The impact of shifting from defined benefits to defined contributions retirement plan on retirement schemes in Kenya
The retirement benefits structure (RBS) are amongst the major source of income at old age, better put, retirement age for vast of world population. As well, RBS funds contribute to the gross domestic product (GDP) of many countries, developed and developing alike. RBS returns accounts for well over 68% of the total income of retirees in Kenya, further RBS assets account for 30% of Kenya’s GDP. Hence, it is important to identify if indeed the structure and thus structure choice would make a difference, either to the retiree, or the government or sponsors in case of a DC. This research will seek to investigate the impacts of shifting from a DB scheme to a DC retirement Scheme. The research involved an investigation of two thousand and ten retirement schemes under the administration of Liaison Financial Services Ltd covering schemes of all design; DB, DC and Hybrid. The retirement schemes were invested by various fund managers some being under guaranteed and other segregated investment vehicle. Other data was as provided by RBA on all the retirement schemes. The investigation involved the analysis of fund values, number of schemes and administrative expenses. Further the analysis looked at the influence of Equity Performance, Income per Capita and Risk Free Rate on scheme fund value. The research finding shows that DB schemes have continued to reduce on expense of DC Schemes. At the same time the administrative expenses in DB schemes have remained static as the number of DB schemes decrease. On the administrative expenses of DC Schemes, the number of scheme continued to increase as the administrative expenses remained constant. This shows the expenses in DC schemes being well managed which has a positive effects to members’ retirement package. At the same time, most of the scheme where the employer shoulders the schemes expenses will be willing to shift to a DC scheme which in long time manages to reduce the administrative expenses thus reduction of company expenses. vi In summary the both DB and DC schemes combined assets, the investor/members are more risk takers/seeker. The investor has continued over year to move from more conservative investment to more active investment like government securities and quoted equities. From the regression models, it’s predictably, the most significant and the most predictive variable relates to equity performance. Further, signs of coefficient for Equity support the intuition: growth in defined contribution assets accelerates with higher equity valuations but dampened by the volatility in equity markets. The model also suggests that defined contribution saving decreased as the per capita income rose. The shift from DB to DC plans is resulting in delayed and less predictable retirements for today’s DC participants. While negatively or positively impacting individuals, this trend also has the potential to affect employers by making it harder to forecast and manage staffing needs, increasing workforce costs, and reducing employee engagement. From the study its evident the conversion from DB to DC shift all risks to the member but interesting the for the best performing DC schemes members end up taking home more than they would have do if they had remain in DC schemes. The DC schemes aptly suited a generation much less prone to work with a single employer for the career. However, another very important factor behind the conversion of DB to DC is to enable members’ control it offered to individual over destination of their investments. The attractiveness was the control increased as equity markets witnessed long bull runs and superior returns. Further research need to be undertaken for a longer period under study to enable one cover period when most of the schemes were established or founded. Also Scheme Members, Sponsors and Trustees need to be involved in the study so that they can give their feeling/views on the shift.