La Reparación desde la Perspectiva Psicosocial

This section covers the profile of respondents and retirement benefits schemes characteristics. The findings revealed that the earliest retirement benefits schemes to be established in Kenya were in the year 1975 with the majority of schemes being set up between 1985 and 2001. This demonstrated that most employers in Kenya embraced the idea of provision of occupational retirement benefits to employees in the 1980s. Table 4.1 presents descriptive statistics for the type of industry from which each scheme was drawn.

Table 4.1: Type of Industry for Retirement Benefits Scheme

Frequency Percent Valid Percent Cumulative Percent Valid Agriculture 7 3.5 3.5 3.5 Manufacturing 22 11.0 11.1 14.6 Education 7 3.5 3.5 18.1 Service 163 81.5 81.9 100.0 Total 199 99.5 100.0 Missing System 1 .5 Total 200 100.0

Source: Survey Data, 2013

The service sector with 81.9 percent accounted for most of the retirement benefits schemes, manufacturing with 11.1 percent while agriculture and education accounted for 3.5 percent each. These findings supported the conclusion by Mogere (2005) that the service sector in Kenya accounted for most of the Gross Domestic Product (GDP). Therefore, the service sector led in provision of occupation retirement benefits schemes while agriculture and education provided the least. This could be explained

by the fact that for most government owned education institutions, with the exception of universities, the employees were covered under the Pensions Act (civil servants). The agricultural sector was generally associated with lesser benefits to a majority of employees. Figure 4.1 presents results of the proportions of the different kinds of retirement benefits scheme operated.

Figure 4.1: Kind of Retirement Benefits Scheme Source: Survey Data, 2013

From figure 4.1, pension schemes accounted for 75.8 percent of all retirement benefits schemes, provident funds 20.2 percent, gratuity 2.5 percent and 1.5 percent simply labelled as staff retirement benefits scheme. The findings were consistent with those of Marwa (1992) who reported a steady growth of pension plans. Therefore, the majority of retirement benefits schemes were pension schemes where benefits were paid as a series of regular periodic payments with gratuity being the least appealing in terms of retirement benefits scheme. The lower number for gratuity which was for those employed on contract was because on average in many organizations more employees were engaged on permanent basis compared to those on contract. The figure that follows shows results of the proportion of contributory and non- contributory retirement benefits schemes.

Figure 4.2: Proportion of Contributory and Non-contributory Schemes Source: Survey Data, 2013

Results in figure 4.2 indicate that contributory schemes were the majority at 96.5 percent of all retirement benefits schemes while non-contributory schemes accounted for a paltry 3.5 percent. The results were consistent with those of the Chartered Insurance Institute (1998) that reported that contributory schemes deliver superior benefits and were preferable. They delivered higher benefits to members since both the employee and employer contribute and were seen to be more equitable. On cross- tabulation between the kind and type of scheme, table 4.2 that follows presents the results.

Table 4.2: Cross-Tabulation of the Kind of Scheme and Type of scheme

Type of scheme Total

Contributory

Non-

contributory

Kind of scheme Pension scheme Count 144 5 149

% within Kind

of scheme 96.6% 3.4% 100.0%

Provident fund Count 37 2 39

% within Kind

of scheme 94.9% 5.1% 100.0%

Gratuity Count 5 0 5

% within Kind

of scheme 100.0% .0% 100.0%

Staff retirement scheme Count 3 0 3

% within Kind

of scheme 100.0% .0% 100.0%

Total Count 189 7 196

% within Kind

of scheme 96.4% 3.6% 100.0%

Source: Survey Data, 2013

Table 4.2 on cross tabulation revealed that 96.6 percent of pension schemes were contributory and 3.4 percent were non-contributory. 94.9 percent of provident funds were contributory and 5.1 percent were non-contributory. All the others were contributory at 100 percent. Therefore, most pension schemes and provident funds were contributory supporting the findings of Marwa (1992) and the Chartered Insurance Institute (1998) that most pension schemes and provident funds were contributory. However, the Pearson chi-square test revealed that the kind of scheme and the type of scheme were independent and had no relationship given the significance of 0.899 (see appendix 3, table A7). Therefore, if a scheme was designed as pension or provident fund, this had no influence on it being contributory or non- contributory. The figure that follows presents results on the basis of the contribution rate for both employee and employer. The results present the proportion of schemes that based the contribution rate on basic and consolidated salary.

