Asian Journal of Probability and Statistics

Background: The modern architecture of retirement benefit schemes in Kenya has undergone profound structural evolution over the past two decades, surpassing KES 2.531 trillion in assets under management, with a pension-to-GDP ratio of approximately 14.6%. While institutional governance dictates internal micro-efficiency, systemic pension fund performance remains inherently tethered to exogenous macroeconomic shocks.

Aims: This study evaluated the long-run equilibrium relationships and structural shock transmission between the Kenyan pension sector and key macroeconomic aggregates (real GDP, consumer price inflation, and 91-day Treasury bill rates) over a two-decade horizon (2005–2024).

Study Design: A quantitative research design was used.

Duration of Study: The study covered a two-decade horizon (2005–2024).

Methodology: Using Johansen co-integration tests and a Hierarchical Bayesian Panel Vector Autoregression (BPVAR) model equipped with Minnesota shrinkage priors (λ=0.259), the study investigated multivariate co-integration properties and dynamic causal mechanisms. The Johansen trace test results (r=0, trace statistic of 52.79 versus a critical value of 53.12 at the 5% significance level) indicated the absence of a long-run co-integrating vector among the variables, supporting the use of the BPVAR in first differences.

Results: Markov Chain Monte Carlo (MCMC) convergence diagnostics, based on 15,000 iterations, a thinning factor of 5, a high acceptance rate of 94.6%, and a posterior marginal likelihood of -173.919, indicated structural stability. Structural Impulse Response Functions (IRFs) and Forecast Error Variance Decompositions (FEVDs) revealed a pronounced “Macro-Tether”: inflationary shocks function as a systemic tax, accounting for approximately 60% of the observed volatility in pension Return on Assets (ROA). Posterior predictive checks indicated high predictive accuracy, showing that, while individual schemes maintain an internal governance floor, aggregate sectoral returns are structurally conditioned by macroeconomic cycles.

Conclusion: These findings provide empirical evidence that may inform macroprudential regulators at the Retirement Benefits Authority (RBA) in safeguarding systemic financial stability.