Impact of retirement benefits regulations on the cost efficiency of retirement benefits schemes in Kenya

Abstract

The purpose of this study is to investigate whether the introduction of Retirement Benefit Act of 1997 increased the cost efficiency of retirement benefits schemes in Kenya. The objective of the study was to examine the impact of Retirement Benefits Regulations (2000) on the cost efficiency of retirement benefit schemes in Kenya. The study compared cost efficiency between the two periods: pre and post introduction of regulations. The population was 2176 occupational retirement benefit schemes registered with Retirement Benefits Authority in Kenya as at January 2010. A random sample of30 retirement benefits schemes was selected for the purpose of this study. Preferences were given to those pension schemes that have been in operation since 1991.

The study period was from the year 1991 to 2009. To measure cost efficiency level of schemes in Kenya, the Stochastic Econometric cost function which involves the estimation of the cost function and the derivation of the cost efficiency estimate based on the deviation from the efficient frontier was used and analysis of data was done through correlation and regression analysis. Pearson correlation results indicate that is high positive correlation between cost efficiency and pension paid out to members and regulation dummy indicating Cost efficiency is determined by pension paid out to members and regulation dummy.

Graphical representation of cost efficiency shows that that cost efficiency in pension scheme sector has been increasing steadily from 1991 to 2009. Therefore, it can be concluded that the introduction of regulation increased the cost efficiency among the pension schemes. Comparative test between the two periods pre and post introduction of regulation indicates that the two periods are weakly correlated. The paired samples t-test statistics is 9.028 and significance indicating the two periods are not related and are independent of each. This result shows that there is slight improvement in cost efficiency after introduction of retirement benefit scheme regulation.