Figure 4.3: Basis of contribution Rate for Employees and Employers Source: Survey Data, 2013

From figure 4.3, most schemes, 97 percent reported that the basis of the contribution rate was basic salary with only 3 percent indicating they use consolidated salary as a basis. This was consistent with Chartered Insurance Institute (1998) position that the basis of contribution was pensionable salary, which was the basic salary excluding any fluctuating emoluments. In addition, the use of basic salary reduces the financial burden to the employer compared to consolidated pay as a basis.

Results for the average contribution rates indicated that, the average employee contribution rate was 11.96 percent while that for the employer was 14.84 percent of pensionable salary. The minimum employee contribution rate was 6 percent while maximum reported was 26 percent. On the other hand, the minimum employer contribution rate was 7 percent with a maximum of 62 percent. The standard deviation for employee rate was 4.233 while for employer was 8.728, indicating higher variability in employer contribution rates. This supported the finding that the type of

industry in which the scheme was extracted influenced the level of benefits, with the service industry leading. The findings were consistent with those of Papke (2004) that compensation was a major determinant of participation and contribution levels, with different sectors providing different levels of compensation. The table that follows provides results on whether the scheme allowed for additional voluntary contributions.

Table 4.3: Additional Voluntary Contributions

Frequency Percent Valid Percent

Cumulative Percent Valid Yes 40 20.0 20.2 20.2 No 158 79.0 79.8 100.0 Total 198 99.0 100.0 Missing System 2 1.0 Total 200 100.0

Source: Survey Data, 2013

From table 4.3, it can be seen that 79.8 percent of the schemes did not allow members to make additional voluntary contributions, with only 20.2 percent allowing for these contributions. This supported the findings of Choi et al. (2001) that when automatically enrolled, members stick with the savings rate and investment option set by their employer. This can greatly compromise the benefits to members particularly if the investment returns are low.

For the few schemes that allowed additional voluntary contributions, 2 percent reported the rate to be same as employee contribution, 3.3 percent allowed the rate at 2 percent while 3.9 percent simply reported that it varied, 90 percent indicated that it was not applicable since they did not allow for additional voluntary contributions and hence could not comment on the rate, further reinforcing the findings of Choi et al.

contributions were allowed, the rates of contribution were very low. Figure 4.4 presents results on whether the scheme had undergone any change in design since inception.

Figure 4.4: Change in Scheme Design Source: Survey Data, 2013

From figure 4.4 on whether the scheme had undergone any design change since inception, a majority 73.2 percent affirmed while 26.8 percent reported not having had any design change. This was important because it indicated reviewing scheme design to keep pace with changes in business environment as a way of guaranting higher benefits. This was supported by the findings of Blake and Board (2000) and Knupp (2010) who contended that periodic reviews were necessary for defined contribution schemes. Therefore, members of a defined contribution scheme need to constantly monitor the performance of the scheme and make appropriate changes if members are to receive adequate benefits. Table 4.4 presents the results of the types of changes on scheme design.

Table 4.4: Type of Change on Scheme Design Frequency Percent Valid Percent Cumulative Percent

Valid Defined benefit to defined

contribution 100 50.0 64.5 64.5 Non contributory to contributory 29 14.5 18.7 83.2 Contributory to non contributory 3 1.5 1.9 85.2 Insured to deposit administration 11 5.5 7.1 92.3 Deposit administration to insured 8 4.0 5.2 97.4

From pension to provident

2 1.0 1.3 98.7

From pension to gratuity 2 1.0 1.3 100.0

Total 155 77.5 100.0

Missing System 45 22.5

Total 200 100.0

Source: Survey Data, 2013

Results from table 4.4 indicate that a majority of the schemes, 64.5 percent reported having converted from defined benefit to defined contribution, 18.7 percent from non- contributory to contributory, 7.1 percent from insured to deposit administration, 5.2 percent from deposit administration to insured, 1.9 percent from contributory to non- contributory, 1.3 percent from pension to provident fund and 1.3 percent from pension to gratuity. Therefore the majority of the schemes changed from defined benefit to defined contribution as well as from non-contributory to contributory. This supported the findings of Knupp (2010) that most schemes had converted from defined benefit to defined contribution.

