Analysis of the Effect of Operating Costs on Financial Performance of Occupational Pension Schemes in Kenya

Abstract

The costs of running pension schemes are believed to be significant and have the potential to take resources away from scheme members’ pensions. However, this study intended to explore the effect of operating costs on pension schemes which consist of administrative and investment costs which can substantially increase the cost of retirement security. This study therefore was motivated by the fact that trustees of the pension funds need to understand the impact of the operating costs on financial performance in Kenya. To meet the objectives of the study, a case study method was used. The study mainly used secondary data from 164 pension schemes for the past 3 years. The population of interest was the value of assets, investment returns, investment costs, administrative costs and other costs as indicated in the audited financial statements from the financial year 2007 to financial year 2009. Stratified sampling technique was used to group the target population of 329 pension schemes into three groups (small, medium and large) which were drawn from the Kenyan Retirement Benefits Authority (RBA) register. Data on pension schemes for the past 3 years financial statements was analyzed using Return on Assets (ROA) as the key performance indicator to  ascertain the change in financial performance as a result of operating costs. The financial performance was done using financial ratios, such as, investment cost ratio and operating expense ratio were computed annually for each category. Data was presented by use of tables for each ratio computed showing the annual average of the three financial years. Tabular presentation was used in trends analysis of each ratios and the year. The study finding on regression analysis shows that there was a strong inverse relationship between financial performance and investment management costs as well as administrative cost. The study recommends that trustees/authorities should monitor and regulate the operating costs incurred by the pension schemes.

Keywords: Operating costs, Administrative costs, financial performance, occupational pension schemes