CONTRIBUTORY PENSION FUND AFFECTS ECONOMIC GROWTH IN NIGERIA

CONTRIBUTORY PENSION FUND AFFECTS ECONOMIC GROWTH IN NIGERIA

This study is to ascertain how contributory pension fund affects economic growth in Nigeria. The research work intends to cover the relevant pension reform Act and the evolution of the pension scheme in Nigeria and its impact on the economy the wide coverage of the pension reform Act of 2014 with a critical analysis of its implication and impact of the contributory pension scheme on the Nigerian economy.

However, an in-depth analysis of data from the pension commission and licensed pension fund administrators and custodians in Nigeria. This will reveal the prospect and potential investment for economic growth. It will also look at the legal framework and duties as enacted in the law for transparent and efficient management of pension funds in Nigeria.

The survey of the study covers the Nigerian economy as relating to the adoption and implementation of the PRA 2014 in the remittance of pension funds or contributions of employers and employees regularly to the PFC for onward investment by the PFA that stimulates economic development. The study revolves around the available financial resource at the researcher’s disposal.

CHAPTER ONE

INTRODUCTION

Background of the Study

When people work they are expected to be remunerated to enhance fluidity and smooth movement on their services to their employers. In that effect, part of their remunerations would be saved for them and the employer would have to add a certain percentage of their remuneration for them as part of their savings, which they get to take after retirement from service to add value to their lifestyle after retirement. And this concept brings about pension, which has bodies in Nigeria such as the National Pension Commission (PENCOM).

The researcher looks at pension as a partial deduction of one’s earnings during his/her years of active service to alleviate difficulties after the employees’ retirement.

To that effect, the Pension fund is investment pools that pay for employee retirement commitments. Funds are paid for by either employee, employers, or both. Corporations and all levels of government should provide pensions, while the fund managers invest these contributions conservatively. They must avoid losing the principal sum and still beat inflation.

The pension could also be a regular stipend or an amount that is expected either monthly or every quarter through any mode of withdrawal the retiree chooses at point of retirement to ensure that the retiree could still be able to live within the standard of living as at when he was working.

Pension schemes have been in existence for a long time as practiced in developed countries. Its sole purpose is to ensure that retirees can have access to their retirement benefits as at when due, promote the culture of saving and live a good life after retirement.

In contemporary Nigerian societies, most workforce or workers are very pessimistic about their retirements. To this development, Ogunbameru and Bamiwuye (2004) are of the view that workers see retirement as a transmission which could result in several challenges such as physiological, psychological and economic problems. It is important to add here that the fear of facing retirement challenges is a harbinger of death to many workers.

The fear associated with uncertainty after the retirement of the employee is the reason for corruption by employees during carrying out their duties Agba et al (2008) and is the culprit to be held responsible for employee’s liaises affaire attitude towards carrying out their duties and responsibilities.

Retirement is the withdrawal from one’s position or occupation or one’s active working life. A person may also semi-retire by reducing his or her work hours.

An increasing number of individuals are choosing to put off this point of total retirement, by selecting to exist in the emerging state of pre-retirement.

Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when bodily conditions no longer allow the person to work any longer either by illness or accident or as a result of legislation concerning their position. In most countries, the idea of retirement is of recent origin, being introduced during the late 19th and early 20th centuries. Previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death. Germany was the first country to introduce retirement benefits in 1889.

Nowadays, most developed countries have systems to provide pensions on retirement in old age, which may be sponsored by employers or the state. In many poorer countries, support for the old is still mainly provided through the family. Today, retirement with a pension is considered a right of the worker in many societies, and hard ideological, social, cultural and political battles have been fought over whether this is a right. In many western countries, this right is mentioned in national constitutions.

Both public and private sector workers are expected to live a comfortable life without having to be dependent on anyone after retirement. Sule and Ezegwu (2009) believe that the working lives of employees move continuously towards a certain direction from employment to growth from growth to retirement. While some can save enough to carry them majority do not attain such feat. The government and the organization need to identify a full proof method of rewarding employees for their human capital through organized pension plans so that zero dependencies could be achieved for the retirees.

