Asset Class Selection and Financial Performance of Registered Umbrella Retirement Benefits Schemes in Kenya

Abstract

Purpose: The financial performance of pension funds has deteriorated over time, threatening their main purpose of shielding retirees from old age poverty. Asset class selection is an essential component of pension management as it outlines the various investments undertaken to give a return, manage risks and maintain the liquidity of the retirement schemes. Uninformed or inappropriate selection of assets may lead to decreased performance of the pension schemes and a consequential decrease in the fund value of the pension savings. This study aimed to ascertain how asset class choice affects the financial performance of Kenyan registered Umbrella Retirement Benefits Schemes (URBS). The main goals of this study were to determine how allocating equity, fixed income, and alternative investments impacts the financial performance of registered URBS in Kenya. Three main research questions were employed in the study.

Methodology: This research targeted thirty-two (32) registered Umbrella Retirement Benefits Schemes as of December 2022. The sampling technique in this study was a complete census because the data was available; the researcher sought to reduce errors and give an overall view of the asset allocation and how the Kenyan Umbrella Schemes performed over the five years. The study utilised secondary data which was obtained from the RBA’s website and offices for the five-year period between 2018 and 2022. A quantitative approach using descriptive and inferential analysis was employed. A multiple linear regression model was fitted on the data using SPSS version 27 and STATA version 14.2 for panel data analysis. Tables, charts, and graphs were also used to display the data.

Findings: According to the multiple linear regression model's findings, alternative investments highly influenced the financial performance of the URBS, followed by fixed income and equity investments. Real estate contributed the highest returns in alternative investments, followed by offshore investments. For fixed income, treasury bonds and bills contributed the most considerable returns, followed by cash, bank deposits, and corporate and commercial bonds. For the equity investments, quoted equity contributed the most returns, followed by the unquoted equity.  It was noted that the allocation of private equity by umbrella schemes was almost non-existent as it only began in 2022. Panel data analysis showed that all the weighted returns of the three asset classes are significant predictors of total weighted return. Weighted returns of offshore investment and property had the most significant associations with total weighted returns among all semi-variables.

Unique Contribution to Theory, Policy and Practice: The results support increased weighting of alternative investments, particularly offshore investments, followed by fixed-income investments.