Determinants of Scheme Design in Occupational Defined Contribution Schemes in Kenya
Defined contribution schemes involve no promises about the size of the benefits and no risk to the employer. The risk of ending up with low or no benefits falls entirely on the scheme members. It is necessary therefore, that determinants of scheme design are carefully considered in establishment and review of defined contribution schemes to deliver adequate benefits to members. Based on modern portfolio and the life cycle theories, the study investigated the key determinants of scheme design in occupational defined contribution schemes in Kenya. First, the study evaluated employer related determinants of scheme design; secondly, it evaluated trustee related determinants of scheme design and lastly it evaluated regulatory related determinants of scheme design. Primary data were collected using a questionnaire administered to scheme administrators in the sample. Descriptive statistics were used to profile respondents, describe sample characteristics and a logistic econometric model was applied to evaluate the determinants of scheme design. Overall, the majority of retirement benefits schemes in Kenya were designed as pension schemes and contributory. The average employee and employer contribution rates were 11.96 and 14.84 percent respectively, with most schemes reporting the basis of contribution as the basic salary. However, most schemes did not allow additional voluntary contributions to augment member benefits. Most schemes had undergone some form of design change since inception, with the overriding change being conversion from defined benefit to defined contribution. Most schemes had a bigger proportion of their investments in treasury bonds and bills, with a majority not setting any investment performance targets. In addition most schemes did not target any level of pensions to their members and paid pension through purchase of annuities. In addition, most scheme administrators reported that their scheme design was poor. The study showed that the key employer related determinants of scheme design were the employer‘s budgetary constraint and recognition of the length of service of scheme members, while the key trustee related determinant of scheme design was investment strategy. The results also revealed that the key regulatory related determinant of scheme design was the existence of a separate public pillar. Gender was important but was mostly associated with poor scheme designs. From the findings, it was recommended that employers should consider pensionable salary, budget constraint, length of service, retirement age and occupation in designing schemes while trustees should consider investment returns, target pension, charges by service providers, annuity rates and the investment strategy. Lastly regulatory agencies should consider incentives for participation, taxation rules, existence of a separate pillar and gender in the design of occupational defined contribution schemes. This would guarantee members a reasonable standard of living after retirement.