Drivers of financial sustainability of individual pension schemes in Kenya

Résumé

This study sought to determine the drivers of the financial sustainability of individual pension schemes in Kenya. It, therefore, looked at the schemes through market timing, security selection, portfolio rebalancing, asset allocation, and market sentiments. The study applied the institutional theory, modern portfolio theory, and the capital market efficiency theory. Subsequently, this study adopted a pragmatic research philosophy and used a sequential explanatory mixed-methods design. The population of the study was 49 individual pension schemes registered by the RBA. This study used a census approach. A quantitative analysis was performed. Subsequently, data collection was done from 27th November to 27th December 2024. The Statistical Package for the Social Sciences (SPSS) Version 27 was utilised for statistical analysis. This study adopted a binary logit regression model. The findings of the study show that security selection, asset allocation, market timing strategies, portfolio rebalancing and market sentiment all had a significant and positive effect on the financial sustainability of individual pension schemes registered with the RBA. Security selection had a statistically significant positive effect on the financial sustainability of individual pension schemes in Kenya (β = 0.620, p = 0.000), indicating that a one-unit increase in security selection increases the log odds of financial sustainability by 0.620. Similarly, asset allocation showed a significant positive effect (β = 0.430, p = 0.002), with a one-unit increase associated with a 0.430 rise in log odds. Market timing also had a significant positive influence (β = 0.360, p = 0.006), implying a 0.360 increase in log odds per unit increase. Portfolio rebalancing demonstrated a significant positive effect as well (β = 0.282, p = 0.004), corresponding to a 0.282 increase in log odds. Lastly, market sentiment exhibited a strong significant positive effect (β = 0.561, p = 0.000), with each unit increase leading to a 0.561 rise in the log odds of financial sustainability. The model was significant (p < 0.05), with Nagelkerke R² values between 0.082 and 0.180, signifying moderate explanatory capacity. The findings emphasise the necessity of incorporating diverse investing methods to improve pension sustainability. Policy recommendations emphasise adopting effective security selection strategies, supported by training for fund managers. Market sentiment should be integrated into portfolio and risk models, while practice should focus on capacity building, market-timing tools, and sentiment analysis.