Abstract
The study examined the impact of contributory pension scheme on the growth of Nigeria economy. The primary aim of this study is to determine how Retirement Savings Account contributes to Nigeria economic growth. The study runs from 2006 through 2018. Data for this study were obtained from the 2018 edition of the Central Bank of Nigeria (CBN) statistical bulletin, National Pension Commission (PenCom) Annual Reports and National Bureau of Statistics (NBS). Descriptive research design was adopted for the purpose of this study. The tools of data analysis is ordinary least square regression methods which were carried out with the aid of E-view statistical packages. Findings from the study revealed that Retirement savings Account (RSA) which was used as a proxy for contributory pension scheme has a positive and significant effect on the economic growth of Nigeria. The study recommends that employees should be made to understand that even within the new pension scheme they can still access up to 25 per cent of their retirement savings as a single bulk payment to enable them start a new business or deal with the issues of transition from active employment to retirement.
Keywords: PENCOM, PFAs, PFCs, Economic Growth, Pension, AES. GDP
CHAPTER ONE
INTRODUCTION
1.1 Background of study
Nigeria like most other countries in the world adopted the Contributory Pension Scheme (CPS) in 2004, as a panacea to the worsening conditions of the Defined Benefit (DB). The conditions associated with the old pension system in Nigeria necessitated the systematic pension reform, which changed the Defined Benefit Scheme to the Contributory Pension Scheme (Koripamo-Agari, Yunusa, 2009). The pension system prior to 2004 were characterized by massive accumulation of debt estimated at over two trillion naira, large-scale arrears of unfunded entitlement of retirees, inadequate budgetary provisions coupled with rising life expectancy, increasing number of employees, higher wages and pensions and inadequate supervision and regulation of pension system. The new Pension Reform Act, predicated upon a Contributory Pension Scheme, was established in 2004 to address the inadequacies of the Defined Benefit Scheme. The Act creates more stringent measures in regulating and supervising the pension industry. This is with the ultimate goal of promoting the growth and deepening of the pension system. Indeed, this development assigned a greater role to the pension sector in the allocation of pension assets particularly in areas of more efficient and productive use as launch pad for the overall growth of the economy. Though all the three central labour organizations (the Nigeria Labour Congress [NLC], the Trade Union Congress [TUC]and the Conference of Free Trade Unions [CFTU] were opposed to the fundamentals of the pension reform, radical changes were made in the new legislation on pension without reflecting the inputs of labour. Similarly the organized private sector resisted the lumping together of pension schemes in both the public and private sectors. However, the new law disregarded private sector’s inputs to the new scheme, in spite of existing constitutional provisions, which support their position. Despite the inability of the unions to prevent the enactment of the Pension Reform Act, 2004, they seem to have delayed its full implementation.
Given the foregoing, Nigeria embarked on pension reforms through a Pension Reform Bill submitted to National Assembly September 2003. The Bill was signed into law as Pension Reform Act 2004 (PRA 2004) and its implementation began 1st July 2004. Consequently, the Act brought about fundamental changes to the structure of leaving service benefits and the way they are provided for. The Act in section 1 establishes a Contributory Pension Scheme (CPS) for any employment in the Federal Republic of Nigeria. The scheme ensure that every worker (public or private) receives his retirement benefit as and when due, assist improvident individuals save for their old age and establish a uniform set of rules for administration and payment of retirement benefits. It is useful to note that all pension schemes existing before the commencement of this Act ceased to operate. The Act applies to persons in the permanent employment of the public sector as well as private sector employees who are in the permanent employment of organizations in which there are five or more employees subject to the provision of section eight. However, a firm having less than five employees is eligible to participate in the scheme. Every employee is required to choose a Pension Fund Administrator (PFA), maintain a Retirement Savings Account (RSA) and each employee shall neither have access to the account nor have any dealings with the custodian with respect to the Retirement Saving Account except through the Pension Fund Administrator. The employers shall deduct at source the monthly contribution of the employees and remit an amount comprising the employees’ contribution and the employers’ contribution to the Pension Fund Custodian. The Custodians are as specified by the Pension Fund Administrator of the employee, and the remittance has to be done not later than 7 working days from the day the employee is paid. The custodian shall notify the Pension Fund Administrator who shall cause the Retirement Saving Account of such employee to be credited.
The rates of contribution to the Retirement Saving Account by the employee and the employer are specified in section 9 (1) of the Act. However, these rates of contribution may upon agreement of the employer and the employee be revised from time to time and notice of such revision shall be given to National Pension Commission (PenCom). As at 2018 December, there were 22 Pension Fund Administrators (PFAs), 7 Closed Pension Fund Administrators (CPFAs) and 4 Pension Fund Custodians, and they are expected to capture a potential 50million contributors. Commission’s 2018 report indicates that pension fund assets have grown up to ₦8.64 trillion in 2018. The report also shows that pension savings contributions from the public and private sectors have grown up to ₦5.09 trillion. These pension funds are expected to be invested in about 12 specified asset classes which include: Local Ordinary Shares, Federal Government Securities, State Government Securities, Corporate Bonds, Financial Institution Deposits, Open and Closed End Funds, Foreign Money Market Securities, Supra-National Bonds, Infrastructural Funds, Real Estate Properties, Unquoted Securities and Cash /Other Assets.
