The Effect of Alternative Investments on the Financial Performance of Pension Funds in Kenya

Abstract

Abstract

Purpose - This research focused on the effects of alternative investments on the financial performance of pension schemes in Kenya.

Methodology - This research was descriptive and Secondary data covering a period of 5 years, 2012-2016, and comprised a population of 442 segregated pension schemes and from which a sample of 90 schemes was selected using stratified sampling technique. Only data from 385 schemes was available. The remaining 57 schemes did not qualify for sampling due to incomplete data, data received did not pass sense checks and also responses to queries were not received on time. The data was obtained from the Retirement Benefit Authority and the Actuaries Survey from Alexander Forbes Consulting. Diagnostic tests carried out were tests for normality, multicollinearity and autocorrelation. They were used to test for data fitness before any further analysis. The study also employed the use of a linear multiple regression model to analyze the effect of alternative investments on the financial performance of pension funds in Kenya. The tests of significance used in the study were the t-test, F-statistic, the R-square and Adjusted R-square.

Findings - From the findings, most pension schemes had the largest allocation in fixed income and government securities and quoted equity, with the least allocation in private equity and venture capital and real estate investment trusts. The R-square test indicated that 10.6% of the variations in the return on investments were due to the weights of the asset classes indicating that the weights of the asset classes are one among many factors which contribute to the returns of the pension funds. The regression coefficients yielded a positive relationship between this alternative asset classes and return on investments except private equity and venture capital.

Implications - Fund managers and Trustees should therefore deliberate about this alternative asset classes which boost the growth of assets under management as well as increase retirees earnings.