Appraisal Of Financial Reporting Practices Of Pension Fund Administrators In Nigeria

Project and Seminar Material for Accountancy / Accounting

Appraisal Of Financial Reporting Practices Of Pension Fund Administrators In Nigeria

Abstract

The divergent opinion on the financial reporting practice of pension funds administrators has been an ongoing issue. Academic scholars overtime have been groping with what factors drive the financial performance of pension funds administrators which still remains unestablished. Hence, this study determines the effect of financial reporting practices on the financial pension funds administrators in Nigeria. The study employed correlational research design while the population of the study is the 20 registered and licensed Pension Funds Administrators in Nigeria and a sample of eleven (11) PFAs were conveniently selected after filter was applied. A multiple regression was adopted as a technique of data analysis of the study. The findings reveal that firm size is statistically insignificant in influencing the performance of PFAs, while firm growth, institutional shareholding, managerial shareholding and leverage have significant negative impact on the performance of PFAs. The study recommended among others that, the Management of PFAs should increase their net assets in order to expand their size and improve performance. Again, as more levered PFAs tend to have better performance, their Management should use less equity financing and increase debt to improve their performance.

Chapter One

Introduction

1.1 Background to the Study

Financial reporting covers those activities related to the preparation of certain reports which are known as financial statement. These statements reports the financial status of firms at a particular time with firms’ activities and resulting profit or losses during the most recent period and the flow of resources occurring within the firm during the same period Schiavo-Campo and Tommasi (2009). Bogdanor, (2011) define financial reporting as a field that treats money as a means of measuring economic performance instead of factor of production. It encompasses the entire system of monitoring and control of money flows in and out of an organization as assets and liabilities, and revenues and expenses. Financial accounting gathers and summarizes financial data to prepare financial reports such as balance sheet and income statement for the organization’s management, investors, lenders, suppliers, tax authorities and others.

Financial reports are necessary tool used by investors and potential investors to see how a company functions and stands financially. It is a deciding factor in what and how much an investor will invest in a company. It is also used to analyze and assess a company’s potential areas of growth as well as its areas of loss. Looking at the manager’s annual report helps to determine some of the reoccurring factors that have affected the financial statement and gives clues on what can be done to avoid potential danger in the future. The report also comes in handy when having to report back to company’s financial statement when being audited Rutherford, (2003). Moreover, financial accounting information usually comes in the disguised form by “wearing” the cloak of technicalities. Such technicalities include calculations which need expert knowledge in its interpretation. But when some business because of low financial layout, cannot employ such experts’ hands, they tend to ignore financial accounting information system which has an effect on the management decision making of such business concern Parry, (2010).

Pension is the amount paid by government or company to an employee after working for some specific period of time, considered too old or ill to work or have reached the statutory age of retirement. It is monthly sum paid to a retired officer until death because the officer has worked with the organization paying the sum Balogun, (2015). Pension is also the method whereby a person pays into pension scheme a proportion of his earnings during his working life. The contributions provide an income (or pension) on retirement that is treated as earned income .This is taxed at the investors’ marginal rate of income tax. On the other hand, gratuity is a lump sum of money payable to a retiring officer who has served for a minimum period of term year.

The pension fund administrators were established for employees in Nigeria as a contributory pension scheme for payment of retirement benefits of employees to whom the scheme applies. Under this Act, all employees in the public service of the Federation, and the private sector are involved except the Military, the judges and top political office holders. Firms employing less than five people may also be exempted. Prior to the enactment of the pension reform Act 2004, pension schemes in Nigeria had been bedeviled by many problems. The public service operated an undefended and ill-defined benefits scheme and the payment of retirement benefits were budgeted annually. The annual budgetary allocation for pension was often one of the most vulnerable items in the budget implementation in the light of resource constraints Orifowomo, (2014).

Pension fund administrators (PFAs) have been duly licensed to open retirement saving accounts for employees, invest and manage the pension funds in a manner as the commission may from time to time prescribe, maintain books of accounts on all transactions relating to the pension fund managed by it, provide regular information to the employees or beneficiaries and pay retirements benefits to employees in accordance with Pencom, (2011) the provision of the Pension Reform Act 2004. Before it is issued with an operating license, the pension fund administrators (PFAs) must be a limited liability company with the sole objective of the management of pension funds. To discourage frivolous applications and to ensure credibility, such company must have a paid up share capital of one hundred and fifty thousand naira and demonstrate professional capacity to manage pension funds and administer retirement benefits.

