwa kasi, ili kushughulikia fursa na nafasi zaidi kwa wanachama pamoja na kuwafikia wengi. zinazoonekana bayana kwenye utendakazi wa kila siku kama ilivyoandikwa kwenye mpango mkakati wa Hazina. Hazina iliandaa vikao vya wanachama wa vyama vya Kwa bahati nzuri, pamekuwa na vipengee vya ubunifu wafanyikazi pamoja na usimamizi wa wafanyikazi jijini vilivyotumia teknolojia za kisasa, kadhalika iliongezea Nairobi na Kisumu ili kuwafahamisha wanachama mahitaji na kusababisha kuwepo kwa huduma za kibinafsi kuhusu mpangilio mzima wa Hazina, miradi ya kimkakati, kwa wanachama wetu kama washikadau wakuu na pia majukumu ya washikadau na wajibu wao, mipango ya kuhakikisha wanapata taarifa za urahisi na zenye thamani huduma ya wateja, uwekezaji wa Hazina na mawasiliano. ili kusaidia kurahisisha ufanyaji wa maamuzi bora. Sababu kuu ya mikutano hii ilikuwa ni kuwapatia maarifa wanachama wa vyama vya wafanyikazi na Maafisa wa Vivyo hivyo, mpango mkuu wa Hazina ni kuweka pamoja Usimamizi wa Wafanyikazi kwa taarifa inayofaa ya Hazina mifumo, siri za kibiashara, kuiweka sawa michakato ya ili kuwawezesha kusaidia wenzao, wengi wao wakiwa ndani, kukamilisha uhamishaji wa mifumo kutoka kwa

22 Kenya Power Pension Fund | Defined Benefits muundomsingi wa teknolojia ya mdhamini na kuunda hiyo kwa lengo la kutatua hatari hizo. Zaidi ya hivyo, kipindi cha bidhaa za kidijitali cha utoaji wa huduma- Hazina ilikamilisha utaratibu wa kuimarisha mpango kibinafsi kwa ajili ya kibunda cha ARAFA, programu ya wa uendelevu wa biashara ambao lengo lake kuu ni rununu, huduma za USSD, huku tukihimiza ukubalifu wa kuhakikisha uendelevu wa huduma ndani ya Hazina. matumizi ya kituo kwa wanachama. Tuna matumaini ya siku za usoni kwa kuwa inaonyesha Mfumo wa Kusimamia Ubora (QMS) umekuwa ndio kiungo kiwango fulani cha ukuaji wa uchumi na fursa kwa kikuu cha utendakazi wetu kutokea kwa uthibitisho wetu Hazina itakayoongeza kasi yakutimiza mpango mkakati. wa kwanza wa ISO 9001:2008 mnamo 2014. Kumekuwa na Tumejiandaa kutumia fursa ya nafasi yoyote inayojitokeza vipindi viwili (2) vya miaka mitatu ya uthibitisho, ambapo kwa lengo la kuunda mapato endelevu na thabiti kwa Hazina hii ilithibitishwa upya chini ya uthibitisho wa ISO ajili ya wanachama wetu. Tunaendelea kujiandaa kwa 9001:2015. Kipindi cha hivi karibuni zaidi kilichomalizikia mustakabali wa kidijitali na utekelezaji wa mkakati wa mapema ya mwaka wa 2020 na mshirika wetu wa TEHAMA na mpango endelevu wa kibiashara utabakia uthibitisho tayari ameanzisha mchakato wa kuthibitishwa kuzingatiwa zaidi kwenye mwaka wa 2020. Tutaendelea upya. Usimamizi na mwelekeo wa Mfumo wa Kusimamia kusawazisha kwenye teknolojia ili kuimarisha ufanisi Ubora (QMS) wa Hazina hii ni jukumu la ofisi ya Mkurugenzi kwenye michakato yetu yote ya ndani pamoja na Mkuu Mtendaji chini ya usimamizi wa kamati ya ISO. kuhakikisha kwamba huduma zetu hazitakatizwa.

Miongoni mwa kanuni zetu za usimamizi wa ubora ni Kwa kuhitimisha, ni muhimu sana kutaja kwamba Uzingatiaji wa Mteja pamoja na maendeleo endelevu matokeo haya yakuridhisha yalitokana na usaidizi wa yatakayosaidia kuongoza jitihada zetu za kiutendakazi kipekee uliotoka kwako, wadhamini wetu, wanachama na hata kuyapitisha matarajio ya wanachama wetu. na washikadau wote. Kadhalika, nachukua fursa hii Kadhalika, tumeimarisha ushirikiano wetu kupitia kwa kuwashukuru kwa dhati Mawasii wa Bodi kwa mchango tathmini za usimamizi wa ndani pamoja na ushirikiano wa wao wenye thamani kubwa, usaidizi, na uongozi na hali wadau ili kuboresha Mfumo wetu wa Kusimamia Ubora kadhalika kwa wafanyikazi wote kwa kujitolea kwao (QMS). Hatua hii imeendelea na itadumu kuendelea kwa bidii ya mchwa ili kuhudumia Hazina. Natazamia kuhakikisha kwamba bidhaa na huduma kwa wanachama kwa jitihada zetu za pamoja zitakazolenga kuunda na washikadau wetu zinafikia viwango vya juu vya ubora ukuaji endelevu pamoja na athari ya muda mrefu kwa na ufanisi unaotarajiwa. washikadau wetu wote.

Kama shirika, Wasii pamoja na wasimamizi wanafahamu Mungu Awabariki nyote. sana umuhimu wa usimamizi unaofaa ili kukabiliana na athari. Kufuatia hayo, tumepangilia kiasasi kanuni zetu za usimamizi wa athari na kuiingiza kwenye michakato yetu kwa kuwa ni muhimu katika kulinda fedha za wanachama wetu na uchumi mpana kwa jumla. Usimamizi wa athari unahusu kuelewa hatari zinazoikabili Hazina, kuunda mikakati ili kupunguza athari zake ama ufanisi kutoka Edwin Ruttoh kwao huku tukiyafikia malengo yetu. Katika mwaka huo, Kaimu Mkurugenzi Mkuu Na Katibu Mdhamini Hazina ilifanya utathmini wa robo mwaka wa kuangaliza hatari itakayopatikana ili kuamua uhakika wa hatari

Annual Report & Financial Statements | 2019 23 24 Kenya Power Pension Fund | Defined Benefits Annual Report & Financial Statements | 2019 25 BOARD OF TRUSTEES

Sammy Oduori – Chairman

He was appointed to the Board on 28th February 2003 and is the current Chairman.

He is a qualified accountant and worked with The Kenya Power and Lighting Company Ltd for 21 years where he held senior management positions prior to his retirement in the year 2000.

He has vast experience in finance, customer service and marketing. He is also a Certified Pension Fund Trustee.

Kairo Thuo

He was appointed to the Board on 31st August 2018. He holds Bachelor of Law degree from the University of Nairobi and is a Certified Public Accountant of Kenya, CPA (K).

He is the founding partner at Viva Africa Consulting which specializes in tax, legal and financial consultancy. Prior to joining Viva Africa Consulting, he was responsible for establishing and running the Tax Transaction Advisory group for Deloitte & Touche and was director of the unit.

Mr. Kairo has extensive experience in all areas of taxation, transaction advisory and legal structuring in Kenya, Uganda, Rwanda, Tanzania. He is the non-executive director of NIC Bank, ICEA-Lion Asset Management and Special Economic Zones Authority.

Currently he is a member of the Board of Directors in Kenya Power and Lighting Company Limited.

Eng. Jared Othieno

He was appointed to the Board on 31st August 2018. He has a Master of Business Administration (MBA) and a BSc. Electrical Engineering degree from the University of Nairobi.

He was the Acting Managing Director and CEO and has served at Kenya Power for over 31 years, and retired as a Trustee on 30th January 2020. He is a Certified Pension Fund Trustee.

26 Kenya Power Pension Fund | Defined Benefits Ernest Nadome

He was appointed to the Board in September, 2003. He holds a Master of Arts (MA) in Labour Management Relations(UON), Bachelor of Arts (B.A) Degree (Hons(UoN). He is the General Secretary of the Kenya Electrical Trades & Allied Workers Union (KETAWU), a position he has held for the past 17years. He is well versed in energy, human resources, social protection and labour matters, having worked for The Kenya Power and Lighting Company Ltd and Kengen for 16 years. He is the Chairman of the Board of Trustees for the DC Fund and also Chairman of the Board of Trustees for the Kengen Company Limited Staff Retirement Benefits Scheme (DC Scheme) and a Trustee of Kengen Company Limited Staff Retirement Benefits Scheme (DB Scheme). He is the 1st Assistant Secretary General for Central Organization of Trade Union (COTU-K) and the out going Director of The National Industrial Training Authority Board (NITA). In addition, he is also the founder Director of the newly established parastatal, Kenya National Qualification Frame Work Authority (KNQF) and a member of The National Labour Board. He is a Certified Pension Fund Trustee.

Imelda Bore

She was appointed to the Board on 31st August 2018. She holds a Master of Laws (LL.M) from the University of Nairobi, a Bachelor’s degree in Law (LL. B) from Moi University, a Post Graduate Diploma in Law, and a Higher National Diploma in Human Resources Management.

She is also a certified Public Secretary (CPS K). She is a member ICSPS and an advocate of the High Court. She has served at Kenya Power for over 9 years.

Currently she is the General Manager, Corporate Affairs & Company Secretary in Kenya Power and Lighting Company Ltd. She is a Certified Pension Fund Trustee.

Ambrose Lamaon

He was appointed to the Board on 31st August 2018. He holds a Master of Business Administration (Finance) from Egerton University, and a Bachelor of Commerce (Accounting) from Kenyatta University.

He is also a Certified Public Accountant (CPA K). He was the Acting General Manager, Finance and has served at Kenya Power for over 22 years. He is a Certified Pension Fund Trustee and retired from the Board on the 30th January 2020.

Annual Report & Financial Statements | 2019 27 BOARD OF TRUSTEES

David Monandi

He was appointed to the Board on 31st August 2018. He holds an Executive MBA (JKUAT), Bachelor of Arts (BA) from the University of Nairobi, a Higher National Diploma (HND) in Human Resources Management and is a registered member with IHRM.

He was the acting General Manager, Human Resource and Administration and has served at Kenya Power for over 22 years. Mr. Monandi is a Certified Pension Fund Trustee and retired from the Board on the 30th January 2020.

Kosgey Kolil

He was appointed to the Board on 30th September 2008. He holds a Master of Science in Commerce (Finance & Investment), a Bachelor of Commerce (Finance option) degree, he is a Certified Public Accountant of Kenya (CPA K) and is a member of the Institute of Certified Public Accountants of Kenya (ICPAK).

He also holds a Post Graduate Diploma in Labour Policy Studies. Mr. Kosgey is the Deputy General Secretary of the Kenya Electrical Trades & Allied Workers Union (KETAWU) and sits in the Board of the Productivity Centre of Kenya (PCK) as a nominee of the Central Organization of Trade Union (COTU-K).

Prior to joining KETAWU he worked with Kenya Power and Lighting Company Ltd for 16 years in Finance where he gained a wide experience in finance and accounting. He is a Certified Pension Fund Trustee.

Edwin Ruttoh – Ag. CEO & Trust Secretary

He was appointed as acting CEO and Trust Secretary on 1st November 2019 and he is Secretary to the Board. He joined the Fund in June 2015. He holds a Bachelor of Commerce degree in Accounting. He has over 15 years of experience in Finance, Investments and Accounting fields.

He is a Certified Public Accountant of Kenya (CPA-K) and a member of the Institute of Certified Public Accountant of Kenya (ICPAK). He has attended several international and local trainings and development programs including those in investments, leadership and governance.

28 Kenya Power Pension Fund | Defined Benefits TRUSTEES WHO JOINED AFTER FINANCIAL YEAR 2019

Bernard Ngugi

He was appointed to the Board on 30th January 2020. He holds a Master of Business Administration (Finance) and Bachelor of Commerce (Accounting).

He is a Certified Public Accountant of Kenya and a member of the Institute of Certified Public Accountants of Kenya (ICPAK). He is also a Certified Public Secretary of Kenya and a member of the Institute of Certified Public Secretaries of Kenya (ICPS). Additionally, he holds a Graduate Diploma from the Chartered Institute of Purchasing and Supplies (CIPS) and is a member of the Kenya Institute of Supplies Management (KISM).

He has over 30 years of service in Kenya Power spread across financial and revenue accounting, internal audit, and supply chain management.

Currently he is the Managing Director & CEO of Kenya Power & Lighting Company Ltd.

Cecilia Kalungu-Uvyu

She was appointed to the Board on 30th January 2020. She holds a Master of Business Administration in Human Resource Management, Bachelor’s degree in Human Resource Management from USIU-A and a Certificate in HR Practice from Cornell University.

She is a member of Institute of Human Resource Management (IHRM) and the Chartered Institute of Personnel & Development (CIPD), UK.

She has over 14 years’ experience as a human resources professional having worked in several organizations.

Currently she is the General Manager, Human Resource & Administration, Kenya Power & Lighting Company Ltd. She is a Certified Pension Fund Trustee.

Mohamed Somo

He was appointed to the Board on 30th January 2020. He holds a Master’s in Strategic Management from Egerton University and a Bachelor’s degree in Economics from Kenyatta University.

He is also a certified Public Accountant (CPA K) and a member of ICPAK. He is currently pursuing PhD in Strategic Management from the Jomo Kenyatta University College of Agriculture and Technology.

He has served at Kenya Power & Lighting Company Ltd. for 23 years in various positions. Currently, he is the General Manager, Finance, Kenya Power & Lighting Company Ltd.

Annual Report & Financial Statements | 2019 29 MANAGEMENT TEAM

Edwin Ruttoh – Ag. CEO & Trust Secretary

He was appointed as acting CEO and Trust Secretary on 1st November 2019 and he is Secretary to the Board. He joined the Fund in June 2015. He holds a Bachelor of Commerce degree in Accounting. He has over 15 years of experience in Finance, Investments and Accounting fields.

He is a Certified Public Accountant of Kenya (CPA-K) and a member of the Institute of Certified Public Accountant of Kenya (ICPAK). He has attended several international and local trainings and development programs including those in investments, leadership and governance.

Steve Mathuka – General Manager Pensions Administration

He joined Kenya Power Pension Fund in 2006. He has over 20 years’ experience in human resource management, project management and pension administration. He holds a Master of Business Administration (Strategic Management), a Bachelor’s Degree in Psychology, a Higher Diploma in Human Resource Management and a Diploma in Mechanical Engineering.

In addition, he is a Chartered Pension Analyst Manager (CPAM) and a member of the Institute of Human Resource Management (IHRM).

Joseph Mitito – Ag. General Manager Investments

He joined Kenya Power Pension Fund in March 2012. He has over 16 years’ experience in property management, valuation and project management.

He holds a Master of Arts in Project Planning and Management and a Bachelor of Arts degree in Land Economics. He has a post graduate diploma from the Institution of Surveyors of Kenya.

He is also a full member of The Institution of Surveyors of Kenya (M.I.S.K), and a Registered and Practicing Valuer and Estate Agent (RV & REA). Prior to his appointment at Kenya Power Pension Fund he worked as an Associate Director at Njihia Muoka Rashid Co. Limited.

30 Kenya Power Pension Fund | Defined Benefits Amos Ndung’u – Finance Manager

He joined Kenya Power Pension Fund in April 2012. He has over 15 years’ experience in treasury management, finance and investments.

He has a Master of Business Administration (Finance) and a Bachelor of Science in Actuarial Sciences. He is also a Certified Public Accountant of Kenya (CPA K). In addition, he is a member of the Institute of Certified Public Accountants of Kenya (ICPAK).

Prior to his appointment at Kenya Power Pension Fund, he worked as a Treasury Accountant at Kenya Airways and as an Assistant Accountant in Kenya Tea Development Agency.

Peter Muia – ICT Manager

He joined KPPF in August 2019. He has over 11 years’ experience in IT service delivery and management.

He holds a Master of Science (MSC) in Computer Science and Bachelor of Science in Computer Science from the University of Nairobi. He holds certifications in project Management (PMP®), ITIL, Linux Systems Administration (Linux Professional Institute), Cisco networks (CCNA) among other professional certifications. He is a member of IEEE Computer Society and the Project Management Institute (PMI). Prior to his appointment at Kenya Power Pension Fund, he worked at the Kenya Education Network (KENET) as an Enterprise Services Manager.

