Effect of Service Provider Costs on Financial Performance of Defined Contribution Pension Schemes in Kenya

Abstract

Service provider costs are those costs associated with the provision of retirement benefits. Some of these costs include administration fees, investment fees, and custodian fees. There is little to no research on the impact of service provider costs on the performance of defined contribution pension schemes in Kenya. Therefore, this study sought to understand the impact of service provider costs on the financial performance of defined contribution schemes in Kenya. The study sampled 93 out of the 933 registered defined contribution schemes by the RBA and retrieved net investment income, administration fees, investment fees, and custodian fees from 2015 to 2021. The study used a multiple regression model to determine the effect of administration fees, investment fees, and custodian fees on the financial performance of defined contributions pension schemes in Kenya. The study found a significant relationship between financial performance and service provider costs. The multiple regression model found a multiple R squared of 0.432, which means that 48.2% of investment costs could be predicted using the model. The regression model also found significant coeficients for the independent variabes. Administration fees, investment fees, and custodian fees had a positive relationship with the financial performance of defined contribution schemes with regression coeficients of 0.262 (p = 0.000), 0.168 (p= 0.004), and 0.333 (p=0.000) respectively. Service provider costs increase with an increase in financial performance but without a direct negative effect on the financial performance of DC schemes.. The main challenge of the study was the failure of large-size defined contribution schemes (schemes above 1 billion in fund value) to respect the regression assumption, and as such, they were dropped from the analysis. More research can be carried out on the effect of service provider fees on large defined contribution schemes' financial.