The relationship between investment strategies and financial performance of pension funds in kenya

Abstract

Pension funds are the principal sources of retirement income for millions of people in the world. They are also important contributors to the GDPs of countries and a significant source of capital in financial markets. The financial performance of Kenyan pension funds, both public and private, has however come under increased scrutiny. Research on how investment strategies affect financial performance in Kenya is therefore of great importance. Pension funds are managed in diverse ways, with governance policies distinguished according to their board composition and size, how the trustees structure their investment decisions, what restrictions are placed on their investments, and whether they have independent performance evaluations. An examination on how these investment strategies, affect the funds' financial performance has been studied. Performance evaluation models which include Sharpe's Ratio, Treynor's Index and Jensen's Index were used to test the relationship between investment decisions and financial performance. Using a sample of 36 pension funds, the study established that there were five basic challenges that were particularly critical in the context of Kenya: inadequate regulatory capacity; imprudent investment, macroeconomic instability; poor corporate governance; inability to extend coverage; and design issues such as choices between DB and DC schemes. The empirical results however showed that smaller pension funds were perceived to exhibit better financial efficiency, while pension funds with membership aged 31 - 40 were perceived to be better governed compared to other age groups. The major recommendations proposed to address issues like reforming and enactment of adequate legal and institutional framework, undertaking sound investment projects, lower administrative costs by implementing time and cost effective operational systems, institute administrative and design changes to reduce contribution evasion. This will be in addition to the government measures to stabilize the macroeconomic environment.