Nigeria has seen a series of pension schemes from the time of the defined benefit scheme (DBS) up to that of the contributory pension scheme (CPS). From the commencement of pension scheme for public servants which can be traced back to 1946, when the Colonial Government in Nigeria, through the Chief Secretary to the Government (in a circular No 19/1945 of 24th march, 1945) announced a superannuating (pension) scheme for African staff employed by Government (Public Notice No 4, 1946). The appropriate legal enactment that brought the scheme into being was the Pensions Ordinance of 1951 but which took retroactive effect from 1946. The Pension Ordinance of 1946 contained vital information about the public sector pension scheme ranging from the identification of who a Civil Servant is, the nature of benefits i.e. pensions and gratuity and eligibility conditions, the minimum annual salaries that qualify for either pension and gratuity or gratuity alone; the rules on conduct, to rules on misconduct leading to a reduction in or outright forfeiture of benefits entitlements. Similarly, staffs of government corporations and parastatals were to enjoy pension schemes and other similar benefits as the core public service schemes but differed only on the modus-operandi of funding. The corporations included, Railway Corporation, National Electricity Commission (now Power Holding Company of Nigeria), and the Nigerian Ports Authority. They run noncontributory funded schemes with some rates at 2.5% of the employees’ salary. It is important to note that the schemes of these corporations must first be approved by the Joint Tax Board as being comparable with the benefit structure of the core civil service scheme. The first private sector pension scheme in Nigeria was set up for the employees of the Nigerian Breweries in 1954, which was followed by the United African Company (UAC) in 1957. National Provident Fund (NPF) was the first formal pension scheme in Nigeria established in 1961 for the non-pensionable private sector employees. The first Pension Reform Act of 102 was introduced by the Federal Government in 1979. The Act consolidated all enactment on pensions and gratuity scales devised for public officers by Udoji Public Service Review Commission 1974, and so it was the precursor of others which developed. The Nigeria Social Insurance Trust Fund (NSITF) was established in 1993 to take over the NPF Scheme and provide enhanced pension schemes to private sector employees. The pensions Act 103 of 1979 consolidated all enactment dealing with pension, disability benefits and gratitude scales devised for the armed forces, public service organizations established by decree in the Federal and edict in the state-operated pension schemes similar to what obtains in the civil service. Local government system also established pension schemes for their staff, with a separate board known as the local government Pension Board.

The pension system before 2004 was characterized by many problems that made payment of retirement benefits a failure in Nigeria. Koripamo-Agari (2009) and Yanusa (2009) pointed out that the major weaknesses associated with the pension schemes were lack of adequate and timely budgetary provisions made worse with the rising life expectancy, increased number of employees, poor implementation of the scheme due to inadequate supervision and regulation of the system and most private-sector employees had no cover in any form of pension scheme.

Also, commenting on some reasons that caused the failure of the pension scheme before 2004. Fapohunda (2013) lamented that the pension scheme administration has been besieged by numerous problems such as poor documentation, inadequate subvention, lack of accountability, corruption and embezzlement of funds.

Sule and Ezegwu(2009) lamented further that uncoordinated administration, non-availability of records, outright fraud, irregularities, and conflicting laws, presence of ineligible pensioners on the pensions payroll all constituted to the problems of the scheme.

The pension reform act of 2004 according to Atedo N.A (2006:19) has been established for all categories of workers, both the public and private sector workers. The coming of the new scheme abolished the era of pay as you go (PAYG) and brought on its place a fully funded scheme which is compulsory for all and is seen as a joint effort of the participants i.e. the employers and employee to fund it towards the retirement of the employee.

The introduction of the new pension scheme has laid to rest ghost pension syndrome Amujiri (2009:148) Also Agbese (2008) in Amujiri (2009) opined that the introduction of the new pension scheme in Nigeria marked a turning point in Nigeria’s economy as it put to rest the issue of ghost pensioners permanently in Nigeria’s pensioners payroll.

The contributory Pension Scheme (CPS) on the Nigerian economy since its inception cannot be underestimated. This can be attested to, from the drastic reduction in external borrowings and from numerous developments in capital projects embarked upon and executed by the government since the enforcement of PRA 2004 and the level of accessibility to funds by the quoted companies as well as government to meet their financial needs especially long- term funds.

