Effect of Changing Retirement Plan From Defined Benefits to Defined Contributions on Financial Performance of Pension Schemes in Kenya
Abstract
The transition from defined benefits (DB) to defined contributions (DC) retirement plans has been a significant trend among pension schemes globally, driven by the need for improved financial sustainability and flexibility. This study aimed to assess the impact of this transition on the financial performance of pension schemes in Kenya. The key variables included the retirement plan type (predictor), fund liquidity, fund size (control variables), and financial performance measured by risk-adjusted return on investment (ROI) (response variable). The study was based on agency theory, institutional theory, and behavioral finance theory. The study targeted 1,340 pension schemes in Kenya as of December 2022, focusing on a sample of 57 schemes that switched from DB to DC plans between 2019 and 2023. Secondary data were collected from annual financial reports published by the Retirement Benefits Authority (RBA). The data were analyzed using descriptive statistics, correlation analysis, and regression analysis to determine the relationships between the variables. The findings indicated a positive and significant impact of changing to DC plans on financial performance, with a correlation coefficient of 0.232 and a regression coefficient of 0.033 (p = 0.007). Fund liquidity also showed a strong positive effect on financial performance (correlation coefficient of 0.468 and regression coefficient of 0.111, p < 0.001). However, fund size did not significantly influence financial performance (regression coefficient of 0.003, p = 0.438). The regression model explained 24.7% of the variance in financial performance. In conclusion, transitioning to DC plans and maintaining high liquidity levels are crucial for enhancing the financial performance of pension schemes in Kenya. The study recommends that policymakers promote the adoption of DC plans and that pension fund managers prioritize effective liquidity management. Additionally, further research should consider longer time frames, additional influencing variables, larger sample sizes, and the long-term effects on pension scheme members' outcomes to provide a more comprehensive understanding of the determinants of financial performance.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1919]
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