PFAs financial reporting is the communication of relevant qualitative and quantitative information for decision making by users of such information through financial statements. PFAs are entrusted with the legal responsibility of preparing and communicating such relevant information to the users. However, they do not independently carry out this task, but it is the joint effort of the management, auditors and the government. The accounting researchers have attempted to develop a theory of financial reporting to support the accounting practices by PFAs or to develop a theory of financial reporting to be followed by the management, the former effort being emphasized by academic researchers. The purpose of this research work therefore is to examine financial reporting practices of pension fund administrators in Nigeria.

1.2 Statement of the Problem

Before now some of the major problem of the pension fund administration in Nigeria was the non-payment or delay in the payment of pension and gratuity by the Federal and State governments. For instance, the pension backlog was put at about two trillion fifty six thousand naira as at December, 2005. In fact, pension fund administration became a thorny issue with millions of retired Nigerian workers living in abject poverty and they were often neglected and not properly cater for after retirement Orifowomo, (2014). Sadly, retirees went through tough times and rigorous processes before they were eventually paid their pensions, gratuity and other retirement benefits. At one time the money to pay their benefits is not available; and at another time, the Pension Fund Administrators were not there to meet the retirees’ needs.

The new contributory pension scheme appropriately focuses on the need for adequate savings, good investment and sustained output growth: there is, however, some doubt as to whether the public sector in Nigeria can exhibit the level of financial discipline over the long run required to generate the surplus pay off accumulated pension obligation carried over from the old scheme which now involve the issuing holding and redemption of retirement bonds.

Financial accounting reporting is very important for the functioning of any organization. However, it is sad to found that most financial statements do not take into cognizance fully the principles of accounting systems. The flow of information, the cost of collecting any information and the internal control procedures suffers from some loopholes. The problem of the study therefore has to do with issue relating to misleading financial accounting reporting by pension Fund administrators in Nigeria.

1.3 Objectives Of The Study

The aim of this study is to appraise financial reporting practices of pension fund administrators in Nigeria with IBTC Plc as case study

Among other Specific objectives of the study are:

  1. Evaluate the relationship between financial reporting and the effectiveness of Pension Fund Administrators in enhancing the welfare of the pensioners
  2. Examine the extent to which the contributory pension scheme is beneficial to the public sector
  3. Examine if the financial reporting of the PFA fully take into cognizance the principles of accounting systems
  4. Ascertain the extent to which the financial information reporting by IBTC Plc. has affected organization

1.4 Research Questions

The questions to be answered for the purpose of this study as follows:

  1. What is the relationship between financial reporting and the effectiveness of Pension Fund Administrators in enhancing the welfare of the pensioners?
  2. To what extent is the contributory pension scheme beneficial to the public Employees?
  3. Does the financial reporting standards of the PFA fully take into cognizance the principles of accountability.
  4. To what extent has the financial reporting of IBTC Plc affects employees in Nigeria.

1.5 Research Hypotheses.

Hypothesis I
  • H0: There is no significant relationship between financial reporting and the effectiveness of Pension Fund Administrators in enhancing the welfare of the pensioners
  • HI: There is significant relationship between financial reporting and the effectiveness of Pension Fund Administrators in enhancing the welfare of the pensioners
Hypothesis II

For the purpose of this study the following has been put forward:

  • Ho: The financial reporting of the PFA fully does not take into cognizance the principles of accountability.
  • H1: The financial reporting of the PFA fully take into cognizance the principles of accountability

1.6 Significance of the Study

The significance of the study will as follows:

It provides an objective view to the relevance of financial reporting in the contributory pension scheme.

The study also assesses the effectiveness of the contributory pension scheme on the stakeholder, government, financial institutions worker etc.

The study will also serve as a reference material to future researchers that will be carrying out study in the research domain

1.7 Scope of the Study

This research work centers around financial reporting practices of pension fund administrators in Nigeria. The research covers the activities of Pension Fund Administrators for six years, 2010 to 2019 to enable critical assessment to be carried out. Further, the study is restricted to financial reporting practices of PFAs in view of the fact that contributors are entertaining fears on the sustainability of the PFAs in Nigeria.

1.8 Definition of Terms

The following terms will be defined for the purpose of this study.

Contributory Pension Scheme:

A pension scheme that establish a uniform set of rules, regulations and standards for the administration and payment of retirement benefits for the public service of the federation, federal capital territory or private sector.