The essence of the Contributory Pension Scheme (CPS) is not only to ensure individuals have access to their retirement benefits as at when due or to still live a better life after retirement or to promote saving culture but rather is to serve as a long- term source of fund for government and quoted companies to meet their long term financial needs, which the short- term sources of finance cannot solve.

However, the enactment of the Pension Reform Act in 2004 by the then Obasanjo’s administration and its acceptability and enforcement in the Federal Capital Territory (F.C.T.) public and private sectors of the economy have transformed most sectors and speed-up the completion of capital projects as a result of easy accessibility to long- term fund through Contributory Pension Scheme. Though many scholars will certainly criticize the Contributory Pension Scheme (CPS) in the Nigerian economy, This work is to critically review its impact on the Nigerian economy, basically how the scheme has helped in the growth of the economy, through human capital development and technology.

Contributory Pension Scheme was established under the Pension Reform Act 2004, which was repealed and replaced with the Pension Reform Act 2014, This action warrants the amendments to essential areas of the Pension Reform Act 2004 to ensure total compliance with the new pension Reform Act 2014 that was signed into law on 1st July 2014 by the Jonathan administration. Section 4 of the Act, provides for a compulsory minimum contribution of ten (10) and eight (8) percent of employee’s monthly emolument by the employer and employee respectively of both the public and private sectors.

Each employee is to open a Retirement Savings Account (RSA) into which the contributions are to be paid, with a Pension Fund Administrator (PFA) licensed by the National Pension Commission, established under section 17 of the Act, to regulate and supervise pension schemes in the country. The PFA is to manage and invest the fund in the RSA, from where the contributor will draw benefits on retirement, in line with the provisions of the Act.

The economic development of a country can be referred to as an economies capacity to increase the productivity of goods and services in comparison with previous times. The success of every government is tied to the growth of the economy of the nation. Therefore, achieving a high and stable economic growth rate is an important issue for every government, since economic development is key to citizen’s enjoyment of a higher standard of living.

A major factor in economic growth in savings. Savings can be termed as money that is set aside in a financial institution or a safe facility. The Contributory Pension Scheme is compulsory, has compelled employees and employers in the public and private sectors to save a minimum total of 18% into the employee’s RSA, from where employees will be paid retirement benefits and this has increased national savings. As of December 2017, the Net Assets Value of Pension Assets under the Contributory Pension Scheme was N7.5 trillion. This happening against a background of Federal government budgetary pension deficit estimated at N2 trillion as of June 2004, when the Contributory Pension Scheme took off is a huge achievement. Of the N7.5 trillion Net Assets Value, 70.42% was invested in FGN Securities, 10.33% in Ordinary shares, 9.08% in local money market securities, 2.03% in States government’s securities, 2.71% in Real Estate properties.

The benefits of the contributory pension scheme could be ascribed to the contributors and also the nation. As seen in the reduction of external debt/borrowings, increase in developmental projects executed, strong capital market capitalization and financial institution turnaround. To a contributor, the ease and flexibility of withdrawal from the retirement savings account while terms and conditions apply.

Pension fund managers under the auspices of Pension Operators Association of Nigeria (PenOp) found it necessary to further enlighten Nigerians on factors that must be put into consideration while accessing benefits under the Contributory Pension Scheme (CPS).

Specifically, age, gender and the Retirement Savings Account (RSA), owner’s health condition among others are factors that are usually put into consideration to guide the process. Presenting the details during a retreat organized by PenOp for insurance and pension journalists in Lagos, the Head Compliance, Stanbic IBTC PFA, Edidiong Akang, said different access modes were depending on the type of contributions.

These include Mandatory, Pre-Act, or Voluntary Contribution.

According to her, whether the RSA holder is an active client i.e. pre-retirement or a Retiree, Foreigner, Exempted person or even a micro-pension contributor, the status can determine how he/she can access the RSA balance.

Also, the health status of an RSA holder can also determine access to the RSA balance. The amount in the RSA balance can determine the type of payment application e.g. less than 550,000 will entitle the RSA holder to an en-bloc payment of the RSA balance on retirement. Anything higher is subject to programmed withdrawal (PW) or Annuity”.

Where an RSA holder is less than 50, he can only access 25 percent (25%) of the RSA balance. ‘Age at Retirement’ is also one of the variables used in calculating programmed withdrawals and the PRA provides that an RSA Holder must be 50 years or retired whichever is later to access pension payments”.

