The Effect of Assets Allocation on Retirement Benefits Fund Performance in Kenya

Abstract

Studies in the developed markets showed that assets allocation explained the variation over time of the returns a pension schemes. It was therefore necessary to carry out a study to establish if there is any relationship between assets allocation and returns of pension schemes in Kenya. The objectives of the study were to determine how much of the variations of returns among retirement benefits schemes in Kenya are explained by asset allocation and also the level of returns which is explained by assets allocation. A sample of 40 schemes was drawn from a population of 400 segregated occupational schemes in Kenya. The secondary data on pension schemes assets allocation and returns was obtained from Retirement benefits Authority was analyzed using regression analysis and descriptive statistics. Regression was done on the fund returns to the policy returns over time to determine the policy impact on variation over time. Regression was also done on the compounded annual fund returns to the compounded annual policy returns among schemes to determine the impact of assets allocation differences of schemes on the variability of returns. To determine the level of returns which is explained by assets allocation, the researcher computed the ratio of the average annualized total returns for each scheme to the average annualized policy returns. The study shows that the variation in returns over time for pension schemes is explained up to 62.4% by investment policy adopted by the trustees of the scheme. Other factors such as securities selection, timing of investments and managers selection explain the remainder. Differences in investment policies explained 37% of the variations on the return among different schemes as shown on Appendix IV. Further the study established that policy explains 100% of the total fund returns level of the schemes in Kenya. This shows that on average, schemes are not adding value above their policy benchmark because of the combination of the active management and the associated management expenses. It is possible for an investor who has the ability to select superior managers before committing funds to earn above average returns.