AN EVALUATION OF THE NIGERIAN PENSION REFORM

AN EVALUATION OF THE NIGERIAN PENSION REFORM

Abstract:

The introduction of a new Pension Scheme in Nigeria in June 2004 changed the standard pay-as-you-go defined-benefit system to an individual account defined-contribution system. The Reform has been controversial with its proponents, i.e., the government and financial market operators on one-side, and its critics, i.e., workers and civil service organisations on the other. Given the emotions and interests that underpin the debate, an economic analysis is necessary to inform clear discussion of the pension reform. Conceptually, a pension scheme has three main functions: (a) to re-distribute income (re-distribution function), (b) to increase the savings rate (savings function), and (c) to provide security (insurance function). In addition, the global pension reform debate brings into focus issues of efficiency and sustainability. Economic efficiency entails maximizing the rate of return hence, ensures maximum benefit possible at minimum cost. Financial sustainability is achieved if the current value of projected pension payments and other expenses from the system over a 75- year period is equal to or less than the current value of projected revenue into the system over a 75-year period. It follows, therefore, that the Nigerian Pension Reform can be evaluated on the extent to which it achieves these three key functions of a pension scheme as well as in terms of its efficiency and sustainability. This study thus focused on an evaluation of the Pension Reform using a mix of deductive and inductive Methods. Both primary and secondary data were collected and analysed to answer the research questions about the efficiency and sustainability of the reform, and its capacity to achieve the savings, redistribution and insurance functions. The findings of the study indicate that the new Pension Reform (a) is inefficient compared to the previous one. However, this will improve over time as the system matures (b) is likely to be financially sustainable and (c) is unlikely to be vi politically sustainable because the case studies show that benefits in the old system are higher than benefits in the new system (d) will achieve the savings function. But the savings rate will ultimately depends on the level of compliance and coverage, and (e) has no provision for the effective redistribution of income from richer segments of the society to those with zero or low lifetime income (f) is unlikely to perform the insurance function because the balances in the Retirement Savings Accounts does not only offer lower retirement benefits compared to the former system, they are also sensitive to inflation and interest rate changes. The study also found that the major beneficiaries are likely to be the Government, Pension Administrators and Custodians while workers are likely to be the major losers.

AN EVALUATION OF THE NIGERIAN PENSION REFORM

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