The gender of the RSA holder is used in calculating programmed withdrawal based on life expectancy which differs depending on the gender. Last Annual Salary is also used in calculating the programmed withdrawal value as the payment is a factor of the RSA holder’s last salary”.

Contributors are now seeing the benefits of the scheme as they are more knowledgeable of the scheme as compared to when it first started. Thereby cutting down on conflicts with the regulators, fund managers, and their employers.

Retirees who are the major target, have continued to learn and practice the processes daily, also, eliminating the tension and conflicts of interest that was the lot of the scheme for a very long time.

Ultimately, more Nigerians have been able to separate the CPS from the Defined Benefit Scheme (DBS), which is the old government-funded pension that visited untold hardship on pensioners across the country.

Before the current understanding that has made accessing benefits easier, some retirees and contributors had taken the CPS as a deposit institution where they can easily walk into and withdraw their deposits.

Hence, one of the biggest challenges faced by the operators had to do with complaints from retirees demanding their supposedly due benefits from their Pension Fund Administrators (PFAs).

According to PenCom, limited public awareness of the workings of the new scheme, different interpretation of some provisions of the Act by retirees, comparison of benefits under the old and new scheme by retirees, benefits by colleagues on similar position and different variables/data as well as the delay in payment of Accrued Rights leading to delay in processing retirement benefits as and when due had worked against the system.

The lack of understanding that the contribution is purely for the future after retirement did not also help matters, as some of the retirees swooped on their PFAs to withdraw either their contributions or that of deceased relatives without going through the stipulated process, especially as it also affects administration and management of pension either through Programmed Withdrawal by PFAs or Annuity by life insurance companies.

The processes are spelled out in the law setting up the scheme all in a bid to ensure that contributors are fully in charge of their funds and carefully managed by their PFA’s according to the Act.

All these are the positive sides to the adoption of the contributory pension scheme (CPS).

Statement of the Problem

A nation that must actively and efficiently develop needs to put all the factors that encourage human beings to live and have sustained standards of living into consideration. The betterment of human lives in any nation is the source of development in such a country. Nigeria as a nation is said to be witnessing all forms of crises ranging from political, economic, religious, cultural, cum socio-economical and many others. The economic stability of a nation is the strength of such a nation, Nigeria, for example, is said to be acclimatized with diverse economic challenges heading to under development. Where there is stunt economic growth, a development that can be sustained would be far from the reach of such a nation.

The management of the pension scheme in Nigeria has been a serious issue of concern. Many retired staff of both private and public sectors are in acute economic crises defacing the economic growth of the nation. Pensioners/ retirees have no other option than to die after retirement due to uninterrupted backlog of salaries owed them; rocked with hunger and emotional crises. The inability of the team players to comply with the rules and regulations, epileptic investment to absorb the growth of the contributory pension fund, Maladministration or mismanagement of the pension fund. Misapplication and misrepresentation of the objectives of the contributory pension scheme and many others are gravely worrisome to any concerned technocrat.

Many persons at retirement prefer to die rather than face the possibility of delayed pension, denied pension or a meager pension that is below the expected pension that cannot even foot the bills of the family. This situation is very worrisome.

One is expected to be celebrated at retirement and not mourned at retirement but the reverse is the case for Nigerian workers/employees at retirement. Every concerned citizen in Nigeria who is still within the active workforce would be most curious about how to avert this ugly menace. It is against this background that the researcher is set to fill this gap.

However, a problem identified without a solution is a problem itself; it is hoped that the economic development of the contributory pension scheme would be a thing of the past based on the outcome of this study.

Hence, this calls for this study. In a related development, it also calls for one to identify who is responsible for, or the architect of this ugly situation after retirement; could this be credited to the government, employer, or employee?

This study seeks to fill this vacuum.

 General Objective of the Study

The objective of this study is to ascertain how contributory pension fund affects economic growth in Nigeria.

Aims/Objective of the Study

The core aims of this study are as follows:

1. To ascertain whether public sector pension contributions significantly affects human capital development.
2. To ascertain whether private-sector pension contributions significantly affects human capital development.
3. To ascertain whether public sector pension contributions significantly affect technology.
4. To ascertain whether private-sector pension contributions significantly affect technology.

