The Relationship Between Retirement Benefits Authority Investment Guidelines and Financial Performance of Pension Schemes in Kenya

Abstract

Data used in the study was for the period 2003 to 2009. The Retirement Benefit Authority investment guidelines which became effective in 2001 classifies investment assets as cash and demand deposits in institutions licensed under the Banking Act in the republic of Kenya, fixed deposits and time deposits in institutions also licensed under the same Act, commercial paper and corporate bonds, government securities, preference and ordinary shares of quoted companies in East Africa, immovable properties and units in property Unit Trust Schemes incorporated in Kenya ,guaranteed funds, offshore investments in bank deposits, government securities and rated corporate bonds and investment in any other approved investments that should not exceed five percent . These guidelines stipulate the maximum in percentage terms that provident pension funds should invest in each of the specified assets. Though investment guidelines became effective from 2001, provident funds did not manage to adjust their investment portfolios due to various technicalities which included appointment of fund managers, custodians, trustees and an actuary. The study findings reveal that the different asset classes have varying effects on investment incomes of pension funds and ultimately on the overall financial performance of the pension funds. Therefore, fund managers should be selective in the RBA asset in which they invest while at the same time ensuring diversification of their investment portfolios. With the application of RBA guidelines, pension schemes have experienced reduced risk and reduction of variability in returns from year to year, an indication of more stable earnings.