Vickie Mburugu – Head of HR and Administration

She joined the Fund in January 2020 as the Head of Human Resource and Administration. She has over 20 years’ wealth of experience in Human Resource and Administration Management in both Public and Private sector. She holds an MBA degree in Human Resources Management, Bachelor of Education degree, Higher National Diploma in HRM, Senior Leadership Development Program (SLDP) and a Trainer of Trainers (T.O.T). She received a Commendation Award from JICA in 2010 for outstanding contribution to Women empowerment. She is a passionate advocate of good governance. She is a member of Institute of Human Resources Management (IHRM). Prior to her appointment and Kenya Power Pension Fund, she worked as the HR Manager at Kenya Institute of Mass Communication.

Annual Report & Financial Statements | 2019 31 MANAGEMENT TEAM

Consolata Mbuiya – Head of Procurement

She joined Kenya Power Pension Fund in 2016. She has over 10 years’ experience in Supply Chain Management and Finance.

She holds a Bachelor of Commerce degree in Finance from the University of Nairobi and Post graduate Diploma from Chartered Institute of Procurement and Supply UK. Before joining the Fund, she worked at Kenya Power and Lighting Company Ltd.

She is a member of Kenya Institute of Supplies Management (KISM), a member of Chartered Institute of Procurement and Supply (CIPS) and a Certified International Procurement Professional (CIPP) from International Academy of Professional Business and Financial Management. She is also a licensed Supplies Practitioner from KISM.

Susan Nguyo – Senior Pensions Officer

She joined Kenya Power Pension Fund in May 2015. She has over 18 years in Pension Scheme Administration, insurance, client relationship management and compliance.

She holds a Bachelor of Arts (Human Resources) degree, and an Advanced Diploma in Insurance (ACII). Prior to her appointment at Kenya Power Pension Fund she worked as a Pension Consultant at Alexander Forbes Financial Services.

She is a Chartered Pension Analyst Manager (CPAM) and a member of the Chartered Insurance Institute (CII).

Martha Simiyu – HR & Administration Officer

She joined Kenya Power Pension Fund in 2006. She has over 16 years’ experience in Pension Administration and Human Resources management.

She holds a Master of Business Administration (Strategic Management), a Bachelor’s degree in Business Administration (Management), Higher Diploma in Human Resource Management and a Diploma in Business Administration.

She is a member of the Institute of Human Resources (IHRM) and holds a valid HR Practicing Certificate.

32 Kenya Power Pension Fund | Defined Benefits Annual Report & Financial Statements | 2019 33 STATEMENT OF CORPORATE GOVERNANCE

INTRODUCTION During the year, the Fund performed a governance audit whose aim was to assess and report on the adequacy The Fund is committed to the highest level of corporate and effectiveness of the organization’s policies, systems, governance practices which strengthen and contribute to practices, and processes within the legal framework and optimal long-term value creation for members and other in line with the best governance practices. stakeholders. The objective is to put in place systems, The Board structures and processes that guide the leadership of the Fund to ensure accountability, fairness and transparency The Board comprises of Trustees appointed to represent in the Fund’s engagement with its stakeholders. the Sponsor and member elected Trustees. The Board’s role is to effectively represent and promote the interests The Retirement Benefits (Good Governance Practices) of Fund members with a view to adding long-term value Guidelines, 2018 were issued on 11th October 2018. The to their retirement benefits. In this regard the Board objective of the guidelines is to provide a framework directs and supervises the management of the Fund and to facilitate schemes to establish and maintain high in particular: standards of best practices in the governance of schemes; to enable and equip sponsors, trustees and service • Ensuring that the Fund’s objectives are clearly providers to better perform their functions, and to provide established, and that strategies for achieving them a governance criteria for evaluating the performance of are in place trustees and service providers. • Establishing policies for strengthening the The Fund has instituted systems to ensure that highest performance of the Fund including ensuring that standards of good corporate governance business ethics, the management is proactively seeking to build the compliance with legal regulations as well as the Trust Fund through innovation, initiatives, technology, and Deed and Rules are maintained. growth of its assets • Monitoring the performance of management Among the principles that continue to guide the Board in • Appointing and performance management of the CEO its corporate governance practices are as follows: and Trust Secretary • Deciding on whatever steps are necessary to protect • Well-articulated Board and management duties and the Fund’s financial position and the ability to meet accountabilities its accrued liabilities and other obligations when they • Ensuring appropriate competencies and appropriate fall due, and ensuring that such steps are taken skills mix within the Board and Secretariat staff, • Ensuring that the Fund’s financial statements are true • Establishment of independent Board committees and and fair and in compliance with the law undertaking annual board evaluations • Ensuring that the Fund adheres to high standards of • Optimising investment returns through the adoption ethics and corporate behaviour of strategies that enable and promote the long-term • Ensuring that the Fund has appropriate risk success of the Fund management/regulatory compliance policies in place • Timely, transparent and relevant communication to provide stakeholders with a clear understanding of BOARD MANUAL the Fund • Implementation of strong, independent audit The Board Manual has been inspired by the dictates procedures, applying internationally recognized of good corporate governance, which is pivotal for accounting principles, undertaking of well-scoped the success, viability and sustainability of the Fund. It annual external audits as well as quarterly internal expounds and explains the collective and individual audits responsibilities, powers, duties, obligations and liabilities • Upholding the highest levels of integrity in the Fund’s of the Trustees. In the discharge of their responsibilities, culture and practices through a well-defined and the Board delegates some duties to the Fund Secretariat implemented code of conduct and ethics for the and seeks advisory services from external parties from Board, staff and suppliers. time to time.

34 Kenya Power Pension Fund | Defined Benefits BOARD STRUCTURE AND COMPOSITION

The Board size and composition is guided by the Occupational Retirement Benefits Schemes Regulations, 2000. Under this regulation, a defined benefit scheme should have a minimum of three and not more than nine trustees. The number of trustees nominated by members should not be less than one third of the Board. The Trustees can serve for a maximum of two terms of three years each.

Members are required to hold elections for member nominated Trustees every three years. The Sponsor appointed Trustees serve for a period determined by the Sponsor within the regulatory framework. The Board strives to have diversity of skills, experience, independence and knowledge to ensure the Fund flourishes in an ever-changing environment. Key among the existing competences include governance, human resource, labour relations, legal, finance, procurement and risk management.

The following Trustees served during the year:

Sammy Oduori (Chairman) Member elected - representing pensioners Kairo Thuo Sponsor appointed Eng. Jared Othieno* Sponsor appointed Ambrose Lamaon* Sponsor appointed Imelda Bore Sponsor appointed David Monandi* Sponsor appointed Ernest Nadome Member elected – representing union members Koskey Kolil Member elected – representing union members

*retired on 30th January 2020.

BOARD INDEPENDENCE AND CONFLICT OF In any undertaking, Trustees debate their matters INTEREST constructively, are analytical and thoroughly challenge The Trustees are required to act in utmost good faith all opinions before making decisions. and in the best interest of the Fund. In this regard, the Trustees have put in place structures for declaration and BOARD EVALUATION management of conflict of interest. In cognizance of its responsibilities to members and other stakeholders, all The success of the Fund ultimately depends upon the the Trustees are expected to disclose at the beginning of capacity of the Trustees to provide strategic direction. each meeting, any circumstances which may give rise to It is therefore paramount for the Board to continuously any actual or potential conflict of interest with their roles. evaluate its performance against set targets. The Board A Trustee is not allowed to participate in the decision undertakes self-evaluation every year while the external making on a matter that they are conflicted. evaluation is done bi-annually. The outcome of these evaluations has been instrumental in improving Board The Trustees are independent of management. Their performance and effectiveness. role is to guide, provide oversight, monitor and evaluate the success of the Secretariat in delivering the agreed strategy within the approved control framework.

35 STATEMENT OF CORPORATE GOVERNANCE

The following areas are covered in the Board evaluation to ensure that it is in line with industry practice in to identify areas of improvement: consideration with the level of Fund expenses.

• Board structure and composition BOARD ACTIVITIES IN 2019 • Board processes and accountability In carrying out its mandate during the year, the Board • Chairman’s leadership, communication and engaged in various key activities which included: relationship with the Board • Composition and operations of Board Committees a. Reviewing the status of implementation of the Fund’s • Role and effectiveness of the CEO & Trust Secretary strategic plan 2016-2020. • Strategy, financial matters and performance b. Implementation of the Board’s annual work plan • Stakeholders engagement c. Monitoring and evaluation of Fund performance • Succession planning and management d. Received reports from Board Committees • Board dynamics e. Reviewing and approving various policies, including the Board Manual CHAIRMAN OF THE BOARD f. Reviewing and approving the Fund budget g. Monitoring Fund compliance to industry regulations The Chairman of the Board is appointed by the Board of and legislation. Trustees in accordance with provisions of the Fund’s Trust Deed and Rules. His roles and responsibilities are distinct BOARD COMMITTEES and separate from those of the CEO & Trust Secretary. The Board operates a comprehensive structure made The Chairman is responsible for the overall Board up of committees in line with current legislation and leadership and its effectiveness. He sets the agenda best practices. These are established to support the for the Board meetings, chairs all Trustee meetings and Board in executing its responsibilities and obligations. the Annual General Meeting. He ensures appropriate The committees provide detailed reports to the Board orientation of new Trustees on Board’s role, processes, that assist in decision making. They are established with policies and awareness of conflict of interest. He specific terms of reference, that are regularly reviewed maintains a separate independent working relationship and streamlined in accordance with emerging trends. with the CEO &Trust Secretary. The appointment of the Committees members is based on ROLE OF THE CEO & TRUST SECRETARY the skills set and experience of individual Trustees. The Committees meet regularly and report to the Board at The CEO & Trust Secretary is responsible for the leadership least once in a quarter. of the Secretariat and the day-to-day management of the Fund’s operations. He acts as the Secretary to the Board The Board currently has four committees namely: and he is accountable for the Fund performance and its compliance with industry legislation and regulations. He a. Risk & Audit Committee is also tasked with the implementation of the strategic b. Strategy, Finance & Investments Committee plan. c. Governance, HR & Compensation Committee d. Project Implementation Committee. BOARD REMUNERATION The details of the remuneration for 2019 is as shown on note 12 of the notes to the financial statements on page The Board’s compensation is determined and approved by 85. the Sponsor. The remuneration is reviewed periodically

36 Kenya Power Pension Fund | Defined Benefits a) RISK & AUDIT COMMITTEE • Oversee the execution of the strategic plan • Oversee the development and execution of the The Risk & Audit Committee was chaired by Kosgey Kolil, annual budget with Kairo Thuo, Ambrose Lamaon and Imelda Bore as • Monitor implementation of the investment policy members. statement • Advise the Board on appointment of Fund managers, The mandate of this Committee includes: custodians and bankers. • To review and make recommendations to the • Liaison and facilitation of both internal and external Board on proposed new investments and capital auditors for effective discharge of their respective developments. assignments • Monitor and evaluate the performance of fund • Monitoring and reviewing the integrity of the Fund’s managers financial statements The committee held six meetings during the year. The key • Reviewing the effectiveness and reliability of activities during the year were as follows: management information systems, risk and internal controls systems a. Monitored implementation of the strategic key • Oversight of the execution of the risk management actions for 2019 strategies of the Fund b. Reviewed and made recommendations on the annual • Advising the Board on ICT governance and related budget matters c. Reviewed quarterly management accounts d. Reviewed Fund managers’ and custodian’s performance The committee held four meetings during the year. The e. Monitored performance of investments key activities during the year were as follows: a. Reviewed the integrity of the Fund’s financial c) GOVERNANCE, HR & COMPENSATION statements and recommended them to the Board for COMMITTEE approval. The Governance, HR & Compensation Committee was b. Approved the external and internal audit plan for the chaired by David Monandi and had Ernest Nadome, year Imelda Bore and Kosgey Kolil as the members. c. Received and reviewed reports on the implementation The mandate of this Committee includes: of the Enterprise Risk Management Framework d. Reviewed risk register detailing the various risks that • To oversee the governance and compliance matters the Fund faces on an ongoing basis including of the Fund operational risk, capital, liquidity, market risk and • To oversee the communication strategy of the Fund reputational risk and approved various • Responsible for the performance management, recommendations by management intended to compensation and staff welfare enhance the management of these risks • Orientation and induction of new Trustees including e. Facilitated internal and external audit, reviewed the training and development of Board of Trustees issues raised and made follow up for conclusion of the issues raised The committee held sixteen meetings during the year. The f. Assessed the performance of the internal and key activities during the year were as follows: external auditors to ensure that they are effective in carrying out their responsibilities a. Reviewed the status of various compliance requirements and recommended appropriate actions b) STRATEGY, FINANCE AND b. Reporting to the Board and Sponsor on Fund activities INVESTMENT COMMITTEE c. Performance management for Secretariat staff d. Reviewed the Board manual and policies The Strategy, Finance & Investment Committee was e. Approved the training and development calendar chaired by Kairo Thuo, with Eng. Jared Othieno, Ernest

Nadome and Ambrose Lamaon as members. The mandate of this Committee includes:

Annual Report & Financial Statements | 2019 37 STATEMENT OF CORPORATE GOVERNANCE

d) PROJECT IMPLEMENTATION COMMITTEE (PIC)

The Committee was chaired by Ernest Nadome with Eng. Jared Othieno, David Monandi and Ambrose Lamaon as members. The mandate of this Committee includes:

• To oversee the implementation of projects in accordance with the directives and approvals from the Board • To ensure that appropriate mechanisms are put in place to ensure close cooperation amongst the consultants involved in the implementation of the projects • To give necessary advice, guidance and support to the project manager and the other consultants on all project related matters to ensure that the project is well implemented • To report on monthly basis to the Board of on matters related to the implementation of the Projects • To review sales and marketing strategies for the Fund projects.

The committee held three meetings during the year. The main activity during the year was the implementation of the project schedule for Stima Plaza expansion.

BOARD AND COMMITTEE MEETINGS

The Board meets at least quarterly, and its Committees meet regularly in accordance with business requirements. The Committees report to the Board at least quarterly. All Trustees participate in discussing the strategy, performance and risk management. The agenda and Board papers for the meetings are communicated in good time to allow the Trustees to prepare for informed deliberations and decision making. The Board, on need basis, invites consultants to give their professional opinion on technical matters to enable them to make well informed decisions.

The agenda and board papers are circulated via the e-Board system which has an interactive and easy to navigate interface and is accessible via a webpage. The Trustees using the e-Board system can access and preview necessary information on all the items to be discussed prior to any meeting. This system has been valuable in enabling Trustees to prepare adequately and hold meetings efficiently, saving on time and eliminating the manual paper-based system. Further to this, minutes are prepared, filed in minute books and safely kept.

MEETING ATTENDANCE

The schedule of meetings together with their respective attendance is as shown below:

Risk & Strategic Finance Governance, HR Staff Project Full Board Audit & Investments Compensation Implementation Total Meetings 10 4 6 16 3 Trustee Name Sammy Oduori 10 - - - - Kairo Thuo 6 3 6 - - Eng. Jared Othieno 6 - 3 - 2 Ernest Nadome 8 - 5 10 3 David Monandi 10 - - 15 3 Imelda Bore 9 2 - 13 - Kosgey Kolil 10 4 - 15 - Ambrose Lamaon 9 2 5 - 2

38 Kenya Power Pension Fund | Defined Benefits SUCCESSION PLANNING WHISTLE-BLOWING POLICY

Succession planning encompasses an ongoing process The Fund is committed to high standards of ethical, moral of systematically identifying, assessing and developing and legal business conduct. In line with this commitment, talent to ensure continuity in specific positions within the the whistle-blowing policy was formulated to provide organization. It incorporates a comprehensive framework an avenue to guide the impartial handling of feedback designed to identify and prepare candidates to take over and reports on any non-compliance. The Fund promotes positions or responsibilities and fill vacancies that may open communication and provide an avenue for whistle occur. The Board has put in place a succession plan that blowers to raise any concerns that they may have. The is being continuously implemented to ensure a smooth whistle blowing policy provides mechanism for protection transition and continuity of operations. against reprisals or victimization.

GOING CONCERN BOARD INDUCTION

The Trustees confirm that the financial statements PROGRAMS & TRAINING are prepared on a going concern basis. The Trustees Upon appointment/election, each Trustee is provided with are satisfied that the Fund has adequate resources to sufficient information to enable him/her to perform his/her continue in business for the foreseeable future. roles through a comprehensive induction program. In preparing the financial statements, the trustees are Every year the CEO & Trust Secretary in liaison with the responsible for assessing the Fund’s ability to continue Board undertakes a Trustees training needs and gaps as a going concern, disclosing, as applicable, matters analysis. From this assessment a calendar is developed relating to going concern and using the going concern highlighting the various training programs required by the basis of accounting unless trustees either intends to Board members. liquidate the Scheme or to cease operations.

