Moderated Analysis of Asset Allocation and Financial Performance of Pension Funds in Kenya

Abstract

The overall returns to pension fund’s assets under management have been inconsistent as per reports from the RBA. The overall industry returns for the years 2016, 2017 and 2018 was negative 20%, 0% and 3 respectively. The total assets growth from 2017 to 2019 averaged 3% implying poor investment decisions and also higher expenses for managing the funds. Former employees and retirees of various public sector pension funds have lodged various claims regarding their underpaid pension benefits. NSSF lost Ksh.666.9 million through subscriptions to the botched Imperial and Chase bank corporate bonds. The investment has been cited by the OAG in the audit of the fund’s books to June 2019 and bears a qualified opinion. Pension industry investments performance has been subject to significant volatility. Thus, the main objective of this study was to determine moderating influence of portfolio rebalancing on the influence of asset allocation on the financial performance of pension funds in Kenya. The specific objectives of the study were to establish how financial performance of pension funds in Kenya is influenced by investments in the government securities, quoted equity investments, alternative investments, guaranteed funds and listed corporate bonds and to determine the moderating influence of portfolio rebalancing on the influence of asset allocation on the financial performance of pension funds in Kenya. This study was informed by modern portfolio theory, risk-return trade off theory, liquidity preference theory, arbitrage pricing theory and post-modern portfolio theory. The study adopted three philosophical positions; positivism, realism and interpretivism. A descriptive research design was used with data collection form used to gather secondary data. Stratified sampling was adopted which was appropriate for getting a sample from the heterogeneous population given the classification of pension funds as small, medium or large. The sample consisted of 294 registered schemes. Secondary data was obtained from the RBA for the study variables for the six-year period between 2016 - 2021. The data was analyzed using multiple linear regression and subjected to diagnostic tests. The study findings revealed that portfolio rebalancing played a moderating influence on the influence of asset allocation on the financial performance of pension funds in Kenya. The study established positive and significant influence of Kenyan government securities, alternative investments and guaranteed funds and a negative and significant influence of alternative investments and listed corporate bonds on pension fund performance. Based on the study findings, the study concluded that it is incumbent upon the pension fund trustees to ensure the fund manager they select possesses relevant knowledge, skills and competencies in portfolio management. In addition, the Retirement Benefits Authority may revise the exiting investments ceilings placed on different assets to ensure pension funds are able to build more efficient portfolios and rebalance the asset composition where necessary. The study recommends that the trustees and pension fund managers should regularly conduct analysis of pension fund portfolio held and its performance return attribution. In addition, trustees and pension fund managers should be trained in evaluation of pension fund performance so that they are able to participate meaningfully during the AGMs. Finally, the study recommends that RBA regularly reviews the quantitative limits placed on different asset classes to provide more room for creation of robust portfolios especially for alternative investments whose limits are generally low due to perceived risks.