With respect to the reasons influencing the design change, 75.2 percent reported that the reason for change in design was to deliver higher benefits to members, 22.4 percent gave the justification of reduction in costs while 2.5 percent cited government directive. Therefore most schemes reviewed their design to achieve higher benefits to members. These findings were inconsistent with those of Blake (2007) who found that

employers were converting from defined benefit to defined contribution merely as a way of cutting their costs.

In addition, the results indicated that for considerations taken into account in designing a scheme, 77.8 percent of the schemes did not have any specific considerations in scheme design while 22.2 percent reported having certain considerations. The findings were inconsistent with those of Blake et al. (2003) who found that the key consideration in scheme design should be targeting a specific benefit level and should be worked from front to back to achieve the set target. This finding supported the position that most schemes were not well designed in achieving a set target pension. This was evident with the majority of scheme administrators rating their scheme designs as poor. For the few schemes that had some considerations in the design, table 4.5 presents the results of the specific considerations.

Table 4.5: Specific Considerations in Scheme Design

Frequency Percent Valid Percent Cumulative Percent Valid Valuation 6 3.0 17.1 17.1 Age of members 3 1.5 8.6 25.7 Salary of members 5 2.5 14.3 40.0

Ease of administration &

operation 12 6.0 34.3 74.3 Availability of funds 5 2.5 14.3 88.6 Target markets 2 1.0 5.7 94.3 Legal framework 2 1.0 5.7 100.0 Total 35 17.5 100.0 Missing System 165 82.5 Total 200 100.0

Source: Survey Data, 2013

From table 4.5, 34.3 percent of the schemes gave ease of administration and operation as the specific consideration, 17.1 percent cited valuation, 14.3 percent reported salary

of members and availability of funds respectively, 8.6 percent cited the age of members and 5.7 percent reported target markets and legal framework respectively. The main consideration was ease of administration and operation which was again inconsistent with the findings of Blake et al. (2003) who reported that target benefits was the overriding consideration. In addition investment plays a key role in the level of benefits to members. Table 4.6 presents the results of the investment mix of the retirement benefits schemes.

Table 4.6: Proportionate Investment Mix for Schemes

N Minimum Maximum Mean Std. Deviation

Equity 34 6 70 17.53 12.635

Treasury bill 21 5 70 27.62 19.172

Treasury bonds 21 12 70 33.52 19.921

Real estate 15 1 40 17.53 14.899

Valid N (listwise) 9

Source: Survey Data, 2013

From table 4.6 it can be seen that the average investment in treasury bonds was 33.52 percent, 27.62 percent was in treasury bills, while equity and real estate had 17.53 percent each. Most schemes therefore preferred to invest in treasury bonds supporting the findings of Haberman and Sung (1994) that most schemes chose conservative investment strategies leading to either low benefits or requiring higher contribution rates. Real estate and equity attracted the least in investment but this could be attributed to the RBA placing regulatory upper limits in investment vehicles for occupational retirement benefits scheme.

As to whether trustees set investment performance targets, 83.5 percent of scheme trustees did not set any investment performance targets, with only 16.5 percent reporting having set an investment performance target. This suggested that most trustees did not set any performance targets for the fund managers and therefore

allocated whatever returns declared by the fund manager. The findings contradicted Blake (2007) who established that investment performance with clear targets was critical to the size of the pension for DC schemes. Table 4.7 presents the results of the measurable investment performance targets for the few schemes that reported having targets.