During the year, the Trustees attended the following The level of funding (the ratio of the Fund assets to training programs based on their individual needs accrued liabilities) as at 31st December 2019 was 111.7% assessment: compared to 115.0% in the previous valuation done as at 31st December 2016. The level of funding was above • Managing pension in emerging and developing the statutory minimum funding requirement of 100% • environment prescribed in the Retirement Benefits Regulations. The • Leadership, Governance & Strategy next actuarial valuation is due as at 31st December 2022. • Improving Board effectiveness • Project Management • Risk Management CODE OF CONDUCT • Private Equity

The Fund has a Code of Conduct as stipulated in the Board In accordance with the Capacity Building of Trustees manual. In discharging their duties, all Trustees observe of Retirement Benefits Schemes Prudential Guideline rules and regulations governing their conduct and are Number RBA 001 of 2013, all the Trustees had been vetted bound by the overriding fiduciary duty to act in good faith and certified as Trustees as at 31st December 2019. and in the best interests of the Fund members.

Annual Report & Financial Statements | 2019 39 STATEMENT OF CORPORATE GOVERNANCE

RISK MANAGEMENT STRUCTURE RISK IDENTIFICATION AND ASSESSMENT

The risk management structure of the Fund is composed The Fund has put in place a system of identifying risks of the Board of Trustees, Risk & Audit committee and the that can hinder the attainment of set objectives. The management team. Their respective roles are shown risks are assessed both quantitatively and qualitatively, below: measured and mapped in accordance with their impact and likelihood. A risk register is maintained and updated (a) BOARD quarterly by the Secretariat and submitted to the Risk & Audit Committee for initial review before being presented The Board bears the overall responsibility of risk to the Board. management. In discharging its duties, it ensures that the Fund has put in place proper risk management policies During the year, the Fund identified major risks and put that provide guidance to either, avoid, control or eliminate in place mitigation measures. The Board pays close potential risk. This has over the years aided the Board in attention and monitors the mitigation measures against decision making within acceptable risk appetite. these major risks.

(b) RISK & AUDIT COMMITTEE Details of the investment and financial risks have been reported under our Note No. 3 as per IFRS 7 disclosure The mandate of this Committee is to develop, implement requirements on nature and extent of risks arising from and monitor risk management framework under the financial instruments both qualitative and quantitative. guidance of the Board. The Committee also ensures that risk management system implemented by management meets the requirements as set out in the policy. They RISK AWARENESS review the work of the internal auditor and advice the The Board’s commitment to risk management has been board based on the findings of the internal audit. They evidenced by the awareness created and training given also monitor opportunities arising from these risks for to the Board of Trustees, management and the staff of consideration. the Fund. In addition, the Fund has inculcated a culture of (c) INTERNAL AUDITOR risk-based thinking amongst staff members, by ensuring that risk management is an agenda in all departmental and management meetings. The Board has appointed an independent internal auditor to review the effectiveness and efficiency of the risk management processes. The internal audit report is presented to the Risk & Audit Committee for review and implementation.

(d) MANAGEMENT TEAM

The Management team’s role is to implement the risk management framework established by the Board of Trustees. It develops a risk register which identifies the various risks, their root causes, mitigating factors, impacts and as well as their owners. The register also identifies opportunities arising from these risks which are further analyzed and recommended to the Board for consideration.

40 Kenya Power Pension Fund | Defined Benefits NATURE OF RISK DESCRIPTION MITIGATION MEASURES

Low return on investments Risk of non-attainment of target 1. Regularly monitor changes on returns mainly due to challenges in macro-economic environment the macro economic environment 2. Monitoring and evaluation of Fund Managers performance

Unsuccessful real estate projects Non- attainment of agreed time- 1. Comprehensive feasibility studies lines, quality and budget utilization and risk analysis for all projects

2. Proper planning and budgeting including budget reviews

3. Conducting proper due diligence before engaging third parties

4. Insurance covers to cushion the Fund against unforeseen events

Data security and integrity This is unauthorized access to 1. Robust system security against data and information contained in unauthorized access and cyber systems that impacts the integrity attacks of the data 2. User training and awareness

3. Non- disclosure agreements with service providers

STAKEHOLDERS’ ENGAGEMENT COMMUNICATION TO MEMBERS

The Fund is committed to maintaining mutually beneficial The Fund has adopted various channels of communication engagement with all stakeholders which is achieved including member education seminars, annual general through information sharing, consultation, involvement, meetings, customer service help desks, newsletters, collaboration and empowerment as maybe appropriate. periodic submission of reports and publishing of all This is executed through quarterly newsletters, of annual relevant information on the Fund’s website. A feedback audited accounts, and holding of the Annual General mechanism has been established where members share Meeting. their responses, complains and suggestions regarding provision of the Fund’s services. Such feedback is The Board has developed a stakeholder’s engagement reviewed, and necessary actions taken to address the policy. This policy identifies the key stakeholders, details issues raised. the perspective and interest for each group, identifies information disclosure and frequency, stipulates how During the year, the Fund utilized bulk SMS services and the key strategic priorities for improving stakeholder emails to communicate with members. relationships will be developed and how grievances will be managed.

Annual Report & Financial Statements | 2019 41 STATEMENT OF CORPORATE GOVERNANCE

BUSINESS CONTINUITY PLAN d. Setting up of signatory clusters in both the Board The Business Continuity Plan (BCP) was approved by the and senior management in case of a disaster Board of Trustees in 2019. It provides a framework that e. Addendums in all key service providers’ contracts, ensures minimal or diminished impact from business to have them provide business continuity in case of disruptions that would impede normal operations of the Fund. any disaster Some of the key initiatives being implemented by the f. Testing; Running Disaster Test Scenario at DRC site secretariat include the following: - and fire drills at the Fund offices a. BCP Implementation teams; Key staff and g. Training staff as fire/rescue marshals departments were allocated roles and h. Monitoring and Evaluation; Including the mandate of responsibilities that are being continually monitored monitoring the implementation of the BCP to the by the management. Risk & Audit Committee of the Board. b. Setup of an alternate site/Disaster Recovery Centre (DRC) The BCP is an important element of risk management as c. Pinning of emergency contacts and evacuation it helps the Fund to plan for major disruptions and ensure plans in strategic places within the premises that critical business functions continue to operate.

42 Kenya Power Pension Fund | Defined Benefits CORPORATE SOCIAL RESPONSIBILITY

The Fund continues to express its commitment to health care services, is vital to improving the health corporate social responsibility. We believe that the status of Kenyans. It is evident that burns are one of the success, strength and sustainability of our operations economic burdens that costs Kenya millions of shillings anchors on the ability to bring together the needs of the in annual hospitalization costs. Additionally, statistics are business and that of the society. In this regard, the Fund overwhelming with over 180,000 burns reported annually, is obligated to contribute towards societal and economic 40% being children from poor families across the country. development, as well as behave ethically to improve the quality of life in the communities and the society at large. In the recent years, the Fund has recognized this as In the year under review, the Fund conveyed its social a problem and provided support through creating responsibility through health and environmental sector. awareness. In the year under review, KPPF participated The Fund has in place a Corporate Social Responsibility in the burns week. Apart from being the golden sponsor of Policy which guides the operations. It has also set a the event, we also sensitized the public on fire safety and committee which oversees the execution of the policy. some of the actions to take in the event of fire.

1. HEALTH The Fund also donated health equipment which included beds, mattress to Burns Unit at Kenyatta National Hospital. Strengthening the health system is at Also, the Fund supported the fire burns victim who had the core of the government’s reform undergone corrective surgery. agenda. A strong, well-functioning and sustainable health system, capable of efficiently delivering and managing

Secretariat staff participating in the Burns Awareness Walk

Donation of hospital beds by the Secretariat staff to the Kenyatta National Hospital Burns Unit.

Annual Report & Financial Statements | 2019 43 CORPORATE SOCIAL RESPONSIBILITY

2. ENVIRONMENTAL POLICY (b) Rainwater harvesting system; To ensure that rainwater running off land surfaces Kenya Power Pension Fund recognizes is harvested, stored, and utilized, the Fund ensures that environmental degradation and that all its projects are fitted with underground tanks. climate change is a serious global Though not consumable, the harvested water is used in problem. As an organization, we are general cleaning of the common areas and maintaining committed to minimizing our impact on the gardens. Aside from being an alternative source of the environment and climate. To meet water, water harvesting reduces water bills and helps in this goal, we not only adhere to laid down maintaining serene gardens in our projects. environmental principles and regulations, but also ensure that every activity carried out by the Fund supports the (c) Water conservancy sanitary fittings and taps; same. To this effect, apart from creating a safe and healthy The average faucet runs 2.2 gallons per minute, while workplace to its personnel, the Fund provides bespoke low-flow models run 1.5 gallons per minute. According to environmental training and guidance to our employees. the U.S. Environmental Protection Agency’s Water Sense Similarly, the organization has adopted green technology program, a low-flow faucet that reduces water flow to ensure efficient utilization of natural resources, such as about 30% can save a home 700 gallons of water a year. water and energy. Therefore, the Fund installs low-flow fittings and taps to conserve water in our offices and its developments.

3. SUSTAINABLE WATER USAGE 4. ENERGY USAGE Hydrological variability of water’s distribution and climate changes Improving energy efficiency is a are natural driving forces that, when valuable near-term step along the road combined with the pressures from to sustainability. It can deliver increased economic growth and major population productivity, a reduction in pollution, change, make the sustainable lower consumption of natural resources, development of our water resources a and improved financial performance - all challenge. Despite the current water crisis, there could this without affecting the benefits that be enough water to meet the world’s growing needs, but are derived from energy use. To this effect, the fund has only if there is a global step to change the way this vital adopted strategies to reduce the cost of energy. resource is used, managed, and shared. Kenya Power Pension Fund is firmly committed to sustainable water These strategies include: management, along with embedding ethical business • The use of solar panels for lighting common areas practices and policies within the sector. To this end, the and heating water in our projects. Solar panels are Fund has continuously adopted the following sustainable cheaper to maintain, thus reducing the cost of water strategies: electricity incurred by the Fund

(a) Recycling and re-using water; • Use of free natural light. Water re-use represents a major opportunity to support The company installs sensors and lighting control our nation’s communities and economy by bolstering systems in workspaces with many lights that are safe and reliable water supplies for human consumption, occupied occasionally, to reduce energy waste agriculture, business, industry, recreation, and healthy by only lighting areas when they are in use. Similarly, ecosystems. To this effect, the Fund ensures that its efficiency measures such as turning off equipment projects are developed with drainage and wastewater and lights that are not in use, switching to compact treatment plants to recycle waste and use the water for fluorescent bulbs, and using more fuel-efficient ground maintenance. Additionally, the plants keep the vehicles are implemented in our offices. waste material under control and handle various diseases that may arise air and water pollution.

44 Kenya Power Pension Fund | Defined Benefits HUMAN RESOURCES

Our people are key in the attainment of the Fund’s goals 2. TRAINING AND DEVELOPMENT and objectives. The Fund endeavors to attract, retain and develop the best talent whilst providing a safe work The Fund philosophy is that with a stable, highly environment. Our human capital has a total of twenty- trained, healthy workforce, productivity will always be eight employees drawn from different backgrounds. It guaranteed. The Fund has a comprehensive staff training incorporates a diverse age profile, which provides a mix and development program which is developed taking of experience and expertise that provides opportunities into considerations the training needs analysis. Our for succession. training programs focus on development of leadership and technical skills across the Fund. The employees are trained using a combination of in-house and external 1. PERFORMANCE MANAGEMENT trainings. During the year, we implemented 85% of the planned trainings for staff which is expected to improve The Fund’s performance management system is tied to our service delivery to members/customers. its strategic pillars. The individual performance targets are derived from the Fund’s corporate targets. Staff During the year, the employees participated in team involvement in setting performance targets is paramount. building activities at Sawela Lodge in Naivasha. A two- Individual employee’s performance is reviewed against day event lead to inculcating the new KPPF culture and their set targets half yearly. The reward and recognition gelling of the new team that had recently joined the Fund. system is based on the results of the appraisal.

Secretariat staff participating in team building activities

Annual Report & Financial Statements | 2019 45 HUMAN RESOURCES

3. WORK ENVIRONMENT

The Fund completed the Stima Plaza Annex expansion for its staff. It has conducive working environment necessary for staff comfort while at work. In addition, we encourage work-life balance by allowing our employees time-off for the annual leave. The Fund ensures the employees have the necessary equipment and resources to carry out their duties.

4. STAFF ENGAGEMENT

The Fund has an open-door policy, a culture in which employees can reach one another without hindrances. It also has in place a communication policy which guides and ensures effective communications across the Fund. The Fund holds staff and departmental meetings on regular basis where employees are updated on all corporate and business developments. Additionally, employees are involved in various projects and initiatives such as corporate citizenship, innovations, customer service, risk management and quality management systems. The Fund conducts employee satisfaction survey biannually, which is useful in identifying areas of improvement. The recommendations arising from the surveys are implemented by inclusion in the subsequent year’s work plan. Last year, the internal survey was carried out and the satisfaction level stood at 74%.

46 Kenya Power Pension Fund | Defined Benefits STATUTORY INFORMATION

Annual Report & Financial Statements | 2019 47 BACKGROUND

The Kenya Power & Lighting Company Limited Staff Retirement Benefits Scheme Trustees are pleased to submit their annual report together with the audited financial statement for the year ended 31 December 2019 in accordance with section 34 of the Retirement Benefits Act.

1. PRINCIPAL ACTIVITIES

The principal activities of the Scheme are provision of cash benefits and pensions to the members upon attainment of the retirement age of sixty years, and where applicable, benefits for dependents’ of deceased members. This is achieved through prudent funds investment.

2. FINANCIAL REVIEW

The statements of changes in net assets available for benefits shows an increase in the net assets of the Scheme for the year of KShs 508 million (2018: decrease of KShs 503 million) and the statement of net assets available for benefits shows the Scheme’s net assets of KShs. 19.4 billion (2018: KShs. 18.9 billion).

3. BOARD OF TRUSTEES

The Trustees of the Scheme who held the office during the year are listed on page 3.

4. AUDITOR

Ernst and Young LLP, having expressed their willingness, will continue to be in office in accordance with Section 34(3) of the Kenyan Retirements Benefits Act and subject to Rule No. 19 (a) (iv) of the Scheme’s Trust Deed and Rules.

5. FINANCIAL STATEMENTS

The Audited financial statements were approved and authorized by the Board of Trustees on 27 March 2020

48 Kenya Power Pension Fund | Defined Benefits STATEMENT OF TRUSTEES’ RESPONSIBILITIES

The Kenyan Retirement Benefits Act requires the Trustees to prepare financial statements for each financial year which show a true and fair view of the financial transactions of the Scheme for the year and of disposition at year end of its assets and liabilities. It also requires the Trustees to ensure that the Scheme keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Scheme. They are also responsible for safeguarding the assets of the Scheme.

The Trustees are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Retirement Benefits Act, and for such internal controls as Trustees determine is necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error. They are also obligated to send to the members a summary of its audited financial accounts together with the members’ benefits statements.

The Trustees accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with International Financial Reporting Standards and the Scheme’s rules. The Trustees are of the opinion that the financial statements give a true and fair view of the financial affairs of the Scheme and of its operating results. The Trustees further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control.

The Trustees certify that, to their best knowledge and belief, the information furnished to the auditor for the purpose of the audit was correct and complete in every respect.

Nothing has come to the attention of the Trustees to indicate that the Scheme will not be able to meet its obligations for the next twelve months as per the requirements of Kenyan Retirement Benefits Act.