Financial Accounting:

Financial accounting “is concerned with the recording of transactions for a business enterprise or other economic units and the periodic preparation of various reports from such records”. Financial accounting then can be said to be a systematic gathering, summarizing and reporting of business transaction in monetary terms such that it provide information which permits informed judgment by the users of such information

Information:

These can be thought of as being facts needed or received by a person or group of persons which is or will be useful to him/her. These information may be spoken/written programmed or tele-printed.

Management:

Management can be defined as the rational selection of courses of action to optimize the interrelationship of man, materials and money for the survival and growth of the organization. It can be regarded as the “process of getting things done through people” A person who manages is called a manager.

Pension:

Pension is the amount paid by government or company to an employee after working for some specific period of time, considered too old or ill to work or have reached the statutory age of retirement. It is monthly sum paid to a retired officer until death because the officer has worked with the organization paying the sum Adebayo, (2006).

Pension Fund Managers:

The pension fund managers were established for employees in Nigeria as a contributory pension scheme for payment of retirement benefits of employees to whom the scheme applies. Their duty is to ensure that every person who worked in either the public service of the Federation, or private sector receives his retirement benefits as and when due.

Chapter Five

Summary, Conclusions and Recommendations

5.1 Summary of Findings

The study investigates the effect of financial reporting practices that drive the financial performance of PFAs in Nigeria within the period of 2009-2013 using a sample of eleven (11) PFAs operating in Nigeria. A stack balanced panel regression model was adopted for the purpose of explaining and predicting the impact of explanatory variables on the profitability of PFAs in Nigeria. Our study therefore focused on five explanatory variables (firm size, firm growth, leverage, institutional shareholding and managerial shareholding) as the determining factors and one dependent variable which is profitability of PFAs.

In analyzing the impact of these factors on the financial performance of PFAs, Ordinary Least Square (OLS) technique was employed to ascertain the impact of the explanatory variables on the explained variable. The result suggest that firm growth, institutional shareholding and managerial shareholding significantly impact on the profitability of PFAs in Nigeria. While firm size and leverage are not significant factors that could influence the financial performance of PFAs in Nigeria. The result therefore revealed that firm growth, institution shareholding and managerial shareholding are negatively and significantly influencing the profitability of PFAs while firm size is positively and insignificantly impacting the financial performance, proxy by ROE and finally, the leverage revealed a negative and insignificant impact on the financial performance of PFAs

The result therefore contributes to the finance literature by providing evidence to the factors affecting the financial performance of PFAs in Nigeria. Additionally, the result could provide finance experts, practitioners, regulators as well as investors with valuable insight unto the complex interaction between different types of determinants and financial performance of PFAs operating in Nigeria.

5.2 Conclusion

This study was undertaken in order to examine the effect of financial reporting practices on the financial performance of Pension Funds Administrators in Nigeria. Several proxies were used to estimate their influence on the performance of Pension Funds Administrators. The results of the analysis provide us with evidence that all the explanatory variables have either a positive or negative significant impact in determining the performance of Pension Funds Administrators in Nigeria.

As also observed, adequately managed Pension Funds Administrators have the capability to influence the performance of the capital market. Although, it is not clear whether the Nigeria Pension Funds Administrators are fulfilling this most important function as this study could not establish such in that direction. However, the study has provided a sense of direction to the significant role Pension Funds Administrators play and the extent to which the identified proxies have the capacity to determine Pension Funds Administration in Nigeria.

5.3 Recommendations

  1. The policy makers as well as the management of pension funds administrators operating in Nigeria, particularly those under observation, should be more inclined to attaining optimum utilization in the use of their assets in the course of service delivery.
  2. Since the analysis of leverage revealed a negative and insignificant relationship with financial performance, it is therefore recommended that pension funds administrators in Nigeria should rely less on external financing (debt). By implication, emphasis should be focused more on internally generated funds instead of alternatives.
  3. The management of pension funds administrators in Nigeria should not be carried away with the objective of increasing the growth of the firm, they should rather seek for investments in portfolios or portfolio diversifications that can yield more returns with lower risks.
  4. The number of shares held by Institutional Shareholders should be diffused and their power or internal control reduced in order to abate the tendencies of their influence on the financial performance of Pension Funds Administrators in Nigeria.
  5. Similarly, the number of shares held by Managerial Shareholders should be reduced in order to mitigate the tendencies of the Managerial Shareholders influence on the financial performance of Pension Funds Administrators in Nigeria.

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