Research Questions

1. How do public sector pension contributions significantly affects human capital development?
2. How do private-sector pension contributions significantly affects human capital development?
3. What is the relationship between public sector pension contributions and technology?
4. What is the relationship between private-sector pension contributions and technology?

Research Hypotheses

H_O1: Public sector pension contributions has no significant effect on human capital development

H_O2: Private sector pension contributions has no significant effect on human capital development.

H_O3: Public sector pension contributions has no significant effect on technology.

H_O4:  Private sector pension contributions has no significant effect on technology.

Significance of the Study

The findings of this study will be beneficial in several ways. Firstly it will add to the pool of research resources on the subject of the Contributory Pension Fund.

The new pension scheme came into existence as of 2004 and was amended in 2014, thus it is still a new area that requires detailed research and needs more input from scholars and as such will form a basis for further research on the subject area.

The findings will benefit the contributors and give them an insight into how their retirement savings account funds are managed by their chosen PFA and PFC and how it affects the development of the economy.

Finally, it will inform policymakers, pension commission and the government on how to improve existing arrangements and provide a way to overcome the shortfalls applicable to the system.

Scope of the Study

The research work intends to cover the relevant pension reform Act and the evolution of the pension scheme in Nigeria and its impact on the economy the wide coverage of the pension reform Act of 2014 with a critical analysis of its implication and impact of the contributory pension scheme on the Nigerian economy.

However, an in-depth analysis of data from the pension commission and licensed pension fund administrators and custodians in Nigeria. This will reveal the prospect and potential investment for economic growth. It will also look at the legal framework and duties as enacted in the law for transparent and efficient management of pension funds in Nigeria.

The survey of the study covers the Nigerian economy as relating to the adoption and implementation of the PRA 2014 in the remittance of pension funds or contributions of employers and employees regularly to the PFC for onward investment by the PFA that stimulates economic development. The study revolves around the available financial resource at the researcher’s disposal.

Definition of Terms

1. Pension: This is viewed as a sum of money paid regularly to a person who no longer works because of old age, disability or retirement. Or to his widowed or dependent children by the state, former employers or from a contributory fund to which he and his employer both contributed.
2. Pension Fund Administrators: These are those who have been fully licensed to open an RSA for employees, invest and manage the pension funds in a manner as the commission may prescribe.
3. Pension Fund Custodians: These are those who have been duly licensed to receive and hold pension fund upon trust for contributors and beneficiaries settle investment transaction on behalf of the PFA provide reports to the PENCOM.
4. Retirement Savings Account (RSA): Is a Defined Contribution Plan required under the Pensions Reform Act 2014. It can be opened by every employee in an organization with 3 staff or more.

Staff will be required to open and maintain a personal Retirement Savings Account (RSA) in their own names after which they would be issued a unique Personal Identification Number (PIN) by the National Pensions Commission. Monthly deductions and remittances of 10% and 8% of total monthly emolument are contributed by the employer and employee respectively into the RSA.

5. National Pension Commission (PENCOM): This commission is responsible for licensing, regulating and monitoring both the PFA and PFC and all pension matters in the country as of 2013, 24 PFA’s and 4 PFC’s have been licensed by PENCOM.
6. Economic Development: this is the process by which a nation improves the economic, political, and social wellbeing of its people. Economic development usually refers to the adoption of new technologies and general improvement in living standards.
7. Human Capital: this is the skill, talent, and productivity that employees bring to an organization or company.
8. Retirement: this means the withdrawal from one’s active working life, position or occupation.

Organization of the Study

This study is divided into five chapters. The first chapter consists of the introductory part of this research work, statement of the problem, the objective of the study, research questions, research hypothesis, significance of the study, scope and limitations of the study, definition of terms and organization of the study were all discussed.

The second chapter dealt with the reviews of related literature on the contributory pension fund and the Nigerian economy with its related pension reforms Act as well as the benefits and challenges of the scheme.

The third chapter dealt with research methodology and tools utilized in the study. It explained the research design, sample procedure/sample size determination, data collection techniques, and data analysis method.

Furthermore, chapter four deals with the presentation of data analysis and interpretation of data collected.

Finally, chapter five presents the summary, conclusion, and suggested recommendation based on the findings of the preceding chapter.