Ernest Nadome Kosgei Kolil Edwin Ruttoh Trustee Trustee Trust Secretary

27 March 2020

Annual Report & Financial Statements | 2019 49 REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

OPINION related to going concern and using the going concern basis of accounting unless trustees either intends to We have audited the accompanying financial statements liquidate the Scheme or to cease operations, or has no of Kenya Power and Lighting Company Limited Staff realistic alternative but to do so. Retirement Benefits Scheme - Defined Benefits (“the Scheme”) set out on pages 52 to 105, which comprise The trustees are responsible for overseeing the Scheme’s the statement of net assets available for benefits as at financial reporting process. 31 December 2019, and the statement of changes in net assets available for benefits, statement of changes AUDITOR’S RESPONSIBILITIES in members’ funds and statement of cash flows for the year then ended, and notes to the financial statements, FOR THE AUDIT OF THE FINANCIAL including a summary of significant accounting policies. STATEMENTS In our opinion, the financial statements present fairly, Our objectives are to obtain reasonable assurance about in all material respects, the financial position of Kenya whether the financial statements as a whole are free from Power and Lighting Company Limited Staff Retirement material misstatement, whether due to fraud or error, and Benefits Scheme - Defined Benefits as at 31 December to issue an auditor’s report that includes our opinion. 2019, and its financial performance and its cash flows Reasonable assurance is a high level of assurance, but for the year then ended in accordance with International is not a guarantee that an audit conducted in accordance Financial Reporting Standards and the requirements of with International Standards on Auditing (ISAs) will Kenyan Retirement Benefits Act. always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, BASIS FOR OPINION they could reasonably be expected to influence the We conducted our audit in accordance with International economic decisions of users taken on the basis of these Standards on Auditing (ISAs). Our responsibilities under financial statements. those standards are further described in the Auditor’s As part of an audit in accordance with ISAs, we exercise Responsibilities for the Audit of the Financial Statements professional judgment and maintain professional section of our report. We are independent of the Scheme skepticism throughout the audit. We also: in accordance with the International Code of Ethics for Professional Accountants (IESBA Code) together with • Identify and assess the risks of material misstatement the ethical requirements that are relevant to our audit of of the financial statements, whether due to fraud the financial statements in Kenya and we have fulfilled or error, design and perform audit procedures our other ethical responsibilities in accordance with responsive to those risks, and obtain audit evidence IESBA Code. We believe that the audit evidence we have that is sufficient and appropriate to provide a obtained is sufficient and appropriate to provide a basis basis for our opinion. The risk of not detecting a for our opinion. material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, RESPONSIBILITIES OF TRUSTEES misrepresentations, or the override of internal FOR THE FINANCIAL STATEMENTS control. • Obtain an understanding of internal control relevant The Trustees are responsible for the preparation and fair to the audit in order to design audit procedures presentation of these financial statements in accordance that are appropriate in the circumstances, but not with International Financial Reporting Standards and for the purpose of expressing an opinion on the the requirements of the Kenyan Retirement Benefits effectiveness of the Scheme’s internal control. Act and for such internal controls as trustees determine • Evaluate the appropriateness of accounting policies is necessary to enable the preparation of financial used and the reasonableness of accounting estimates statements that are free from material misstatement, and related disclosures made by management. whether due to fraud or error. In preparing the financial statements, the trustees are • Conclude on the appropriateness of the trustee’s responsible for assessing the Scheme’s ability to continue use of the going concern basis of accounting and, as a going concern, disclosing, as applicable, matters based on the audit evidence obtained, whether

50 Kenya Power Pension Fund | Defined Benefits a material uncertainty exists related to events or We also provide the directors with a statement that conditions that may cast significant doubt on the we have complied with relevant ethical requirements Scheme’s ability to continue as a going concern. If regarding independence, and to communicate with them we conclude that a material uncertainty exists, we all relationships and other matters that may reasonably are required to draw attention in our auditor’s report be thought to bear on our independence, and where to the related disclosures in the financial statements applicable, related safeguards. or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Scheme to cease to continue as a going concern. The engagement partner responsible for the audit resulting in this independent auditor’s report is CPA • Evaluate the overall presentation, structure and Herbert C Wasike-Practicing Certificate Number 1485 content of the financial statements, including the disclosures, and whether the financial statements Nairobi represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we 31 / 3 / 2020 identify during our audit.

Annual Report & Financial Statements | 2019 51 STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS For the Year Ended 31 December 2019

2019 2018 Notes Kshs’000 Kshs’000 CONTRIBUTIONS AND BENEFITS Contributions receivable from sponsor 5 - -

Benefits payable 6 (1,243,170) (1,186,748)

Net deficit from dealing with members (1,243,170) (1,186,748)

RETURNS ON INVESTMENTS

Investment properties 7 (i) 198,350 216,656 Inventory properties 7 (ii) 11,873 24,524 Government securities at fair value through profit and loss 7 (iii) 829,089 846,532 Government securities at amortised cost/held to maturity 7 (iv) 21,309 28,549 Term deposits with financial institutions 7 (v) 25,472 32,242 Quoted equities at fair value through profit or loss 7 (vi) 754,820 (426,773) Corporate bonds at fair value through profit or loss 7(vii) 73,077 103,763 Unquoted investments at fair value through profit or loss 7 (viii) 18,523 64,120 Expected credit loss allowance expense – Property receivables 7 (ix) 13,017 (5,718) Expected credit loss allowance – term deposits at amortised cost 7 (x) 9,358 (5,579)

Investment income 1,954,888 878,316

Investment management expenses 8 (46,965) (31,932)

Net returns on investments 1,907,923 846,384

OTHER INCOME 9 12,150 32,231

OPERATIONAL EXPENSES 10 (168,783) (194,945)

INCREASE/(DECREASE) IN NET ASSETS FOR THE YEAR 508,120 (503,078)

52 Kenya Power Pension Fund | Defined Benefits STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS FUNDS As at Year Ended 31 December 2019

2019 2018 Notes Kshs’000 Kshs’000 ASSETS Property and equipment 14 333,651 5,398 Intangible assets 15 20,783 23,536

354,434 28,934 INVESTMENTS Investment properties 16 5,980,880 6,974,559 Inventory properties - work in progress 16 1,383,981 279,367 Inventory properties 16 - 24,113 Government securities at fair value through profit or loss 16 6,394,250 5,900,612 Government securities at amortised cost 16 223,754 191,212 Unquoted equity investments at fair value through profit or loss 16 542,342 484,406 Quoted equity investments at fair value through profit or loss 16 3,073,534 2,491,706 Corporate bonds at fair value through profit or loss 16 377,594 716,072 Term deposits with financial institutions at amortised cost 16 596,650 351,218 18,572,985 17,413,265

CURRENT ASSETS Receivables 24 679,980 1,695,193 Amounts due from related parties 25 74,929 12,347 Cash and bank balances 26 20,367 9,613

775,276 1,717,153

TOTAL ASSETS 19,702,695 19,159,352

LIABILITIES

Amounts due to related parties 25 - 61,150 Other payables and accruals 27 233,346 136,973

TOTAL LIABILITIES 233,346 198,123

NET ASSETS AVAILABLE FOR BENEFITS 19,469,349 18,961,229

REPRESENTED BY MEMBERS’ FUNDS: SCHEME BALANCE 19,469,349 18,961,229

The financial statements were approved for issue by the Board of Trustees on 27 March 2020 and signed on its behalf by:

Ernest Nadome Kosgei Kolil Edwin Ruttoh Trustee Trustee Trust Secretary

Annual Report & Financial Statements | 2019 53 STATEMENT OF CHANGES IN MEMBERS’ FUNDS For the Year Ended 31 December 2019

2019 2018 Notes Kshs’000 Kshs’000 CONTRIBUTIONS AND BENEFITS At 1 January 18,961,229 19,477,980 Adjustment on change in accounting policy - (13,673)

Restated 18,961,229 19,464,307

Increase/(decrease) in net assets for the year 508,120 (503,078)

At 31 December 19,469,349 18,961,229

54 Kenya Power Pension Fund | Defined Benefits STATEMENT OF CASH FLOWS For the Year Ended 31 December 2019

2019 2018 Notes Kshs’000 Kshs’000 CASH FLOWS FROM OPERATING ACTIVITIES Increase /(decrease) in net assets for the year 508,120 (503,078) Adjustment for:

Fair value gain on investment properties 7(i) (72,921) (92,726) Gain on disposal of inventory property 7(ii) (11,873) (24,524) (Gain)/loss on disposal of government securities at fair value through profit or loss 7(iii) (14,434) 10,916 Fair value gain on government bonds at fair value through profit or loss 7(iii) (110,452) (207,319) Accrued interest 7(iii) (22,328) Gain on disposal of government securities at amortised cost 7(iv) (6,875) (16,682) Interest on government securities at amortised cost 7(iv) (14,434) (11,867) (Gain)/loss on disposal of quoted equity investments at fair value through profit or loss 7(vi) (39,450) 60,747 Fair value (gain)/loss on equity investment at fair value through profit or loss 7(vi) (560,559) 475,677 Loss on disposal of corporate bonds at fair value through profit or loss 7(vii) 7,523 2,254 Fair value (gain)/loss on corporate bonds at fair value through profit or loss 7(vii) (244) 5,853 Fair value loss/(gain) on unquoted equity at fair value through profit or loss 7(viii) 16,728 (38,673) Depreciation on property and equipment 14 11,156 2,468 Amortization of intangibles 15 6,803 10,759 Expected credit loss (writeback)/expense- Deposit with financial institutions 7(x) (9,358) 5,718 Expected credit loss allowance- Property receivables 7(ix) (13,017) 5,578

Operating deficit before working capital changes (325,615) (314,898)

Decrease in other receivables 24 1,028,230 390,943 (Increase)/decrease in amounts due from related parties 25 (62,582) 2,905 (Decrease)/increase in amounts due to related parties 25 (61,150) 54,438 Increase/(decrease) in payables and accruals 27 96,373 (36,042)

Net cash generated from operating activities 675,256 97,346

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of Inventory property 16 35,986 76,386 Purchase of property and equipment 14 (41,302) (1,839) Purchase of intangible assets 15 (4,050) (4,721) Purchase of inventory properties 17 (13,522) (15,640) Proceeds from sale of property & equipment 14 - 94 Purchase of Inventory properties - work in progress 18 (322,599) (233,244) Purchase of government bonds at fair value through profit or loss 16 (1,588,894) (1,085,121) Proceeds from sales of government bonds at fair value through profit or loss 16 1,242,470 661,770 Purchase of government securities at amortised cost 16 (221,491) (258,538) Proceed from sale of government securities at amortised cost 16 210,258 468,200 Purchase of quoted equity investments at fair value through profit or loss 16 (323,997) (607,164) Proceeds from sale of quoted equity investment at fair value through p & L 16 342,178 450,068 Purchase of unquoted equity investments at fair value through profit or loss 20 (75,114) (69,880) Proceeds from sale of unquoted equity investment 20 450 9,642 Proceeds from corporate bonds at fair value through profit or loss 16 331,199 161,255

Net cash used in investing activities (428,428) (448,732)

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 256,186 (361,329) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 26 360,831 722,160

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 26 617,017 360,831

Annual Report & Financial Statements | 2019 55 NOTES TO THE FINANCIAL STATEMENTS For the Year Ended 31 December 2019

REPORTING ENTITY

The Kenya Power and Lighting Company Limited Staff Retirement Benefits Scheme was established by the Kenya Power and Lighting Company (the sponsor) under irrevocable trust as a scheme for the purpose of providing pension and other benefits to the members upon attainment of the retirement age of sixty years, and where applicable, benefits for the dependants of deceased members. The Scheme is registered by the Retirement Benefits Authority, and is domiciled in Kenya. The address of its registered office is as follows: Retirement Benefits Scheme Trustees Stima Plaza, Kolobot Road, Parklands P O Box 1548 – 00600, Nairobi

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial statements are set out below and as described under section 34 (2) of the Kenyan Retirement Benefits Act. As per the Retirement Benefits Act, the statement of income and expenditure and the statement of the assets and liabilities of the scheme are represented by statement of changes in net assets available for benefits and the statement of net assets available for benefits.

These policies have been consistently applied over the periods presented unless otherwise stated: a) Basis of preparation of financial statements Basis of preparation The financial statements are presented in Kenya Shillings, and are prepared under the historical cost basis except for certain investments that have been measured at fair value.

Statement of compliance The financial statements are prepared in compliance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) and the Kenyan Retirement Benefits Act.

(b) New and amended standards and interpretations The following amendments and interpretations apply for the first time in 2019, but do not have an impact on the financial statements of the Scheme. The Scheme has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

Effective for accounting period beginning on or after

IFRS 16 Leases 1 January 2019 IFRIC Interpretation 23 Uncertainty over Income Tax Treatments 1 January 2019 Amendments to IFRS 9: Prepayment Features with Negative Compensation 1 January 2019 Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures 1 January 2019 Amendments to IAS 19: Plan Amendment, Curtailment or Settlement 1 January 2019 Annual Improvements 2015-2017 Cycle 1 January 2019 • IFRS 3 Business Combinations • IFRS 11 Joint Arrangements • IAS 12 Income Taxes • IAS 23 Borrowing Costs

56 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b) New and amended standards and interpretations (continued) Standards issued but not yet effective

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Scheme’s financial statements are disclosed below. The Scheme intends to adopt these standards, if applicable, when they become effective.

Effective for accounting period beginning on or after

Amendments to IFRS 3: Definition of a Business 1 January 2020 Amendments to IAS 1 and IAS 8: Definition of Material 1 January 2020 IFRS 17 Insurance contracts 1 January 2023 Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets Effective date deferred between an Investor and its Associate or indefinitely Joint Venture indefinitely

c) Revenue from contracts with customers

The Scheme’s revenue is generated from rental and license income from investment properties, sale of completed inventory properties, interest, discounts and rebates from government securities, interest on term deposits, interest on corporate bonds and dividends from quoted and unquoted equities.

Revenue represents the fair value of consideration received or receivable in the course of the Scheme’s activities. It is recognised when it is probable that future economic benefits will flow to the Scheme and the amount of revenue can be measured reliably. It is stated net of value added tax, rebates and trade discounts.

Investment income Interest income is recognised in the changes in net assets available for benefit as it accrues and is calculated by using the effective interest rate method. Investment income also includes dividend income which is recognised when the right to receive the payment is established, which is generally when shareholders approve the dividend.

The Scheme is the lessor in operating leases. Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of changes in net assets available for benefits, except for contingent rental income which is recognised when it arises (where applicable). Initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis as the lease income.

Licence income - Service charges, management charges and other expenses recoverable from tenants

Income arising from expenses recharged to tenants is recognised in the period in which the compensation becomes receivable.

Contributions from the sponsor are accounted for in the period in which they fall due. There were no contributions during the year as the Scheme is closed, fully funded and hence no contributions were received.

Annual Report & Financial Statements | 2019 57 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

c) Revenue from contracts with customers (consumer)

Sale of completed properties A property is regarded as sold when the significant risks and returns have been transferred to the buyer, which is normally on unconditional exchange of contracts. For conditional exchanges, sales are recognised only when all the significant conditions are satisfied.

Realised / unrealised gains and losses

Realised / unrealised gains and losses recorded in the changes in net assets available for benefits on investments include gains and losses on financial assets and investment properties. Gains and losses on the sale of investments are calculated as the difference between net sales proceeds and the original or amortised cost and are recorded on occurrence of the sale transaction. Fair value gains and losses are determined as the difference between the carrying amount and the prevailing market value.

d) Benefits payable

Benefits payable are accounted for in the period in which they fall due.

e) Property and equipment

Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Property and equipment are reviewed for impairment whenever there are any indications of impairment identified.

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The impairment loss is recognised changes in net assets available for benefit for the year.

An item of property and equipment is derecognised upon disposal or when no further economic benefits are expected from its use or disposal. Gains and losses on derecognition of property and equipment are determined by reference to their carrying amounts.

The residual value, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and are adjusted prospectively, if appropriate. Depreciation charge is on a straight-line basis. The depreciation rates per respective class are as follows:

Computer hardware 3 years Equipment 4 years Furniture and fittings 10 years

58 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

f) Accounting for leases

Determination

The determination of whether an arrangement is, (or contains), a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

Scheme as a lessor

Leases in which the Scheme does not transfer substantially all the risks and benefits of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

When an operating lease is terminated, any payment required by the lessor by way of penalty is recognised as an expense in the period in which termination took place.

g) Intangible assets

Intangible assets represent the Biometric System for member registration and identification and the Server Kit software for the fund operations which is stated at cost less accumulated amortization and accumulated impairment losses. Amortization is calculated to write off the cost over two years in equal installments in line with the requirements of the Retirement Benefits Authority Act Occupational –Regulations 34C.

Software license costs and computer software that is not an integral part of the related hardware are initially recognised at cost, and subsequently carried at cost less accumulated amortisation and accumulated impairment losses. Costs that are directly attributable to the production of identifiable computer software products controlled by the company are recognised as intangible assets. Amortisation is calculated using the straight line method to write down the cost of each license or item of software over its estimated useful life (three years).

Amortisation begins when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management, even when idle. Amortisation ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognised.

Softwares under implementation are recognised as work in progress at historical costs less any accumulated impairment loss. The cost of such softwares includes professional fees and costs directly attributable to the software. The softwares are not amortized until they are ready for the intended use. It is at this point that the costs are transferred to intangible assets and carried at cost less accumulated amortization and accumulated impairment losses. Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

Annual Report & Financial Statements | 2019 59 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

g) Intangible Assets (continued)

Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortized.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of net assets when the asset is derecognized.

h) Investment Properties

Investment property is property held to earn rentals or for capital appreciation or both. Investment property, including interest in leasehold land, is initially recognised at cost including the transaction costs. Subsequently, investment property is carried at fair value representing the open market value at the reporting date determined by annual valuations carried out by external registered valuers/ directors. Gains or losses arising from changes in the fair value are included in determining the increase in net assets for the year to which they relate.