Table 4.7: Measurable Investment Performance Targets

Frequency Percent

Valid Percent

Cumulative Percent

Valid Investment policy guidance

13 6.5 52.0 52.0 RBA rules 4 2.0 16.0 68.0 Guaranteed fund 2 1.0 8.0 76.0 To maximise on returns 6 3.0 24.0 100.0 Total 25 12.5 100.0 Missing System 175 87.5 Total 200 100.0

Source: Survey Data, 2013

The results in table 4.7 established that of the few schemes that set investment performance targets, 52 percent of the schemes reported that investment policy guided their targets, 24 percent simply put it as maximizing returns, 16 percent referred to the Retirement Benefits Authority rules and 8 percent referred to the guaranteed fund contract. The results were inconsistent with those of Lehmann and Timmermann (2002) who reported that the common measure of investment performance was the peer-group benchmark. Therefore trustees were expected to follow performance by other fund managers and compare with their fund manager rather than rely on their internal investment policy. The figure that follows presents results on whether trustees targeted set levels of pensions.

Figure 4.5: Proportion of Trustees Setting Target Level of Pension Source: Survey Data, 2013

From figure 4.5, 90.6 percent of schemes did not target any level of pensions to their members with only 9.4 percent reporting some targeted pension. This was inconsistent with findings of Fabozzi and Konishi (1991) who reported that most schemes set a target pension, such as two thirds of final salary. This implied that it was important for trustees to give consideration to setting target pensions to guarantee a reasonable standard of living after retirement.

When asked about the specific targeted pensions for the few who affirmed, 66.7 percent of the schemes cited pension increment above inflation and minimum wage, 16.7 percent reported a 3 percent increment while 16.7 percent indicated that it was not applicable. Since respondents seemed to have misunderstood the question and responded on whether the schemes provide pension increases, the findings were dropped from the analysis as ambiguous. On the method used to pay pensions to retirees, table 4.8 presents the results of the study.

Table 4.8: Method of Payment of Pensions Benefits to Retirees Frequency Percent Valid Percent Cumulative Percent

Valid Through purchase of annuity

88 44.0 49.2 49.2

Through income drawdown

programme 86 43.0 48.0 97.2

Lumpsum 5 2.5 2.8 100.0

Total 179 89.5 100.0

Missing System 21 10.5

Total 200 100.0

Source: Survey Data, 2013

From table 4.8, 49.2 percent of the schemes paid pensions through purchase of annuity, 48 percent used an income drawdown programme and a paltry 2.8 percent paid in lumpsum implying they were provident funds. The findings were consistent with those of Horneff et al. (2006) who found that most schemes bought annuities to hedge against the longevity risk. This implied that to avoid outliving retirement benenefits most schemes purchased annuities from insurance companies for their members on retirement. With regard to the proportion of pension to annual salary in the last year to retirement, table 4.9 presents the results.

Table 4.9: Proportion of Pension Paid to the Annual Salary in the Last Year to Retirement

Frequency Percent

Valid Percent

Cumulative Percent

Valid Less than one quarter 5 2.5 2.6 2.6

One third 15 7.5 7.9 10.5

Two thirds 133 66.5 69.6 80.1

More than two thirds 38 19.0 19.9 100.0

Total 191 95.5 100.0

Missing System 9 4.5

Total 200 100.0

Source: Survey Data, 2013

Table 4.9 highlights that 69.6 percent of the schemes paid two thirds of what the member was earning as pension, 19.9 percent paid more than two thirds, 7.9 percent paid one third and 2.6 percent paid less than one quarter. The findings were inconsistent with those of O‘Brien et al. (2005) who established that most schemes

paid less than two thirds replacement ratio leading to inadequate benefits. However the results support the general actuarial position that pension should be atleast two thirds of what the member was earning before retirement. Table 4.10 presents the results of the overall commends by scheme administrators on the design of their schemes in delivering adequate benefits to members.

Table 4.10: Commend on the Ranking of Scheme Design

Frequency Percent Valid Percent

Cumulative Percent Valid Good 60 30.0 31.1 31.1 Poor 133 66.5 68.9 100.0 Total 193 96.5 100.0 Missing System 7 3.5 Total 200 100.0

Source: Survey Data, 2013

From table 4.10, 68.9 percent of the scheme administrators ranked their scheme design as poor, with only 31.1percent ranking their scheme designs as good. This somehow contradicted the results in table 4.9 which indicated that most schemes delivered two thirds as replacement ratio, which is considered good yet overall the scheme administrators assessed their designs as poor implying lower benefits. However the results supported the findings of Chirchir (2010) that most schemes were not well designed as a single integrated financial product.