Effect of risk on return of pension schemes in Nairobi Kenya

Abstract

Kenyans have a tendency of not taking care of their old people and that little attention is ever given to the old once they retire from their respective jobs after many years of service. This has given rise to studies that try to find out the root cause of people not saving well for their old age or if they do, why their returns are not as beneficial as they had wished for. The objective of the study is therefore to establish the risk-return impact on pension funds in Kenya through various savings schemes known as Pension Schemes/Funds (Pension Schemes and Funds to be used interchangeably). This study used empirical design to investigate how pension investment risks affect their return by use of Sharpe Ratio and finding out the relationship between pension fund returns and asset allocation.A sample of 45 pensions funds registered in Nairobi County by Retirements Benefits Authority was selected and historical monthly performance or returns data for all investments used i.e. fixed income, equities and offshore. Risk adjustment measures of Standard Deviation and Sharpe Ratio were applied to test the riskiness of the investments. Analysis of the data collected was summarised using tables in order to derive the study findings. Accordingly, the study viewed risk-returns in terms of the ratios and returns as per the sectors in investments for Pensions Funds in 45 schemes based Nairobi Kenya. The initial analysis showed that there is a link between the asset allocation and risk factor at all the schemes with a high mean of 1.24%. However, the difference in returns for the various schemes seems to be insignificant. This implies that the assumed risks by policy makers might not have existed, but to be sure of the relationship between risk return and decision making, the regression results were clearly indicative that the variables can be linked. The study concludes that investment decisions should be based on the best estimates of as it remains a factor in the calculation of returns and is therefore prudent to use risk measures such as Sharpe Ratio in making investment decisions. Policy makers such as RBA, CMA, CBK and Ministry of Finance should review impact of risk on market development.