The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property.

Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Valuation of investment properties was carried by Joseph Mwaura Njoroge (Sundown Valuers & Realtors Limited) an external independent valuer. The valuer has vast experience and carried out similar valuations in locations near the Scheme’s properties. The valuation was based on the fair value applicable as at 31 December 2017. The independent valuer made the following assumption when carrying out the valuation;

(i) The fair value is at arm’s length where the buyers and the sellers are operating with full knowledge of the market and that none of them is forced to sell or buy. (ii) That the economic situation will remain favorable for a period of time. (iii) That the property is free from any encumbrances/charges. (iv) The ownership of the property is not contested.

When the Scheme can reliably determine the fair value of a self-constructed investment property under construction or development, any difference between the fair value of the property at that date and its previous carrying amount is recognised in the increase in net assets.

The difference between the carrying value and the fair value of the properties at the date of reclassification from investment properties under construction or development or work in progress to investment properties is recognised in the increase in net assets.

60 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

h) Investment Properties (continued)

Investment properties are derecognised when either they have been disposed off or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. On disposal of an investment property, the difference between the disposal proceeds and the carrying amount is charged or credited to the changes in net assets available for benefit.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner occupied property becomes an investment property, the Scheme’s accounts for such property in accordance with the policy stated under property and equipment up to the date of the change in use.

i) Property Inventory

Property acquired or being constructed for sale in the ordinary course of business, rather than to be held for rental or capital appreciation, is held as inventory property and is measured at the lower of cost and net realisable value (NRV). Cost includes: • Freehold and leasehold rights for land • Amounts paid to contractors for construction

Non-refundable commissions paid to sales or marketing agents on the sale of real estate units are expensed when incurred.

NRV is the estimated selling price in the ordinary course of the business, based on market prices at the reporting date and discounted for the time value of money if material, less estimated costs of completion and the estimated costs necessary to make the sale.

The cost of inventory property recognised in statement of changes in net assets available for benefits on disposal is determined with reference to the specific costs incurred on the property sold and an allocation of any non-specific costs based on the relative size of the property sold.

(j) Financial Instruments

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Assets Initial recognition and measurement Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Scheme’s business model for managing them. The Scheme initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.

In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

Annual Report & Financial Statements | 2019 61 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial Instruments (continued)

Financial assets (continued)

The Scheme’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the company commits to purchase or sell the asset.

Subsequent measurement

For purposes of subsequent measurement, financial assets are classified in four categories: • Financial assets at amortised cost (debt instruments) • Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments) • Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) • Financial assets at fair value through profit or loss

Financial assets at amortised cost (debt instruments) This category is the most relevant to the Scheme. The Scheme measures financial assets at amortised cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; And • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in the statement of changes in net assets available for benefits when the asset is derecognised, modified or impaired.

The Schemes financial assets at amortised cost includes government securities, term deposits with financial institutions, cash and bank balances, receivables and amounts due from related parties.

Financial assets at fair value through OCI (debt instruments) The Scheme measures debt instruments at fair value through OCI if both of the following conditions are met: • The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; And • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding

62 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

h) Investment Properties (continued)

Financial assets (continued)

For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in statement of changes in net assets available for benefits and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to statement of changes in net assets available for benefits.

The Scheme does not have any financial assets classified as debt instruments at fair value through OCI.

Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the Scheme can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by- instrument basis.

Gains and losses on these financial assets are never recycled to statement of changes in net assets available for benefits. Dividends are recognised as other income in the statement of changes in net assets available for benefits when the right of payment has been established, except when the Scheme benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment.

The Scheme does not have any financial assets classified as equity instruments at fair value through OCI.

Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

Financial assets at fair value through profit or loss are carried in the statement of net assets available for benefit at fair value with net changes in fair value recognized in the statement of changes in net assets available for benefits.

The scheme has designated government securities, quoted equity investments, corporate bonds and unquoted equity investments under this category.

Annual Report & Financial Statements | 2019 63 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial instruments (continued)

Financial assets (continued)

Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a company of similar financial assets) is primarily derecognised (i.e., removed from the Scheme’s statement of net assets available for member’s benefit) when:

• The rights to receive cash flows from the asset have expired Or • The Scheme has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the company has transferred substantially all the risks and rewards of the asset, or (b) the company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Scheme has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the company continues to recognise the transferred asset to the extent of its continuing involvement.

In that case, the Scheme also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Scheme has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the company could be required to repay.

Impairment of financial assets For receivables and bank balances, the Scheme applies a simplified approach in calculating ECLs.Therefore, the Scheme does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Scheme has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors, banks and the economic environment.

The Scheme considers a financial asset to be in default when internal or external information indicates that the Scheme is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Scheme. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

The Scheme has recognised expected credit losses on the receivables it is holding.

64 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial instruments (continued)

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Scheme’s financial liabilities amount due to related parties and other payables.

Subsequent measurement The measurement of financial liabilities depends on their classification, as described below:

Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Scheme that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

Gains or losses on liabilities held for trading are recognised in the statement of changes in net assets available for benefits.

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.

The company has not designated any financial liability as at fair value through profit or loss.

Loans and borrowings This is the category most relevant to the Scheme. After initial recognition, amount due to related parties and other payables are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs profit or loss. This category generally applies to interest-bearing loans and borrowings.

Annual Report & Financial Statements | 2019 65 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Financial instruments (continued)

Financial liabilities (continued)

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in profit or loss.

Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

k) Capital management

The Scheme does not hold any capital. Each member is entitled to retirement benefits based on a pre- determined formula. At any one time the Scheme’s assets should at least be equal to the liabilities failure to which the sponsor would be required to finance the deficit.

(l) The Scheme’s funding policy and objectives

When deciding on an appropriate investment strategy and risk profile for the investment of the Scheme assets, the objectives of the Scheme, and the membership profile, by both term and nature are analyzed.

Primary Objective of the Scheme is to provide lump sum and pension benefits on a defined contribution benefits basis for members on their retirement or invalidity as well as benefits to members’ dependents on members’ death before retirement.

Analysis of liabilities

The age liability profile of the members and the ability to pay benefits and expenses out of monthly contributions and investment income are particularly important in determining the liquidity constraints of the Scheme.

The age liability profile of the members has an important influence on the risk tolerance that the Scheme can assume in meeting its long-term performance objectives (e.g. the younger the age profile of the Scheme, the greater the level of ‘aggression’ the Scheme can tolerate. The more members close to retirement, or to receiving benefits, the more conservative the risk profile, particularly if the ‘older’ members’ assets represent a significant proportion of the Scheme).

The primary investment objectives of the Scheme are as follows:

A medium to long term view towards the investment of the Scheme assets has been adopted, the minimum period being no less than three (3) years with the following primary investment objectives of the Scheme:

66 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) The Scheme’s funding policy and objectives (continued)

Analysis of liabilities (continued)

(i) To maximize the long term “real” return on the Scheme assets. To do this in a way that minimizes, to the extent practical, the possibility the Scheme’s assets (at their realizable value), at any one time, would fail to cover 100% of the total accrued liabilities; (ii) Subject to i) above, to ensure an optimum level of return within specified risk parameters and to do so effectively, prudently and in a cost efficient manner, in full compliance with applicable laws and regulations. The Trustees have a statutory and fiduciary duty and responsibility to invest the Scheme’s assets in a responsible and prudent manner. For the purposes of achieving the funding objectives, the funding position shall be reviewed annually.

m) Taxation

Current income tax Current income tax is the amount of income tax payable on the taxable profit for the year determined in accordance with the Kenyan Income Tax Act. Income tax expense is the aggregate amount charged/ (credited) in respect of current tax and deferred tax in determining the profit or loss for the year. Current income tax assets or liabilities are based on the amount of tax expected to be paid or recovered in respect of the taxation authorities in the future. Tax is recognised in the statement of changes in net assets available for benefits. However, The Scheme is a registered pension scheme under the Kenya Income Tax Act and is therefore tax exempt.

n) Employee entitlements

The estimated monetary liability for employees’ accrued annual leave entitlement at the end of the reporting period is recognised as an expense accrual. Retirement benefit obligations The Scheme operates a defined contribution Scheme for its employees. The assets of the Scheme are held in separate trustee administered funds, which are funded from contributions from both the Scheme and employees. The Scheme also contributes to a statutory defined contribution pension scheme, the National Social Security Fund (NSSF). Contributions to this scheme are determined by local statute and are currently at KShs 200 per employee per month. Statutory Pension Scheme

The Scheme’s contributions to the defined contribution scheme and NSSF are charged to changes in net assets available for benefits as they fall due.

Bonus An accrual is recognised for the amount expected to be paid under short-term cash bonus if the Scheme has a present legal and constructive obligation to pay this amount as a result of past service provided by the employee, the obligation can be estimated reliably and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

Annual Report & Financial Statements | 2019 67 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

o) Impairment of non-financial assets The Scheme assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Scheme estimates the asset’s recoverable amount. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash- generating unit’s fair value less costs to sell and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not enerate cash inflows that are largely independent of those from other assets or groups of assets. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used.

Impairment losses of continuing operations are recognised in the changes in net assets available for benefits in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Scheme makes an estimate of recoverable amount. A previous impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years.

The Scheme’s assets affected by this policy include property and equipment and intangible assets.

p) Fair value measurement

The Scheme measures financial instruments such as quoted equity investments at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Scheme. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Scheme uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

68 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

p) Fair value measurement All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2-Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3-Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements on a recurring basis, the Scheme determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. External valuers are involved for valuation of significant assets, such as property and investment properties. Involvement of external valuers is decided upon annually by the finance and investment manager after discussion with and approval by the Scheme’s trustee committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. For the purpose of fair value disclosures, the Scheme has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. q) Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise cash at hand, deposits held with financial institutions and other short-term highly liquid investments.

r) Expenses Expenses are recognised in the statement of changes in net assets available for benefits when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably and is independent from transactions with equity participants.

This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).

i) When economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined expenses are recognised in the statement of changes in net assets available for benefit on the basis of systematic and rational allocation procedures. This is often necessary in recognising the equipment associated with the using up of assets such as property and equipment in such cases the expense is referred to as a depreciation or amortisation. These allocation procedures are intended to recognise expenses in the accounting periods in which the economic benefits associated with these items are consumed or expire.

ii) An expense is recognised immediately in the statement of changes in net assets available for benefit when expenditure produces no future economic benefits or when, and to the extent that, future economic benefits do not qualify, or cease to qualify, for recognition in the statement of net assets available for benefits as an asset.

Annual Report & Financial Statements | 2019 69 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

In the process of applying the accounting policies adopted by the Scheme, the Trustees make certain judgments and estimates that may affect the carrying values of assets and liabilities in the next financial period. Such judgments and estimates are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the current circumstances. The Trustees evaluate these at each financial reporting date to ensure that they are still reasonable under the prevailing circumstances based on the information available.

The preparation of the Scheme’s financial statements requires Management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

Key sources of estimation uncertainty:

Property lease classification – Scheme as lessor

The Scheme has entered into commercial property leases on its investment property portfolio. The Scheme has determined, based on an evaluation of the terms and conditions of the arrangements, such as the lease term not constituting a substantial portion of the economic life of the commercial property, that it retains all the significant risks and rewards of ownership of these properties and accounts for the contracts as operating leases.

Impairment of non-financial assets

The Scheme assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Scheme estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or Cash Generating Unit’s (CGU’s) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

The Scheme bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Scheme’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.

Impairment losses of continuing operations are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset, except for properties previously revalued with the revaluation taken to the statement of changes in net assets available for benefits. For such properties, the impairment is recognised in the statement of changes in net assets available for benefits up to the amount of any previous revaluation.

70 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)

Impairment of non-financial assets (continued) For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Scheme estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognized in the statement of changes in net assets available for benefits.

Estimation of net realisable value for inventory property Inventory property is stated at the lower of cost and net realisable value (NRV). NRV for completed inventory property is assessed by reference to market conditions and prices existing at the reporting date and is determined by the Scheme, based on comparable transactions identified by the Scheme for properties in the same geographical market serving the same real estate segment.

NRV in respect of inventory property under construction is assessed with reference to market prices at the reporting date for similar completed property, less estimated costs to complete construction and an estimate of the time value of money to the date of completion.

Valuation of property The fair value of investment property is determined by real estate valuation experts using recognised valuation techniques and the principles of IFRS 13. Investment property under construction is measured based on estimates prepared by independent real estate valuation experts, except where such values cannot be reliably determined. In one case, the fair value of the investment property under construction could not be reliably determined because it was in an area in which the surrounding properties were under development and reliable estimates could not be made. This property is recorded at cost. The Investment properties are stated at fair value, which has been determined based on valuations performed by Joseph Mwaura Njoroge (Sundown Valuers & Reltors Limited) as at 31 December 2017 having regard to the foregoing particulars and the present day economic circumstances. The valuer used the market approach by comparing the properties with identical or similar assets for which price information is available.

Property and equipment Critical estimates are made by the Scheme’s management, in determining depreciation rates for property and equipment and amortization of intangible assets. However, the intangible assets currently reported have yet to be commissioned for use and are thus held at cost.

Income taxes

The Scheme is subject to income taxes in various jurisdictions for offshore and regional investments. Significant judgment is required in determining the Scheme’s provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Scheme recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provision in the period in which such determination is made.

Annual Report & Financial Statements | 2019 71 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

2. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued)

Fair value measurement of financial instruments When the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility.

Receivables

Critical estimates are made by the trustees in determining the recoverable amount of receivables.

The scheme uses a provision matrix to calculate ECLs for account receivables and bank balances. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by geography, product type, customer type and rating, and coverage by letters of credit and other forms of credit insurance).

The provision matrix is initially based on the Scheme’s historical observed default rates. The Scheme will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.

The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The company’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future.

The information about the ECLs on the Scheme’s term deposits with financial institutions and receivables is disclosed in notes 23 and 24 respectively.

72 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

3. FINANCIAL RISK MANAGEMENT

The Scheme generates revenues for the members by investing in various income generating activities which involve trading in the securities, and investing in other financial assets including offshore investments.

These activities expose the Scheme to a variety of financial risks, including credit risk and the effects of changes in debt and equity market prices, foreign currency exchange rates and interest rates. The Scheme’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on its financial performance.

Risk management is carried out by the Trustees together with the investment managers under policies approved by the Trustees. The investment managers review the market trends and information available to evaluate the potential exposures. They then arrive at strategies to mitigate against market risks. The Trustees provide guidelines for overall risk management, as well as policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk, use of derivative and non-derivative financial instruments and investing excess liquidity. The Scheme also follows guidelines issued by the Kenyan Retirements Benefits Authority (RBA) in respect of maximum investment in different types of investments.

a) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments affected by market risk include loans and borrowings, deposits and AFS investments.

(i) Foreign exchange risk The Scheme is exposed to the risk that the fair value or the future cash flows of financial instruments will fluctuate due to changes in foreign exchange rates. The Scheme invests internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the Uganda shilling. Foreign exchange risk arises from investment in offshore investments, quoted shares on the Uganda Stock Exchange (USE) and the Rwanda Stock Exchange (RSE).

The Scheme currency risk is evaluated as low because the foreign investments are long-term and any currency losses are expected to be recouped through interest income earned and which comprises the value of the Scheme. The Scheme manages foreign exchange risk by limiting offshore investments to strategic range of 5% of total portfolio as required by the RBA regulations. The quoted investments in the USE and RSE are low risk and form an insignificant part of the total portfolio. At 31 December 2019, the Scheme did not have offshore investments.

(ii) Price risk

The Scheme is exposed to equity securities price risk because of investments in quoted shares classified at fair value through profit or loss. The Scheme is also exposed to the risk that the value of debt securities will fluctuate due to changes in market value. To manage its price risk arising from investments in equity and debt securities, the Scheme diversifies its portfolio invested in bonds of varying maturities. Diversification of the portfolio is done in accordance with trust deed.

Annual Report & Financial Statements | 2019 73 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

3. FINANCIAL RISK MANAGEMENT

a) Market risk

(ii) Price risk (continued)

For equities, the Scheme has invested in companies in different sectors of the economy, while for debt securities; the Scheme has policy which is reviewed after every three years. All quoted shares held by the Scheme are traded on the Nairobi Securities Exchange (NSE), Uganda Securities Exchange (USE) and Rwanda Stock Exchange (RSE).

