Governance, Risk, and Regulation: A Framework for Improving Efficiency in Kenyan Pension Funds

TL;DR

This study investigates how governance, risk management, and regulation influence the efficiency of Kenyan pension schemes, highlighting the positive role of employee representation and effective risk management, and proposing a new Self Cleaning Mechanism based on Agency Theory.

Contribution

It provides empirical evidence on the effects of governance and risk management factors on pension scheme efficiency in Kenya, introducing a novel Self Cleaning Mechanism extension of Agency Theory.

Findings

Employee representation on boards improves efficiency.

Effective risk management positively impacts efficiency.

Independent board members negatively affect efficiency.

Abstract

As life expectancy in Kenya increases, so does the need for efficient pension schemes that can secure a dignified retirement and protect members from old age poverty. Limited research, however, has explored the efficiency of these schemes under existing governance structures. This study addresses that gap by examining the combined effects of corporate governance, risk management, and industry regulation on pension scheme efficiency in Kenya. Using a quantitative design, we conducted a panel regression analysis on a seven-year secondary dataset of 128 Kenyan pension schemes, totaling 896 observations. Our results reveal significant insights That the presence of employee representatives on the board and effective risk management have a significant positive effect on efficiency. Conversely, independent board members exhibit a significant negative effect. Other factors, including top management representation, female board members, and industry regulation, showed no significant effect on efficiency in the joint model. These findings suggest that the impact of governance and risk management on efficiency is nuanced, with specific factors like employee representation playing a more prominent role. We propose that the electoral process for employee board members may introduce a Self Cleaning Mechanism that progressively enhances scheme efficiency. This mechanism offers a novel theoretical extension of Agency Theory, explaining the convergence of interests between elected trustees and scheme members.