Investment Strategy and Financial Performance of Defined Contribution Pension Funds in Kenya
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Date
2022
Authors
Kinyua, Muthinga Linus
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Pension funds are meant to enable pensioners to live quality life upon retirement by paying them retirement benefits. In defined contribution pension funds, both the employer and employees contribute in accordance with the minimum standards as set by individual pension funds and the retirement benefits authority. Financial performance of defined contribution pension funds in Kenya has continued to portray unimpressive trend despite positive targets set by the pension funds. The study’s general objective was to establish the effect of investment strategy on financial performance of defined contribution pension funds in Kenya. The specific objectives were to assess the effect of long term investments, medium term investments, short term investments and alternative investments on financial performance of defined contribution pension funds in Kenya and to examine the moderating effect of density of contributions on the relationship between investment strategy and financial performance of defined contribution pension funds in Kenya. Systems theory view of pension funds, agency theory, portfolio theory and fisher’s theory of investment guided this study. Secondary data was used in the study; as collected from audited financial reports of the defined contribution pension funds in Kenya. Correlational research design and positivism research philosophy were adopted by this study. The target population comprised of 1172 registered defined contribution pension funds in Kenya as of December 2018. A sample size of 289 defined contribution pension funds were involved in the study and were selected by applying stratified random sampling method. The study applied descriptive statistics, correlation analysis and panel regression analysis to analyze panel data collected. Diagnostics tests were carried out to ensure legitimacy and validity of data collected and these included multicollinearity, autocorrelation, normality, heteroskedasticity, panel unit root and Hausman tests. For ethical and confidentiality purposes, the researcher ensured the data collected was solely for academics. The study established that a positive association exists between investment strategy and financial performance of defined contribution pension funds in Kenya. It concluded that investment strategy explained up to 57.76% of the variations in the return on investment. The regression analysis conducted found a significantly positive association between long term investments and return on investment. Medium term investments was also found to be positively and significantly connected to return on investment. There was also a significantly positive relationship between short term investments and return on investment. Alternative investments was found to be positively and significantly connected to return on investment. The coefficient of determination increased from 57.76% to 65.47% when density of contributions interacted with long term investments, medium term investments, short term investments and alternative investments. This implied that density of contributions moderated the relationship between investment strategy and financial performance of defined contribution pension funds in Kenya. The study recommended long term investments as the most ideal investment option for defined contribution pension funds because of its ability to generate the highest return on investment. Medium term investments was recommended as the second best investment option to be embraced by defined contribution pension funds because of its ability to yield good returns as well, second to long term investments. The next investment priority should be given to the alternative investments since it had the third highest regression of coefficients. The least investment option to be undertaken by defined contribution pension funds should be short term investments. The short term investments had lowest regression of coefficients which implied that it makes the least contribution to return on investment.
Description
A Thesis Submitted to the School of Business in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Science in Finance of Kenyatta University, April 2022
Keywords
Investment Strategy, Financial Performance, Defined Contribution Pension Funds, Kenya