If the price of securities were to appreciate/depreciate by 5% it would have the following effect (approximately):

2019 2018 KShs ‘000 KShs ‘000 Effect on returns from Investment 5% Appreciation 37,741 (21,339) 5% Depreciation (37,741) 21,339 Effect on Scheme balance 5% Appreciation 153,677 124,585 5% Depreciation (153,677) (124,585)

iii) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Scheme’s interest bearing assets are investments in treasury bonds, corporate bonds, treasury bills and fixed deposits. All of these instruments are at fixed interest rates.

The nature of financial instruments held, that is, fixed interest instruments mitigates risk exposure of the Scheme. Fluctuations in interest rates will not have a significant effect on the Scheme.

b) Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.

Credit risk arises from receivables, term deposits with financial institutions, interest bearing investments, deposits with banks, and cash and cash equivalents. As part of the credit risk management system, the Investment Manager and the Trustees monitor and review information on significant investment. The Trustees have approved a larger portfolio investment with the Government of Kenya debt securities which have a low credit risk and no default record.

The Scheme has an elaborate vetting process before a term deposits are placed in a financial institution. The deposits are also spread to mitigate against concentration risks. The vetting process is continuously reviewed to take into consideration of new developments.

74 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

3. FINANCIAL RISK MANAGEMENT

b) Credit risk (continued)

The amount that best represents the Scheme’s maximum exposure to credit risk as at reporting period is made up as follows:

2019 2018 KShs’000 KShs’000

Term deposits with financial institutions 596,650 351,218 Receivables 679,980 1,695,193 Bank and cash balances 20,367 9,613 Amount due from related parties 74,929 12,347

1,371,926 2,068,371

The Scheme holds no collateral over the above assets. The Scheme has not pledged any part of the above assets to fulfil any collateral requirements. There were no financial guarantees thus none included in the liquidity table under note 3(c).

For terms and conditions relating to related party receivables, refer to note 25.

Receivables are non-interest bearing and are generally on terms of 30 to 90 days, save for mortgage house sales, refer to note 3(c) and note 24(a).

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Scheme, and earn interest at the respective short-term deposit rates. Refer to note 3(c) and note 26.

None of the above financial assets are past due or impaired.

The Scheme’s maximum exposure to credit risk for the components of the statement of net assets available for benefits at 31 December 2019 and 2018 is the carrying amounts as illustrated in 24.

Excessive risk concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have economic features that would cause theirability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Scheme’s performance to developments affecting a particular industry.

In order to avoid excessive concentrations of risk, the Scheme’s policies and procedures include specific guidelines to focus on the maintenance of a diversified portfolio and in line with the Investment Policy Statement for the Scheme. Identified concentrations of credit risks are controlled and managed accordingly. Selective screening is used by the Scheme to manage risk concentrations at both the relationship and industry levels.

Annual Report & Financial Statements | 2019 75 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

3. FINANCIAL RISK MANAGEMENT (continued)

c) Liquidity risk

Liquidity risk is the risk that the Scheme will encounter difficulty in meeting obligations from its financial liabilities.

The Scheme is required to make periodic payment in respect of pension payments when members retire from the Scheme, and is therefore exposed to the risk of difficulty in raising funds to make such payments. It therefore invests a portion of its assets in investments that are readily convertible to cash. The investment managers monitor the Scheme’s liquidity on a regular basis and the Trustees review it on a quarterly basis.

The Scheme’s primary long – term risk is that its financial assets will fall short of its financial liabilities (promised benefit payable to members). Therefore, the aim of investments risk management is to minimize the risk of overall reduction in the value of the Scheme and to maximize the opportunity for gains across the whole Scheme portfolio. The Scheme achieves this through asset diversification to reduce exposure to market risk (price risk, currency risk and interest risk) and credit risk to an acceptable level. In addition, the Scheme manages liquidity risk to ensure there is sufficient liquidity to meet its forecast cash flows. The Scheme manages this investment risk as per part of its overall pension Scheme risk management program.

The table below analyses the Scheme’s financial assets and financial liabilities as at the end of the reporting period. The amounts disclosed in the table below are the undiscounted cash flows. Balances due equal their carrying balances, as the impact of discounting is not significant.

The Scheme’s liabilities are all payable within a year.

76 Kenya Power Pension Fund | Defined Benefits - Total 20,367 542,342 377,594 679,980 223,754 596,650 3,073,534 6,394,250 233,346 233,346 11,983,700 11,750,054 74,929 ------542,342 3,073,534 4,477,521 KShs ‘000 - - More than 5 Years ------12,347 131,364 1,666,685 KShs ‘000 - 1 to 5 months ------246,230 678,831 223,754 596,650 250,044 1,995,509 1,810,396 8,093,397 1,995,509 1,810,396 8,093,397 KShs ’000 3 to12 months

------1,149 20,367 84,098 233,346 233,346 62,582 (149,248) KShs ’000 L ess Than 3 months liabilities FINANCIAL RISK MANAGEMENT (continued) Due from related parties Corporate bonds Receivables Bank and cash balances Unquoted equities Other payables, and accruals Government securities held to maturity Short term deposits with financial institutions Quoted equity investments Due to related parties The table below summarizes the maturity profile of the Scheme’s financial assets and liabilities based on contractual undiscounted obligations as at 31 December 2019. financial assets and liabilities based on contractual undiscounted obligations The table below summarizes the maturity profile of Scheme’s Financial assets Government securities at fair value through profit and loss Liquidity surplus as at 31 December 2019 Financial NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 3.

Annual Report & Financial Statements | 2019 77 Total 9,613 61,150 484,406 716,072 191,212 351,218 1,695,193 2,491,706 5,900,612 136,973 198,123 11,852,379 11,654,256 12,347 ------484,406 2,491,706 4,580,712 KShs ‘000 - - - More than 5 Years ------635,272 1,136,600 KShs ‘000 1 to 5 months ------176,212 351,218 133,300 1,659,487 2,320,217 1,771,872 7,556,824 2,320,217 1,771,872 7,556,824 KShs ’000 3 to12 months

- - - 9,613 80,800 35,706 15,000 61,150 50,000 203,446 198,123 12,347 136,973 5,343 KShs ’000 Less Than 3 months liabilities FINANCIAL RISK MANAGEMENT (continued) Due from related parties Corporate bonds Receivables Bank and cash balances Unquoted equities Other payables, and accruals Government securities held to maturity Short term deposits with financial institutions Quoted equity investments Due to related parties Financial The table below summarizes the maturity profile of the Scheme’s financial assets and liabilities based on contractual undiscounted obligations as at 31 December 2018. financial assets and liabilities based on contractual undiscounted obligations The table below summarizes the maturity profile of Scheme’s Financial assets Government securities at fair value through profit and loss Liquidity surplus as at 31 December 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 3.

78 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

3. FINANCIAL RISK MANAGEMENT (continued) (d) Operational risk

Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies, employee errors, systems failures, fraud or other criminal activity and has potential to disrupts business processes. The Trustees have put in place policies that ensure the secretariat follow the laid down procedures, competent employees are employed, disciplinary action against any criminal activity and procurement of insurance policies for any loss of assets.

(e ) Business risk

Business risk is the possibility a company will have lower than anticipated return. Business risk is influenced by numerous factors, including inflation, interest rates and the overall economic climate and government regulations. The Trustees have diversified the investment portfolio through investment in the capital markets and alternative investments to reduce the volatility of returns. 4. ACTUARIAL VALUATION METHOD AND ASSUMPTIONS

The pension Scheme liability is calculated every three years by the appointed actuary, with annual updates in the intervening years. The methodology used is in line with accepted guidelines and in accordance with IAS 26. Assumptions underpinning the valuations are agreed with the actuary and are summarised in the actuarial position. This estimate is subject to significant variances based on changes to the underlying assumptions. The accrued (past service) liability in respect of each in-service Scheme member is taken as the present value of all benefits accrued to the Scheme’s date of closure with allowance for revaluation of the accrued benefits to date of retirement or earlier exit. Each member’s accrued liability is subject to a minimum of the member’s own accumulated contributions and the Employer’s accumulated contributions “on the member’s behalf”. The accrued liability in respect of pensioners is taken as the present value of the expected future pension payments. In arriving at the value of accrued benefits, various assumptions have to be made. These assumptions are divided into demographic and financial assumptions. Demographic assumptions relate to the probability of an event occurring that would lead to the payment of a benefit. These include the mortality, withdrawal, retirement and similar assumptions. Financial assumptions on the other hand relate to those factors that affect the actual value/ amount of the benefit paid out. These would ideally include the rate of salary increases and the valuation rate of discount and the rate of pension increases. The financial assumptions have a greater bearing on the results of the actuarial valuation, particularly the relative differences between the assumptions as opposed to their absolute values.

The principal features of the actuarial basis can be summarised as follows: Rate of interest/discount rate : 10% per annum Rate of revaluation of deferred benefits : 5% per annum from 30/6/2006 Rate of pension increases : 0% per annum for post 31/12/1999 service 3% per annum for pre 1/1/2000 service Rate of icreases to deferred pensions : 0% per annum Mortality - Pre-retirement : A1949/52 Ultimate - Post-retirement : a (55) Males/Females Ultimate Retirements : 50% assumed to retire at age 55 and the balance at age 60 Withdrawals Ill-health early retirement : In accordance with the average experience of other similar schemes. Assets : Assets taken into account at amounts shown in the audited accounts as at 31 December 2019. Nature of benefits : All the benefits are vested

Annual Report & Financial Statements | 2019 79 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

4. ACTUARIAL VALUATION METHOD AND ASSUMPTIONS

The actuarial basis adopted for this valuation is identical to that used for the last actuarial valuation of the Scheme as at 31 December 2013.

The actuarial basis adopted is, in the opinion of the Actuary, wholly consistent with the bases used for the actuarial valuations of other similar closed schemes in Kenya at the present time. It is important to appreciate that whilst individual elements of an actuarial basis may be subject to differences of opinion, it is the basis as a whole that is relevant rather than its individual constituent parts. The valuation method used was the Attained Age Method (AAM).

Sensitivity of Actuarial Valuation Results of Scheme

It is important to appreciate that the results of the actuarial valuation of the Scheme are sensitive to the actuarial assumptions made. The actuarial assumptions reflect one view of likely future events and there is therefore uncertainty as to how the financial position of the Scheme will develop in future. There is no guarantee that the assumptions made will be borne out in practice and the expectation is that the Scheme’s actual experience will from time to time be better or worse than that assumed.

2017 2016 KShs ‘000 KShs ‘000

Scheme surplus 2,433,618 2,433,618

Funding level 115.0% 115.0%

The level of funding (the ratio of the Scheme assets to accrued liabilities) is 115.0% (2016: 115.0 %). The level of funding is above the statutory minimum funding requirement of 100% prescribed in the Retirement Benefits Regulations as amended in 2009.

The table below shows the results of the actuarial calculations based on the data provided to the appointed actuary and the assumptions and methodology adopted.

80 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

4. ACTUARIAL VALUATION METHOD AND ASSUMPTIONS (continued)

50% retire at 25% retire at age All retire at age 55 55 age 60 Value of: Kshs ‘000 Kshs ‘000 Kshs ‘000

Future Benefits to Current and Suspended Pensioners (non-vested benefits) 6,425,401 6,425,401 6,425,401 Deferred Pensioners 235,756 235,756 235,756 Active Members Accrued Benefits 9,421,597 9,102,310 8,766,056 Outstanding Liabilities 136,514 136,514 136,514 Total Liabilities 16,259,268 15,896,955 15,563,727 Non-vested benefits 6,425,401 6,425,401 6,425,401 Vested benefits 9,833,867 9,471,554 9,138,326 Value placed on Scheme Assets 18,692,886 18,692,886 18,692,886 Surplus 2,433,618 2,795,931 3,129,159 Funding level 115.0% 117.6% 120.1%

Assuming all (or most active) active members retire at age 60, the results of the actuarial valuation as at 31 December 2016 show a bigger actuarial surplus of KShs 3.129 billion. The funding level on this basis is 120.1%.

The movement in the number of pensioners and dependants was as shown below:

Primary Widow/ orphans Total pensioners widowers Number as at 31 December 2013 909 1,199 2,111 4,219 New retirements/deaths from active service 270 51 121 442 New retirements from deferred status 31 - - 31 Omitted in data for 2013 valuation 12 13 17 42 Deaths-beneficiaries on payroll (48) 54 26 32 Deaths-ceased as no other beneficiaries - (20) - (20) Ceased on attaining age 23 years - - (707) (707) Number as at 31 December 2016 1,174 1,297 1,568 4,039

5. CONTRIBUTIONS RECEIVABLE FROM SPONSOR

The Scheme is closed, fully funded and hence no contributions were received.

Annual Report & Financial Statements | 2019 81 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

6. BENEFITS PAYABLE 2019 2018 KShs ‘000 KShs ‘000

Withdrawals 394,920 350,940 Pensions 848,250 835,808

1,243,170 1,186,748 7. RETURNS ON INVESTMENT

(i) Investment properties: Fair value gains on investment property (note 16) 72,921 92,726 Rental income 116,818 123,930 Loresho licence 8,611 - 198,350 216,656 (ii) Inventory properties: Sale of inventory property 35,986 76,386 Inventory cost (note 18 (b)) (24,113) (51,862)

Gain on sale of inventory property 11,873 24,524

(iii) Government securities at fair value through profit or loss: Interest on treasury bonds 680,394 649,544 Fair value gain (note 16) 110,452 207,319 Rebate on bonds 1,481 585 Accrued interest 22,328 - Loss on disposal of treasury bonds (note 16) 14,434 (10,916)

829,089 846,532

(iv) Government securities at amortised cost Accrued interest 14,434 11,867 Gain on disposal of (note 16) 6,875 16,682

21,309 28,549

(v) Term deposits with financial institutions at amortised cost Interest on deposits 25,472 32,242

(vi) Quoted equities at fair value through profit or loss: Dividends receivable 154,811 109,651 Gain/(loss) on sale Fair value gain/(loss) (note16) 560,559 (475,677) Gain/(loss) on disposal (note 16) 39,450 (60,747)

754,820 (426,773) (vii) Corporate bonds at fair value through profit or loss: Interest on corporate bonds 80,356 111,870 Fair value gain or loss in market value (note 16) 244 (5,853) Loss on disposal (note 16) (7,523) (2,254)

73,077 103,763 (viii) Unquoted investments at fair value through profit or loss Unquoted investments: Interest received 35,251 25,447 Fair value (loss)/gain (note 16) (16,728) 38,673

18,523 64,120

(ix) Write back of expected credit loss allowance – Property receivables 13,017 (5,579)

(x) Write back of expected loss allowance– Term deposits 9,358 (5,718)

1,954,888 878,316

82 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

8. INVESTMENT MANAGEMENT EXPENSES 2019 2018 KShs ‘000 KShs ‘000

Investment management fee 37,399 21,924 Custodial fee 9,541 10,008 Brokerage fees 25 -

46,965 31,932

Investment management expenses include investment manager’s fees, custodial fees and brokerage fees paid by the Scheme. Investment managers are paid a fee of 0.18% (2018: 0.18%) of the net asset value held by the investment managers and a performance fee of 0.07% (2018: 0.07%) of the market value of the portfolio if the performance meets the bench mark. The composite benchmark is derived with reference to the strategic asset allocation as set out in the Investment Policy Statement. Custodians on the other hand are paid a maximum fee of 0.07% of the net asset value. Applicable transaction costs and bank charges are also payable to the custodian. Brokerage fees are part of the cost of purchase and sale of investments at the Nairobi Securities Exchange Limited (NSE), Uganda Securities Exchange (USE) and Rwanda Stock Exchange (RSE).

9. OTHER INCOME 2019 2018 KShs ‘000 KShs ‘000

Write back of excess accrual 12,150 32,231

The write back relates to Loresho professional fees which are contractors’ retainer fees, Runda license fees and other writebacks.

