The Effect of Asset Allocation on the Financial Performance of Pension Schemes in Kenya

Abstract

The relationship between asset allocation and financial performance of pension funds is critical in determining whether asset allocations as selected by fund managers of pension schemes is critical in influencing the financial performance of pension funds resulting in better retirement benefits for pensioners. The main objective of this study was to determine the effect of assets allocation on the financial performance of pension schemes. This research was conducted through a descriptive survey and utilized secondary data available from RBA and Fund Managers. From the study, it was found out that there is a linear correlation between fund performance and the returns of the various asset classes with the strongest correlation being between overall fund performance and returns in Equities, fixed deposit and Government securities. From a population of 1297 schemes in Kenya, the findings of the study showed that asset allocation explained 89.5% of the variability of fund performance and that 10.5% was due to other factors such as the manager’s selection, timing of investments and securities selection within as asset class and the management style adopted by the fund managers of the fund. The study recommended that a related review should be carried out replacing actual weights of assets with a departure/deviation from the weights recommended by RBA to determine if the same conclusions of the study will still hold.