The Impact Of Contributory Pension Scheme On The Nigerian Economy

Project and Seminar Material for Economics

Abstract

The aim of the study was to examine the impact of contributory pension scheme on the Nigerian economy. Secondary Data were collected from PenCom data bank from 2014 to 2016 for both private and public sector contributions. Four hypotheses were tested using multiple regression analyses with the help of ordinary least square and the findings revealed the positive and significant relationship between public sector PenCom contribution with real GDP and Per Capital Income but a negative and insignificant relationship exist between private sector Pension contribution with Real GDP and Per Capital Income. Thus, an increase in public sector Pension Contribution accelerates an attendant growth in the real GDP and Per Capital Income. It is recommended that PenCom should ensure adequate compliance of Pension Reform Act 2014 as amended especially in the private sector to mitigate against leakages in the economy.

Chapter One

Introduction

1.1 Background of the Study

An employee who has worked for an organization for some years is entitled to some benefits which could be in form of gratuity and pension payable to such employee by its employer at the time of retirement. Pension is viewed as a sum of money paid regularly to a person who no longer work because of old age, disability or retirement or to his widowed or dependent children by the state, former employers or from provident fund to which he and his employer both contributed.

The pension system prior to 2004 was characterized with many problems which make the payment of the retirement benefit a failure in Nigeria. Koripamo-Agari (2009) and Yunusa (2009) pointed out that the major weaknesses of pension scheme was lack of adequate and timely budgetary provision coupled with rising life expectancy, increasing number of employers, poor implementation of pension scheme in the private sector due to inadequate supervision and regulation of the system and too many private sector employees were not even covered by the form of pension scheme.

These problems associated with payment of pension in Nigeria necessitated the government during Obasanjo regime could be reformed or reviewed which gave birth to the pension reform Act of 2004. Elumelu (2005) posits the 2004 Pension Reform Act established a uniform contributory; private sector managed and fully funded pension system for both the public and private sector of the country.

The Pension Reform Act 2004 was also established to address the manifested loopholes in the old defined benefit pension scheme and provide adequate resources to retirees after retirement from the service. The large capital pool demands that there should be sound and uniform investment decision making to ensure that value is added to Retirement Saving Account (RSA) contribution. Investment is normally done in the presence of numerous risk mostly political, markets and economic in nature. Investment and market analysis of these Pension Fund Administrators (PFAs) are always propelled to ensure that there is safeguard and safety of these pension assets. The fund accounting organ of PFAs record every bit of inflow and outflow of pension assets in and out of the entity fund. Based on the aforementioned, this study seek to examine the impact of contributory pension scheme on the Nigerian economy.

1.2 Statement of the Problem

Although the new reform is guided by the key principles of sustainability, accountability, equity, flexibility and practicability, there is also this fear that funds or Retirees Savings Account (RSA) contributory can be mismanaged by the existing trustees. Also, risk of a given portfolio determines the return thereof. Some pension fund administrators do not have the necessary risk management profile while some fail to pay regard torating signals needed to making sound investment decision.

The decision of investment managers of the pension fund administrators who are responsible for this process impact greatly on the contribution value due to employees (fund owners). Sound investment and efficient management of the huge pension fund assets has great implication on the economy. The spread of large accumulated fund to the capital and money markets are employment opportunities creation.

From the forgoing, the following specific problems will be studied:

The impact of fund investment and management on the contributory fund and the Nigeria economy as a whole.
The status of the fund assets regulation and framework.
The nature and effect of risk prevailing in the pension assets.
Monitoring and documentation of status report by the contributors.

1.3 Objective of the Study

The overall aim of this study is to critically examine the impact of contributory pension scheme on the Nigerian economy. Hence, the study will be channeled to the following specific objectives;

Determine the relationship between private sector pension contribution and real GDP in Nigeria.
Determine the relationship between public sector pension contribution and real GDP in Nigeria.
Ascertain the relationship between private sector pension contribution and per capita income in Nigeria.
Determine the relationship between public sector pension contribution and per capita income in Nigeria.

1.4 Research Questions

The study will be guided by the following questions;

Is there any relationship between private sector pension contribution and o relationship with real GDP in Nigeria
What is the relationship between public sector pension contribution and real GDP in Nigeria.
What is there is the relationship between private sector pension contribution and per capita income in Nigeria.
What is the relationship between public sector pension contribution and per capita income in Nigeria?

1.5 Research Hypothesis

H01: Private sector pension contribution has no relationship with real GDP in Nigeria

H02: Public sector pension contribution has no relationship with real GDP in Nigeria

H03: There is no relationship between private sector pension contribution and per capita income in Nigeria.