Annual Report & Financial Statements | 2019 83 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

10. OPERATIONAL EXPENSES 2019 2018 KShs ‘000 KShs ‘000

Administrative expenses: Office expenses 3,862 1,812 Auditor’s remuneration 3,449 2,683 Legal and professional fees 3,707 8,162 Actuarial fees 585 - Levies and taxes 5,000 5,000 Bank charges 3,573 1,442 Depreciation of property and equipment (note 14) 11,156 2,468 Depreciation of property and equipment-DC share (note 14) (5,020) - Amortization of intangible assets (note 15) 6,803 10,759 Amortization of intangible assets-DC share (note 15) (3,062) - office Repairs and maintenance 6 14 Insurance expenses 2,389 812 Land rates 1,421 1,127 ICT expenses 6,373 11,720 Secretariat expenses (note 11) 78,998 53,302 Governance fees and expenses (note 12) 24,974 19,212 Members’ expenses (note 13) 10,208 8,793

Net administrative expenses 154,422 127,306

Other administrative expenses: Printing and stationery 1,913 1,967 Subscription 6 13 ISO expense 391 157 Corporate events 1,303 417 Service Charge 7,177 4,992 Parking rent expense 435 752 Procurement expenses 667 1,104 Other expenses 1,687 9,808 Write off of expense* - 44,429 Corporate social responsibility 782 4,000

14,361 67,639

Total operational expenses 168,783 194,945

*Relates to write-off of overstated Loresho receivables

84 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

11. SECRETARIAT EXPENSES 2019 2018 KShs ‘000 KShs ‘000

Salaries, wages and bonuses 59,665 36,480 NSSF contributions 47 60 Contribution to defined contributions pension scheme 4,056 3,754 Staff training 7,976 10,768 Leave pay provision 7,254 2,240

78,998 53,302

These are expenses relating to the staff in the Scheme secretariat. The Secretariat oversees all activities performed by the Scheme’s service providers that include investment manager, custodian, property manager, actuary and legal advisors. The secretariat is responsible for communication with members and other stakeholders as well as ensuring the Scheme is compliant with all applicable statutory requirements.

12. GOVERNANCE FEES AND EXPENSES 2019 2018 KShs ‘000 KShs ‘000

Trustees’ remuneration 11,386 11,731 Internal audit fee 1,400 1,436 Trustees’ training 12,188 6,045

24,974 19,212

Governance expenses are incurred by the Trustees in fulfilling their mandate as is required of them by the Trust Deed & Rules and by the Kenyan Retirement Benefits Act. Trustees’ remuneration relates to their sitting allowances for the meetings attended.

13. MEMBERS’ EXPENSES 2019 2018 KShs ‘000 KShs ‘000

Annual general meeting costs 1,541 1,631 Customer service week 202 177 Members’ education costs 8,465 6,985

10,208 8,793

Annual Report & Financial Statements | 2019 85 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

14. PROPERTY AND EQUIPMENT 2019 Computer Furniture Motor Hardware Equipment & fittings Buildings vehicle Total COST Kshs ‘000 Kshs ‘000 KShs ‘000 KShs ‘000 KShs ‘000 KShs ‘000

As at 1 January 2019 11,681 6,705 2,700 - - 21,086 Additions 3,209 1,114 27,237 - 9,742 41,302 Transfer from work in progress - - - 298,107 - 298,107

As at 31 December 2019 14,890 7,819 29,937 298,107 9,742 360,495

ACCUMULATED DEPRECIATION As at 1 January 2019 8,480 5,322 1,886 - 15,688 Charge for the year 1,972 869 1,123 5,521 1,671 11,156

As at 31 December 2019 10,452 6,191 3,009 5,521 1,671 26,84

CARRYING AMOUNT 4,438 1,628 26,928 292,586 8,071 333,651

2018 Computer Furniture Hardware Equipment & fittings Total COST Kshs ‘000 Kshs ‘000 KShs ‘000 KShs ‘000

As at 1 January 2018 8,649 8,089 2,700 19,438 Reclassifications 1,384 (1,384) - Additions 1,839 - - 1,839 Disposal (191) - - (191)

As at 31 December 2018 11,681 6,705 2,700 21,086

ACCUMULATED DEPRECIATION As at 1 January 2018 4,451 5236 1698 11,385 Reclassifications 2,540 (685) 77 1,932 Charge for the year 1,586 771 111 2,468 Disposal (97) - - (97)

As at 31 December 2018 8,480 5,322 1,886 15,688

CARRYING AMOUNT As at 31 December 2018 3,201 1,383 814 5,398

There was no existence of any restrictions on title, and property and equipment pledged as security for any liabilities.

86 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

15. INTANGIBLE ASSETS 2019 2018 KShs ‘000 KShs ‘000

COST At 1 January 35,935 31,214 Additions 4,050 4,721

At 31 December 39,985 35,935

AMORTISATION At 1 January 12,399 1,640 Charge for the year* 6,803 10,759

At 31 December 19,202 12,399

CARRYING AMOUNT 20,783 23,536

Intangible assets - work in progress relate to Document Management System acquired by the Scheme which was still in the implementation phase and thus is yet to be commissioned.

*This relate to the Fundmaster System that was commissioned for use within the year.

Annual Report & Financial Statements | 2019 87 - 223,754 542,342 596,650 377,594 Value at Value 5,980,880 1,383,981 6,394,250 3,073,534 KShs’000 31.12.2019 18,572,985 ------9,359 9,359 KShs’000 Expected credit Loss Allowance ------6,288 20,328 26,616 interest Accrued KShs’000 - - - 244 value 72,921 14,434 110,452 560,559 727,448 (16,728) Change KShs’000 in market - - - - 6,875 Profit/ 16,434 39,450 18,735 73,971 (7,523) (loss) on disposal KShs’000 - - - (24,113) (210,258) (342,178) (331,199) KShs’000 proceeds (1,242,470) (4,516,520) (6,652,304) Sales/maturity ------(450) 782,015 Transfer Transfer from/(to) (298,557) KShs’000 (1,080,122) - - 13,522 75,114 322,599 221,491 323,997 1,588,894 4,727,570 7,273,187 KShs’000 Purchases 24,113 279,367 191,212 484,406 716,072 351,218 6,974,559 5,900,612 2,491,706 KShs’000 17,413,265 Value at 01.01.2019 at Value

Investment property (note 17) Investment property - WIP (note18 (a)) Inventory property (note18 (b) Government securities at fair value through profit or loss (note 19 (a)) Government securities at amortised cost (note 19 (b)) Unquoted equity investments at fair value through profit or loss (note 20) Quoted equity investments at fair value through profit or loss (note 21) Corporate bonds (note 22) Term deposits with financial Term institutions (note 23) The change in market value of investments comprises carrying amount the as a result valuation at th e reporting date. transaction costs are included cost of purchases and sales proceeds. Investment property was revalued by S.N Maina (Gimco Limited), a registered valuer as at 31 December 2019 using the market comparison approach having regard to the foregoing particulars and present-day economic circumstances. NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 16. INVESTMENTS

88 Kenya Power Pension Fund | Defined Benefits 24,113 279,367 191,212 484,406 716,072 Value at Value KShs’000 6,974,559 5,900,612 2,491,706 31.12.2018 351,218 17,413,265 ------(9,943) (9,943) KShs’000 Expected credit Loss Allowance ------11,867 1,456 interest 13,323 Accrued KShs’000 - - - value 38,673 92,726 (5,853) Change 207,319 KShs’000 (475,677) (142,812) in market - - - - - Profit/ 16,682 (2,254) 27,218 (10,916) (60,747) (30,017) (loss) on disposal KShs’000 - - - (51,862) (468,200) (450,068) (161,255) (661,770) KShs’000 proceeds (4,125,833) (5,918,988) Sales/maturity - - - - - 24,781 (4,010) (20,771) Transfer Transfer from/(to) KShs’000 - - - - 60,238 15,640 233,244 258,538 607,164 KShs’000 1,085,121 3,742,792 6,002,737 Purchases 66,894 79,985 372,325 385,495 885,434 KShs’000 5,280,858 2,871,034 6,841,412 715,528 17,498,965 Value at 01.01.2018 at Value

Investment property - WIP (note18 (a)) Inventory property (note18 (b) Government securities at fair value through profit or loss (note 19 (a)) Government securities at amortised cost (note 19 (b)) Unquoted equity investments at fair value through profit or loss (note 20) Quoted equity investments at fair value through profit or loss (note 21) Corporate bonds (note 22) deposits with financial Term institutions (note 23) Investment property (note 17) The change in market value of investments comprises carrying amount the as a result valuation at th e reporting date. transaction costs are included cost of purchases and sales proceeds. INVESTMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 16.

Annual Report & Financial Statements | 2019 89 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

17. INVESTMENT PROPERTIES

Stima Umeme Karen Plaza/Annex Plaza Land Total KShs’000 KShs’000 KShs’000 KShs’000

2019 At 1 January 2019 1,903,598 1,309,010 3,761,951 6,974,559 Additions - - 13,522 13,522 Transfers from/(to) investment property work in progress (note 18 (a)) 228,888 (1,309,010) - (1,080,122) Fair value gains 54,714 - 18,207 72,921

At 31 December 2019 2,187,200 - 3,793,680 5,980,880

2018 At 1 January 2018 1,900,000 1,305,000 3,636,412 6,841,412 Addition - - 15,640 15,640 Transfers from investment property work in progress (note 18 (a)) - - 20,771 20,771 Transfer from inventory property (note 18 (b)) - 4,010 - 4,010 Fair value gains 3,598 - 89,128 92,726

At 31 December 2018 1,903,598 1,309,000 3,761,951 6,974,559

The Scheme investment properties consist of three commercial properties; Stima Plaza, Umeme Plaza and Karen land.

Rental income earned from the investment property during the year amounted to KShs 117 million (2018: KShs 124 million) (note 7).

As at 31 December 2019, investment property were revalued by Gimco Limited (2018: Gimco Limited), registered valuers, using the market comparison approach having regard to the foregoing particulars and the present day economic circumstances. Gimco Limited is an industry specialists in valuing these types of investment properties.

There were no direct operating expenses arising from investment property that generated rental income. There was no acquisition or sale of investment property during the year.

There was no existence of restrictions on the realisability of investment properties or the remittance of income and proceeds of disposal of investment properties. There were no contractual obligations to purchase or for repairs, maintenance or enhancements. The contractual obligations to construct or develop investment properties are detailed in note 18 and note 28.

90 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

18. a) INVESTMENT PROPERTIES - WORK IN PROGRESS

2019 2018 KShs ’000 KShs ’000

At 1 January 279,367 66,894 Additions 322,599 233,244 Transfer from investment properties 1,309,010 (20,771) Transfer to property inventory and PPE (526,995) -

As at 31 December 1,383,981 279,367

Investment properties work in progress relates to contractors and subcontractors’ costs incurred in relation to development of Stima Plaza.

18. b) INVENTORY PROPERTIES

2019 2018 KShs ‘000 KShs ‘000

As at 1 January 24,113 79,985 Transfer to investment properties (note 17) - (4,010) Cost of sold inventory property (24,113) (51,862)

As at 31 December - 24,113

There were no inventories pledged as security for any liability.

19. GOVERNMENT SECURITIES

a) At fair value through profit or loss 6,394,250 5,900,612

b) At amortised cost 223,754 191,212

The weighted average interest rate realized on the investment in treasury bonds during the year was 12.01% (2018: 12.01%).

Annual Report & Financial Statements | 2019 91 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

20. UNQUOTED EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

Ascent Gulf Rift Valley Fanisi Catalyst Power Capital Fund II Principals Total KShs ‘000 KShs ‘000 KShs ‘000 KShs ‘000 KShs ‘000 2019 As at 1 January 312,674 136,217 564 34,951 484,406 Addition* - 27,386 12,706 35,022 75,114 Reimbursements** - - - (450) (450) Fair value gains 8,015 (5,554) (6,075) (13,114) (16,728)

As at 31 December 320,689 158,049 7,195 56,409 542,342

2018 As at 1 January 245,688 98,988 7,441 33,378 385,495 Addition* - 36,074 4,201 29,605 69,880 Reimbursements** - (9,642) - - (9,642) Fair value gains 66,986 10,797 (11,078) (28,032) 38,673

As at 31 December 312,674 136,217 564 34,951 484,406

*Relates to additional investment in Ascent Rift Valley Fund Ltd, Catalyst Fund II L.P. and Fanisi Capital.

** Relates to reimbursement from Catalyst Fund II LP after entry of new investors.

The Scheme together with The KPLC Staff Retirement Benefit Scheme (Defined Benefit) jointly acquired a 10% interest in the equity shares of Gulf Power Ltd, an independent power producer. Both Schemes have a direct equity stake on a 50:50 ratio.

As at 31 December 2019, the unquoted equity investments were valued as follows;

Gulf Power Limited The investment in Gulf Power Limited was revalued using the discounted cashflow method and the discount rate used to rate used to discount the cashflows is 13%.

Ascent Rift Valley Capital, Catalyst Principals and Fanisi Fund II The private equity managers have calculated the fair value by applying the International Private Equity and Venture Capital (IPEV) Valuation Guidelines of December 2019 that represent current best practice on the valuation of private equity and venture capital investments. The fair values of the fund’s portfolio companies have all been determined using the market approach by applying the median multiples of similar businesses to EBITDA.

92 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

21. QUOTED EQUITY INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

2019 2018

Security Units Value Units Units No of shares KShs ‘000 No of shares No of shares

B.O.C Kenya Plc Ord 5.00 - 3 - 4 Bamburi Cement Ltd Ord 5.00 1,086 86,872 1,351 179,047 Bank of Kigali 500 14,158 500 15,842 Barclays Bank of Kenya Ltd Ord 0.50 890 11,882 1,504 16,469 British American Tobacco Kenya Plc Ord 10.00 158 78,950 121 87,653 Centum Investment Co Plc Ord 0.50 - - 163 4,777 Crystal Telecom Ltd 1,200 8,978 1,200 7,252 Diamond Trust Bank Kenya Ltd Ord 4.00 662 72,170 686 107,376 East African Breweries Ltd Ord 2.00 1,469 291,532 1,156 201,954 Equity Group Holdings Plc Ord 0.50 7,292 390,101 6,892 240,172 I&M Holdings Plc Ord 1.00 904 48,812 452 38,417 Jubilee Holdings Ltd Ord 5.00 71 24,747 71 28,535 KCB Group Plc Ord 1.00 7,053 380,856 5,573 208,705 KenolKobil Ltd Ord 0.05 0 0 9,699 184,763 Kenya Power & Lighting Co Ltd Ord 2.50 5,197 14,603 5,288 21,521 Kenya Re Insurance Corporation Ltd Ord 2.50 8,000 24,240 - - NIC Group Plc Ord 5.00 4,764 175,561 4,764 132,445 Safaricom Plc Ord 0.05 36,793 1,159,362 38,293 850,113 Stanbic Holdings Plc ord.5.00 778 85,049 358 32,454 Stanbic Bank Uganda Limited 32,095 23,153 32,095 27,288 Standard Chartered Bank Kenya Ltd Ord 5.00 176 35,539 75 14,665 The Co-operative Bank of Kenya Ltd Ord 1.00 8,491 138,820 5,520 78,940 Umeme Ltd Ord 0.50 343 2,841 343 2,779 Uganda Clays Ltd. 20,206 5,305 20,207 10,530 Williamson Tea Kenya Plc Ord 5.00AIMS - - - 5

138,128 3,073,534 136,311 2,491,706

*The Scheme has invested in 5,196,857 (2018: 5,287,657 units of the sponsor (Kenya Power & Lighting Company Limited) quoted shares which were valued at KShs 14,603,168 (2018: KShs 21,520,764) as at reporting date.

Annual Report & Financial Statements | 2019 93 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

22. CORPORATE BONDS AT FAIR VALUE THROUGH PROFIT OR LOSS

2019 2018 KShs ‘000 KShs ‘000

ABC Bank Limited 12.50% - 51,053 NCBA Group plc 12.75% 76,426 76,266 Centum Investment Fixed Bond 13.00% 81,030 81,030 Centum Senior Unsecured Fixed Rate Notes 13.00% 60,126 60,106 CIC Insurance Group PLC 13.00% - 97,457 East African Breweries PLC 12.25% 127,808 127,744 I&M Bank Holdings PLC 12.80% - 70,503 KENGEN PLC 12.50% - 35,787 NCBA Group plc 12.50% - 83,922 Stanbic Holdings plc 12.95% 32,204 32,204

377,594 716,072

The weighted average interest rate realized on the corporate bonds during the year was 12.73% (2018: 8.76%).

