OTIENO FRIDAH APONDI.

HDB211-C002-0020/2017.

JKUAT KAREN CAMPUS.

HBF 2405: PENSION FINANCE

ASSIGNMENT.

B.Com Finance Option 4.1

a. Discuss the various ways pension moneys are invested in the financial markets.
 Fixed Income Investments. Treasury securities and investment-grade bonds are still a
key part of pension fund portfolios. Investment managers seeking higher returns than
available from conservative fixed-income instruments have expanded into high-yield
bonds and well-secured commercial real estate loans.
 Stocks. These are major investment class for pension funds. Managers traditionally
focus on dividends combined with growth. The search for higher returns has pushed
some fund managers into riskier small-cap growth stocks and international equities.
 Private equity. Institutional investors such as pension funds and those classified as
accredited investors invest in private equity- a long term, alternative investment
category suited for sophisticated investors
 Real estate. Pension Fund real estate investments are typically passive investments
made through real estate investment trust or private equity pools. Some pension funds
run real estate developments departments to participate directly in the acquisition,
development or management of properties.
 Infrastructure. This investment remains a small part of most pension- plan assets, but
they are a growing market of diverse assortment of public or private developments
involving power, water, roads and energy. Public projects experience limitations due to
budgets and the borrowing power of civil authorities.

b. Explain the case for and against of additional Voluntary Contribution.

Advantages of Additional Voluntary Contribution.
o Full and immediate relief from income tax on contributions deducted at source.
o The fund in which the contributions are invested does not attract tax.
o Additional Voluntary Contributions give the member a facility to have some control over
benefit levels, by choosing the pace of additional saving retirement. The mix of benefits
at the same time of retirement can be adjusted to suit individual circumstances.
o Present legalization allows for the AVC fund to be paid as an additional tax-free lump
sum on death.

Disadvantages of AVCs.

o Contributions are locked in and may emerge only as benefits on death, retirement
or leaving service and the scope for cash refunds of contributions is extremely
limited.
 o Unlike life assurance policies, a voluntary contribution fund may not be assigned,
charged or borrowed against and it is therefore outside the employee’s effective
control until it emerges as benefits.
o AVCs are not short term savings. While it is possible for a member to stop
contributing, no refund of contributions is possible, except in the limited
circumstances of leaving employment before completing two years as a member of
the scheme.
o If a refund of contribution is taken on leaving service, this would usually exclude the
possibility of any other benefit from the company pension scheme.
c. The following are some information on Mr. John.
Pensionable Pay: KSH 240,000 per year.
Pensionable Service: 45 years.
Pension Fraction: 1/60th
Calculate the amount of John’s Pension Entitlement and explain the merits of this formulae.

45*1/60*240,000= 180,000

Merits of Defined Benefit scheme.

1. Retaining a defined benefit plan is likely to cost state and local governments less over
the short term. The long-term cost savings of switching to a defined contribution plan
are uncertain at best.
2. Almost all state and local defined benefit plans provide disability and survivor benefits,
as well as retirement income. Switching to a defined contribution plan would require
employers to obtain these benefits from another source, likely at a higher cost.
3. Defined benefit plans enhance the ability of state and local governments to attract and
retain qualified employees.
4. Defined benefit plan helps state and local governments manage their workforce by
providing flexible incentives that encourage employees to work longer or retire earlier,
depending on the circumstances.
5. Defined benefit plans earn higher investment returns and pay lower investment
management fees, on average than defined contribution plan.
d. Discuss the advantages and disadvantages of merging the contribution scheme and defined
benefit scheme.
Advantages.
 Reduced administration cost and professional fees.
 Future pension harmonized which may help with corporate identity.
 Increased funds may give greater flexibility.
 Eliminate any weak funding but at an expense of other strong funding provided this is
not seen as a reduction in either’s expectations.
 Possibly more purchasing power for insurance contract or other services.

Disadvantages.

 Professional cost of merger and communication exercise terming it expensive.

 Each set of trustees will want independent advice.
  Employees may be suspicious and not want to change.
 Some employees may be worse off and therefore unhappy.
 Risks of legal challenge or dispute.
 Rule amendments may be required.
 Future service benefit/contribution structure may not suit one or other workforce.
 May need benefit improvement to get trustees to agree.
 Surplus apportionment in terms of Act could pose problems or prevent merger
before apportionment exercise is completed.
 Members of either side may want their share of surplus reversed or distributed to
them before any merger.
e. Explain reasons as to why most employees are not very good at solving the retirement saving
problems on their own.
 Most employers without plans said that starting a retirement plan is too expensive to
set up and some say they lack administrative resources.
 Lack of employee interest in demand for retirement benefits especially if they are low
income earners or short-term employees.
 Lack of familiarity with retirement plan options available for them especially the self-
employed with small and midsize business.
 There is limited correlation between potential motivating circumstances to offer a plan
and the main reasons employers give for not offering retirement benefit plan.
 Employee’s ignorance on the benefits on can accrue after joining the Retirement Benefit
Schemes.