The Impact of Pension Savings Scheme on Kenya's Investment Growth - an Empirical Analysis

Abstract

The accumulation of physical capital has long been linked to growth by various theories of Growth and development. In his well-established empirical fact (Kuznets, 1973), draws strong association between investment ratios and long term growth. This study analysed the impact of pension savings scheme on Kenya’s investment growth. The pension sector in Kenya is estimated to hold assets in excess of Ksh 700 billion or 16 per cent of gross domestic product. Using time series analysis for a period between 2001- 2014, the study findings show that investments in Kenya are highly responsive to pension scheme funds. Holding other factors constant, a one dollar change in pension funds increases investments by 128,619.7 dollars. This implies that pension funds shock the economy positively. From these findings and with a scope for further development in the sector, prudent investment of these funds with enabling policies will be catalytic in enhancing Kenya’s economic growth as only 15 per cent of the labor sector is currently covered by the formal retirement benefits sector. With proper policies in place, the sector can help in deepening of capital markets, long term capital formation and the development of financial markets. Sensitisation programmes of the public on the importance of participating in the pension scheme and ensuring wide sector coverage to include informal sector need to be implemented by the retirement benefits authority.