In view of the foregoing, conscious attempts have been made to examine the effects of Contributory Pensions Asset on the various aspects of the Nigerian economy. Ameh, Ajie, & Duhu, (2017) examined the impact of contributory pension scheme on economic growth in Nigeria. In a similar study, Nwanne (2015) carried out a research on the impact of contributory pension on economic growth in Nigeria covering 2004-2012. In a separate study, Edogbanya (2013), by correlation analysis using t-test examined the impact of contributory pension scheme on Nigeria economic development. Oladapo (2016) examined funded pension scheme and economic growth in Nigeria, covering 2004-2014. Although, the study examined the time series properties of the variables employed as well as carried out co-integration, this research work extends Oladapo (2016) in terms of the period covered. In addition, the Error Correction Model (ECM) employed in Oladapo (2016) does not show causality as to whether Contributory Pension Scheme is driving economic growth. The individual effect of each fund under the CPS is also examined in this present study as opposed to the aggregate pension asset employed by Oladapo (2016). The researcher also employed data from 2004, there is no congruency between the scopes which dated from 2004 to 2014 due to unavailability of data on Contributory Pension Scheme between 2004 to 2005. Previous research works have indicated that the contributory pension scheme is yet to have a significant impact on the Nigerian economic growth and this is traced to the inefficient management of the pension asset. The wellbeing and interest of Nigeria retirees, for the past ten years, had not received proper attention as expected from the contributory pension scheme. The Contributory Pension Fund (CPF) is expected to support economic growth by providing extra funds for investment as well as expand the capital market, thereby leading to increased capital allocation which translates to improved and general efficient allocation of resource.
1.2 Statement of the Problem
Prior to the enactment of the Pension Reform Act 2004, pension scheme in Nigeria had been bedeviled by many problems. The Public Service operated an unfunded 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 budget implementation in the light of resource constraints. In many cases, even when budgetary provisions were made, inadequate and untimely release of funds resulted in delays and accumulation of arrears of payment of pension rights. It is obvious therefore that the Defined Benefits Scheme could not be sustained. In the private sector on the other hand, many employees were not covered by the pension schemes put in place by their employers and many of those schemes were not funded. Besides, where the schemes were funded, the management of pension funds was full of malpractices between the fund managers and the Trustees of the pension funds. This scenario necessitated a re-think of pension administration in Nigeria. Accordingly, the administration initiated a pension reform in order to address and eliminate the problems associated with pension schemes in the country. The outcome of the reform was the enactment into law of the Pension Reform Act 2004. Nine years after the introduction of contributory pension scheme in Nigeria, there is still doubt as to the ability of the scheme to solve the problem of scarcity of long-term funds for long-term investment. Similar fear was expressed that forced savings in a low income country with large scale poverty and inadequate complementary social security system may not be desirable in Nigeria. However, some notable authors in this field of study have expressed optimism that the contributory pension scheme has the potentials of mobilizing savings for economic growth. The contributory pension scheme is expected to mobilize savings for financial market development and economic growth. Surprisingly, as at 2010, pension contributors were 3.89 million which represents 7.62% of the estimated 51 million working population in Nigeria. The pension fund assets as percentage of the GDP in 2010 was 7.8% while pension savings as percentage of the GDP was 1.11% in 2010. This study seeks to fill the research gap by empirically analyzing the impact of contributory pension scheme on economic growth in Nigeria.
1.3 Objectives of the Study
The specific objectives of the study are:
1. To determine the impact of pension funds on economic growth
2. To ascertain the impact of pension savings mobilized on economic growth.
1.4 Research Hypothesis
H0i: Retirement Savings Account does not impact significantly on the growth of Nigeria economy.
1.5 SCOPE OF THE STUDY
This study focuses on the Impact of the Contributory Pension Scheme on Nigerian economy; determines the relationship that exists between the Impact of the Contributory Pension Scheme on Nigerian economy. The time frame for the study is ten years scovering the period 2008 to 2018.
1.6 SIGNIFICANCE OF THE STUDY
The significance of this study is germane considering the important of pension entitlements in the lives of pensionable retiring workers and those in active service. This study will be of immense benefits in the following ways.
First, it reviewed problems associated with old Pension Schemes and examine how the New Contributory Pension Scheme could be used to salvage situations.
Secondly, this study would help the commission and other parties involves in the new administration of Pension Scheme to be alive to their responsibilities by ensuring efficiency and effectiveness in its operations
Thirdly, this study will go a long way restoring hope to the Nigeria workers, give an insight on the New Contributory Pension Scheme and encourage the Nigerian workers on the need to embrace it.
Also, this study will serve as useful information for further research work and as a useful literature on Nigeria Pension Scheme and its reform.
Besides, this study will be of great use in managing pension and pension related problems more effectively and efficiently, because information provided will serve as good basis for realistic decisions.
Lastly, the recommendations proffer in this study will be useful to the government in policy making and good governance.
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