H04: There is no relationship between public sector pension contribution and per capita income in Nigeria.

1.6 Significance of the Study

Every country faces many choice is dealing with micro and macro-economic issues. These choices are made daily in more or less coordinated ways with a long or short term perspective. The Pre-pension Reform Act2004 was a “Pay As You Go” (PAGA) pension scheme faced with a lot of challenges that gave birth to the new contributory pension scheme. The significance of this work therefore can never be overemphasized as it will avail the stakeholders the necessary and basic understanding on how their mutual interests are protected.

The contributors would have a grasp of how their Retirement Savings Account (RSA) funds are managed by Pension Fund Administrators (PFAs) and safe custody by Pension Fund Custodians (PFCs) and its effect on the economy.
It is also of importance to Pension commission, PENCOM and the government at different levels as it provide avenue to overcome the short-comings in the modern system. New pension scheme came into existence in 2004.

Consequently, this is undoubtedly a new horizon that calls for detailed research. Pension fund accounting us a new area that needs input from scholars, hence, this study will help other researchers with interest in pension.

1.7 Scope of the Study

This study is structured to generally examine the impact of contributory pension scheme on the Nigerian economy. However, the area of coverage of the study will further examine how Contributory Pension Scheme influence the Gross Domestic product (GDP). And examine how the risk prevalent in pension fund investment affects pension management. The study will cover the period of 2004 to 2016.

1.8 Limitation of the Study

The major limitation experienced in this study is the Pension Fund Administrators itself. Most of the information provided by the Legacy Pension Manager required explanation as to the reason behind such activities and actions. Nevertheless, there is always solution to a problem the problems were to an extent surmounted. There is also a limitation to textbooks, Journals and other materials in the library which are relevant to this study. I have to source for some materials outside the library. In addition, there was insufficient time for the study. In fact, it is very difficult for a student to go for a research work at the detriment of his lectures. This affects the expected quality of the research work. Furthermore, inadequate finance has an effect on this research work due to the current situation of the economy which makes prices of things very high viz-avis the cost of transportation the pension fund administrator to obtain relevant materials to this research work were very expensive.

1.9 Definition of Terms

Pension

Pension entails money paid at regular bases by government or any establishment to someone who is officially considered retired from active service after serving for a stipulated time usually minimum of ten years and maximum of thirty five years

Pension Scheme

A Pension Scheme is a plan, procedures and legal processes of setting aside funds to meet the social obligation which employers owe their employees on retirement or in case of death and disability

Contributory Pension Scheme

Contributory Pension Scheme is a full funded pension scheme that tries to generate adequate funds (contribution) through savings.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc.
Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the impact of contributory pension scheme on the Nigerian economy. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary

The researcher discovered from his findings that the new contributory pension scheme which was ushered in by the Reform Act 2004, has helped in reducing the problem associated with the define benefit scheme. The researcher discovered the followings findings: Adequate investment and management of the pool of fund contributed by employees and employers from the public sector has immensely contributed to development of the economy.

Creating job or employment to the masses thereby reducing unemployment and alleviating poverty as well increased tax revenue to the government, Provide resources for investment in the money and capital market, Enhances adequate and prompt payment of pension to retirees.

5.3 Conclusion

This study has provided evidence on the impact of contributory pension scheme on economic growth in Nigeria using SPSS version 16. It is clear from the analysis that increases in pension fund contributions and pension fund assets in Nigeria positively affected economic growth but with minimal impact. There should be more emphasis on the management of pension assets in the capital market as well as government bond, real estate, investment trust to boost Gross Domestic Product (GDP) of the country (Nigeria).

There should be prompt reconciliation between PFAs, PFCs and PENCOM statements of accounts should be given to contributors regularly. This will bring transparency and accountability to the system. PenCom should ensure effective monitoring, supervision and enforcement of the provision of the PRA 2014, which are the inevitable ingredients in the Contributory Pension Scheme towards Gross Domestic Product (GDP).

5.4 Recommendations

Having reviewed the Contributory Pension Scheme (CPS), the researcher hereby recommend thus:

There should be more emphasis on the management of pension assets in the capital market as well as government bond, real estate, investment trust to boost Gross Domestic Product (GDP) of the country (Nigeria).
PenCom should ensure effective monitoring, supervision and enforcement of the provision of the PRA 2014, which are the inevitable ingredients in the Contributory Pension Scheme towards Gross Domestic Product (GDP).
Because of leakages in the private sector pension contribution based on this study, Pencom should ensure maximum compliance by private sector operators.
Pencom should ensure stiff penalties for defaulters both in the public and private sector, who deduct pension contributions without remitting same to pension fund administrators to serve as deterrent to other.

Project Material Download