94 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

23. TERM DEPOSITS WITH FINANCIAL INSTITUTIONS AT AMORTISED COST/ HELD TO MATURITY 2019 2018 Interest Rate KShs ‘000 KShs ‘000 Co-operative Bank of Kenya Limited 7.50% 19,750 - Equity Group Holdings Plc 7.50% 7,000 - Equity Group Holdings Plc 9.00% 68,000 - Equity Group Holdings Plc 6.25% 2,200 - Equity Group Holdings Plc 6.75% 2,200 - Equity Group Holdings Plc 9.00% 7,800 - Equity Group Holdings Plc 8.50% 20,000 - KCB Group Plc 6.00% 79,500 - KCB Group Plc 7.00% 1,000 - KCB Group Plc 8.00% 40,000 - KCB Group Plc 9.00% 39,500 - NCBA Group plc 8.50% 30,000 - NCBA Group plc 8.50% 6,700 - NCBA Group plc 8.50% 17,200 - NCBA Group plc 8.50% 4,800 - NCBA Group plc 8.50% 57,000 - NCBA Group plc 8.50% 7,200 - NCBA Group plc 8.50% 1,300 - NCBA Group plc 10.00% 32,300 - NCBA Group plc 6.50% 700 - NCBA Group plc 10.00% 80,000 - Stanbic Holdings Plc 6.50% 300 - Stanbic Holdings Plc 7.00% 15,700 - Stanbic Holdings Plc 6.50% 1,900 - Co-operative Bank of Kenya Limited 9.00% 25,000 - Co-operative Bank of Kenya Limited 6.50% 17,600 - Co-operative Bank of Kenya Limited 6.00% 200 - NCBA Group plc 7.00% 1,000 Stanbic Holdings Plc 9.00% 6,500 NCBA Group plc 9.50% 24,500 NCBA Group plc 9.00% 25,000 NCBA Group plc 9.00% 30,000 NCBA Group plc 9.50% 56,000 NCBA Group plc 8.00% 22,000 Co-operative Bank of Kenya Limited 8.50% 21,000 Equity Group Holdings Plc 8.25% 35,000 Equity Group Holdings Plc 8.00% 21,000 I &M Holdings Plc 10.00% 11,400 KCB Group Plc 8.00% 11,000 Co-operative Bank of Kenya Limited 7.00% 32,800 Co-operative Bank of Kenya Limited 7.75% 10,000 Equity Group Holdings Plc 8.00% 7,000 Equity Group Holdings Plc 8.00% 6,100 KCB Group Plc 8.50% 5,800 Co-operative Bank of Kenya Limited 7.75% 5,300 Bank of Africa Limited 9.00% 5,100 Co-operative Bank of Kenya Limited 8.00% 3,500 Equity Group Holdings Plc 7.75% 1,300 Equity Group Holdings Plc 8.00% 1,000 Equity Group Holdings Plc 7.50% 200 Co-operative Bank of Kenya Limited 7.50% 6,096 16,142 Total deposits 590,946 358,642 Add: Accrued interest 6,289 2,519 Less: Allowance for credit loss (note 23 (b)) (585) (9,943)

596,650 351,218

The weighted average interest rate realized on the term deposits during the year was 7.85% (2018: 8.76%). Annual Report & Financial Statements | 2019 95 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

23. TERM DEPOSITS WITH FINANCIAL INSTITUTIONS AT AMORTISED COST

2019 2018 KShs ‘000 KShs ‘000

1 January 9,943 - Adoption of IFRS 9 - 4,364 Charge /writeback in the year (note 16) (9,358) 5,579

31 December 585 9,943

24. RECEIVABLES

(a) MORTGAGE HOUSE SALES RECEIVABLES 2019 2018 KShs ‘000 KShs ‘000

Runda houses sales* 100,802 175,743 Loresho houses sales* 564,233 1,486,396 Expected credit loss allowance (2,010) (15,026)

663,025 1,647,113

(b) OTHER RECEIVABLES Rent receivable(a) 913 33,839 Prepayments 5,093 1,091 Parking rent deposit receivable(b) 235 1,602 Other receivables 2,000 2,000 Pension recoverable (medical premiums)(c) 8,714 9,548

16,955 48,080

Total 679,980 1,695,193

* Outstanding receivables from sale of Runda and Loresho houses are amounts due from mortgage buyers. The Scheme has obtained a multi dwelling title and registration of leases is ongoing. Amounts are yet to be released to the Scheme as the lease registration has yet to be finalized. Thus none of the above assets are impaired.

(a) Rent receivable relates to rent that was outstanding from property manager in relation to Stima Plaza property as at the end of the year. (b) Parking rent deposit receivable relates to deposit on staff parking paid to KenGen Staff Retirement Benefits Scheme for rented parking space. (c) Pension recoverable (medical premiums) relates to the medical premiums paid by the Scheme on behalf of retirees which is recoverable from their monthly pension.

96 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

25. RELATED PARTY DISCLOSURES

The Scheme transacts with its sponsor, the Kenya Power & Lighting Company Limited (the sponsor) and the Kenya Power & Lighting Company Limited Staff Retirement Benefits Scheme 2006 (defined contribution); a sister Scheme.

Amounts due from Kenya Power & Lighting Company Staff Retirement Benefits Scheme 2006 (defined contribution) represent recoverable secretariat costs not received by the end of the reporting period.

Amounts due to the Sponsor represent pensions and salaries paid on behalf of the Scheme by the sponsor and are recoverable from the Scheme.

Amounts due from Kenya Power Provident Fund A (PFA) relates to balances recoverable from a Provident Fund maintained by Kenya Power & Lighting Company for its employees as the Fund’s sponsor. These are payments of benefits to members made by the Scheme on behalf of the Provident Fund. The payments were made through the Scheme as the Provident Fund awaits to constitute a new board to facilitate approval of such payments for the respective Fund .A transfer of amount paid by the Fund will be made by the PFA Fund as soon as the Board is constituted.

Amounts due from related parties are current and considered to be fully recoverable and thus no provisions for impairment losses have been made in the books of account. There are no trade off agreements between the related parties for amounts outstanding at the end of the period.

Key management includes the Board of Trustees who are entitled to a sitting allowance and Secretariat staff who are paid a salary. The trustees’ allowances are short term in nature and the Scheme does not have: post tenure benefits, other long-term benefits and termination benefits.

2019 2018 KShs ‘000 KShs ‘000 Related parties’ balances and transactions: Amounts due from related parties: Due from KPLC staff retirement benefits scheme 2006 62,582 - Due from Kenya Power Provident Fund A (PFA) 12,347 12,347

74,929 12,347 Amounts due to related parties: Due to KPLC staff retirement benefits scheme 2006 - 61,150

Rental income earned from the Kenya Power & Lighting Limited 99,619 102,199 Short-term employment benefits: Key management compensation: Salary and other allowances 53,860 42,110

Trustees’ remuneration 11,386 11,731

The Scheme does not have a share based payment for key management personnel. Termination benefits include: pension contributions plus accrued interest. There were no guarantees and/ or commitments made on behalf of related parties.

There were no provisions for bad and doubtful debts in relation to related party balances. Amounts due to/from related parties do not attract interest.

Annual Report & Financial Statements | 2019 97 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

26. CASH AND CASH EQUIVALENTS

For the purpose of the statement of cash flows, cash and cash equivalents comprise the following at 31 December:

2019 2018 KShs ‘000 KShs ‘000

Cash and bank balances 20,367 9,613 Short term deposits 596,650 351,218

617,017 360,831

27. OTHER PAYABLES AND ACCRUALS

Rent deposits 1,958 1,958 Accruals 231,388 135,015

233,346 136,973

Accruals include construction costs, management and custodian fees, professional, legal and other pending suppli- er balances as of respective year end.

28. CAPITAL COMMITMENTS

As at the reporting date, the Scheme had committed the following to investment in unquoted equity shares and the

2019 2018 KShs ‘000 KShs ‘000

Unquoted equity shares: Authorized and contracted for: Ascent Rift Valley 200,700 200,336 Catalyst Fund II L.P 200,700 200,336 Fanisi Capital 200,700 200,336

602,000 601,008

Development of investment property: Stima plaza extension 250,593 407,000

852,694 1,008,008

The Scheme has committed USD 6 million to be evenly distributed in three private equity funds namely Ascent Rift Valley, Catalyst Fund II L.P and Fanisi Capital. The exchange rate used is USD/KShs 100.168 (2018: 100.170).

98 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

29. INCOME AND EXPENDITURE ACCOUNT 2019 2018 KShs ‘000 KShs ‘000 Investment income 1,954,888 878,316

EXPENDITURE: - Investment management fee (note 8) (46,965) (31,932) Net administrative expenses (note 10) (154,422) (127,306) Other administrative expenses (note 10) (14,361) (67,639)

Total expenditure (217,748) (226,887)

Net income for the year 1,737,140 651,439

30. OPERATING LEASES

Net rental income earned during the year was KShs 111 million (2018: KShs 108 million). The Scheme has various lease contracts of 6-year renewable terms with a 2-year 15% escalation close running to the end of the lease term. At the end of the reporting period, the Scheme had contracted with tenants for the following future lease receiva- bles: 2019 2018 KShs ‘000 KShs ‘000 Less than one year 7,917 385 Between one and five years 584,830 614,250

592,747 614,635

31. FAIR VALUE MEASUREMENT

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability Or • In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible by the Scheme.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

Annual Report & Financial Statements | 2019 99 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

31. FAIR VALUE MEASUREMENT

The Scheme specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Scheme’s market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities. This level includes equity securities and debt instruments listed on the Nairobi Securities Exchange Limited. • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 – inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components and investment property

This hierarchy requires the use of observable market data when available. The Scheme considers relevant and observable market prices in its valuations where possible.

For assets where the fair value cannot be measured reliably, cost basis has been used.

The table below shows an analysis of assets recorded at fair value by level of the fair value hierarchy.

Level 1 Level 2 Level 3 Total 31 December 2019 KShs KShs KShs KShs Quoted equity Investments -at fair value through profit or loss 3,073,534 - - 3,073,534 Unquoted equity at fair value through profit or loss - - 542,342 542,342 Corporate bonds at fair value through profit or loss 377,594 - - 377,594 Government securities at fair value through profit and loss 6,394,250 - - 6,394,250 Investment properties - - 5,980,880 5,980,880

9,845,378 - 6,523,222 16,368,600

31 December 2018 KShs KShs KShs KShs Quoted equity Investments -at fair value through profit or loss 2,491,706 - - 2,491,706 Unquoted equity at fair value through profit or loss - - 484,406 484,406 Corporate bonds at fair value through profit or loss 716,072 - - 716,072 Government securities at fair value through profit and loss 5,900,612 - - 5,900,612 Investment properties - - 6,974,559 6,974,559

9,108,390 - 7,458,965 16,567,355

100 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

31. FAIR VALUE MEASUREMENT (continued)

Valuation techniques used in determining fair value of financial assets and liabilities:

The significant unobservable inputs used in the fair value measurements categorized in level 3 of the fair value hierarchy as at 31 December 2019 are as shown below.

Instrument Level Valuation basis Rate Significant unobservable Inputs Investment properties 3 Discounted Cash Flow 13% Discount rate used Unquoted equity investment 3 Market Approach - Median multiples of similar business to EBITDA

Annual Report & Financial Statements | 2019 101 - 5 Total 86,872 17,444 48,986 370,486 377,594 2,292,147 3,688,733 1,390,749 1,158,992 6,394,250 KShs ‘000 15,826,258 ------Level 3 2,292,147 3,688,733 5,980,880 KShs ‘000 ------Level 2 KShs ‘000 - - - 5 86,872 17,444 48,986 Level 1 370,486 377,594 1,390,749 1,158,992 6,394,250 9,845,378 KShs ‘000 Date of valuation 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 Dec 2019 31 December 2019 Investment properties Residential properties Commercial properties Quoted equity Investments at fair value through profit or loss Agricultural Banking sector Construction & allied sector Energy & Petroleum sector Insurance sector Investment sector Manufacturing & allied sector & technology Telecommunication Quoted Debt Securities at fair value through profit or loss Corporate bonds Government securities Fair value measurement hierarchy for assets as at 31 December 2019: There were no transfers between level 1 and 2 during 2019. FAIR VALUE MEASUREMENT (continued) VALUE FAIR NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 31.

102 Kenya Power Pension Fund | Defined Benefits - 5 Total 31,188 24,252 429,598 335,771 454,546 188,486 716,072 3,725,540 3,249,019 1,027,860 5,900,612 KShs ‘000 16,082,949 ------Level 3 3,725,540 3,249,019 6,974,559 KShs ‘000 ------Level 2 KShs ‘000 - - 5 31,188 24,252 Level 1 429,598 335,771 454,546 188,486 716,072 1,027,860 5,900,612 9,108,391 KShs ‘000 Date of valuation

31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 Dec 2018 31 December 2018

Investment properties Residential properties Commercial properties Quoted equity Investments at fair value through profit or loss Agricultural Banking sector Construction & allied sector Energy & Petroleum sector Insurance sector Investment sector Manufacturing & allied sector Telecommunication & technology Telecommunication Quoted Debt Securities at fair value through profit or loss Corporate bonds Government securities Fair value measurement hierarchy for assets as at 31 December 2018: FAIR VALUE MEASUREMENT (continued) VALUE FAIR NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS Ended 31 December 2019 For the Year 31.

Annual Report & Financial Statements | 2019 103 NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

32. FINANCIAL ASSETS

2019 2018 KShs ‘000 KShs ‘000 Non-current financial assets Financial assets at fair value through profit or loss: Government securities at fair value through profit or loss (note 19(a)) 6,394,250 5,900,612 Quoted equity investments at fair value through profit or loss (note 21) 3,073,534 2,491,706 Unquoted equity investments (note 20) 542,342 484,406

10,010,126 8,876,724

At amortised cost/loans and receivables: Receivables (note 24(a)) 663,025 1,647,113

Total non-current financial assets 10,673,151 10,523,837

Current financial assets Financial assets at fair value through profit or loss:

Corporate bonds at fair value through profit or loss (note 22) 377,594 716,072

At amortised cost/held-to-maturity investments: Government securities held to maturity 223,754 191,212 Loans and receivables: Receivables (note 19(b)) 16,955 48,080 Amount due from related parties 74,929 12,347 Term deposits with financial institutions (note 23) 596,650 351,218 Cash and bank balances (note 26) 20,367 9,613

708,901 421,258

Total current financial assets 1,310,249 1,328,542

Total financial assets 11,983,400 11,852,379

(b) FINANCIAL LIABILITIES

Financial liabilities at amortised cost: Due to related parties - 61,150 Other payables and accruals 233,346 136,973

Total financial liabilities 233,346 198,123

104 Kenya Power Pension Fund | Defined Benefits NOTES TO THE FINANCIAL STATEMENTS (continued) For the Year Ended 31 December 2019

33. TAX STATUS

The Scheme is a registered pension scheme under the Kenya Income Tax Act and is therefore tax exempt.

34. REGISTRATION

The Scheme is registered in Kenya under the Retirement Benefits Act.

35. CURRENCY

The financial statements are presented in Kenya Shillings (KShs ‘000).

36. EVENTS AFTER REPORTING DATE

Initial cases of Covid-19 infection were reported in China towards the end of 2019. The viral infection has spread to other regions in the world and on 11 March 2020 World Health Organization (WHO) declared the viral disease a pandemic. The first case of Covid-19 was reported in Kenya on 13 March 2020. Since then additional cases have been confirmed and the first death confirmed, as at date of signing this report.

Because of the COVID – 19, the annual global GDP growth is projected to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being significantly negative in the first quarter of 2020. Before the Coronavirus outbreak, the Kenyan GDP had been projected to accelerate to 5.8% in the FY2020 up from 5.2% for the prior year, but the economy is likely to overheat from the effects of the pandemic as the contraction of output in China and other global majors will likely have devastating impact on commodity prices. Due to travel disruptions, the tourism industry in likely to feel the blunt of the pandemic and the anticipated longer recovery of the economies is likely to have a significant negative spill over on the financial systems around the globe. The Nairobi Securities Exchange index- NSE 20 share index has already dropped to a 17 year low as investors keep booking losses due to the havoc being wrecked around the world by the pandemic.

The aforementioned situation will likely have a debilitating impact on the Scheme’s equity portfolio in the FY2020 if it persists for a longer period. However, the Scheme will endeavour to mitigate against this risk through gradual accumulation to ensure downward averaging of the portfolio cost in the short run. The equity portfolio is though significant is not expected to threaten the Scheme’s going concern status given the strong capital position.

The Fund anticipates increased likelihood of decreased return on investments mainly in the quoted entities investment in year 2020 due to the outbreak of Covid-19 pandemic. The pandemic is projected to slow down economies of many markets, mainly due to lockdown of major cities which will curtail movement of capital and people.

Management has put in place ample measures such as remote working for some employees, with an exception of those offering essential services to ensure continuity in business operations. Management is prudently investing in short term investments to avoid volatility in the market and they believe that these measures will mitigate any going concern uncertainties that may arise due to the outbreak.

Management assesses that it is not practicable to accurately estimate the financial impact on COVID-19 now as the effects are yet to fully materialise.

Annual Report & Financial Statements | 2019 105 106 Kenya Power Pension Fund | Defined Benefits

Stima Plaza Annex - Kolobot Road Nairobi, Kenya Tel: +254 20 5029600 SMS Shortcode: 30305 Email:[email protected]