The Impact of Contributory Pension Scheme on the Nigerian Economy

1.0 Introduction

1.1 Background of Study

The pension system in Nigeria has evolved over the years, transitioning from an unfunded and inefficient Defined Benefit Scheme (DBS) to a more sustainable Contributory Pension Scheme (CPS). The DBS, which was prevalent before the 2004 pension reform, was characterized by inadequate funding, delays in pension payments, and a heavy financial burden on the government (Balogun, 2006). Many retirees faced difficulties in accessing their benefits, leading to economic hardship and an increase in old-age poverty. The introduction of the CPS under the Pension Reform Act (PRA) of 2004 sought to address these challenges by mandating both employers and employees to contribute a percentage of monthly earnings into individual Retirement Savings Accounts (RSAs), which are managed by licensed Pension Fund Administrators (PFAs) and regulated by the National Pension Commission (Ahmad & Oyedokun, 2020).

The adoption of the CPS has had significant macroeconomic implications, particularly in deepening financial markets, increasing national savings, and contributing to infrastructural development. According to Orifowomo (2006), the scheme has enhanced capital formation by providing long-term funds for investment in critical sectors such as real estate, power, and transportation. Additionally, Akinwale (2019) asserts that the pension funds have contributed to stabilizing the Nigerian economy by providing a steady source of investable funds, thereby reducing reliance on foreign loans.

The Contributory Pension Scheme (CPS) was introduced in Nigeria through the Pension Reform Act (PRA) of 2004, replacing the unfunded and unsustainable Defined Benefit Scheme (DBS). The primary objective of the CPS is to ensure that retirees receive regular pensions, thereby reducing the financial burden on the government and enhancing national economic stability (Balogun, 2006). Under this scheme, both employers and employees contribute a fixed percentage of the employee's monthly earnings into a Retirement Savings Account (RSA), which is managed by Pension Fund Administrators (PFAs) and regulated by the National Pension Commission (PenCom) (Ahmad & Oyedokun, 2020). The impact of the CPS on the Nigerian economy has been significant, particularly in terms of financial sector deepening, capital market development, and improved savings culture. According to Orifowomo (2006), the scheme has contributed to economic growth by channeling long-term funds into infrastructural and developmental projects. Additionally, it has provided a reliable income for retirees, reducing poverty levels among the aged population and increasing their purchasing power, which in turn stimulates economic activities (Akinwale, 2019). Despite the successes recorded, challenges such as inadequate enforcement of pension remittances, regulatory constraints, and inflationary pressures affecting pension benefits persist (Eme et al., 2021).

Therefore, this study aims to analyze the impact of the Contributory Pension Scheme on the Nigerian economy, highlighting its benefits, challenges, and potential policy recommendations for improvement.

1.2 Statement of Problems

Investigation revealed that the Contributory Pension Scheme (CPS) is designed to provide financial security for retirees while contributing to the overall economic stability of Nigeria. However, despite its potential benefits, several challenges continue to hinder its effectiveness. One of the major issues is the non-compliance of some employers, particularly in the private sector, who either fail to remit pension contributions regularly or deduct funds without remitting them to employees' Retirement Savings Accounts (RSAs) (Ahmad & Oyedokun, 2020).

Additionally, many retirees face bureaucratic bottlenecks and prolonged verification processes before they can access their funds, leading to financial hardship and emotional distress (Eme et al., 2021). The delay in payments is often compounded by administrative inefficiencies within Pension Fund Administrators (PFAs) and the regulatory body, the National Pension Commission (PenCom).

Furthermore, the purchasing power of pension benefits is also being eroded by inflation. While the CPS is designed to accumulate wealth over time, the rising cost of living and fluctuating economic conditions reduce the real value of retirees' savings, making it difficult for them to sustain a decent standard of living (Odia & Okoye, 2012). It is against the backdrop that this research seeks to examine the impact of the Contributory Pension Scheme on the Nigerian economy, evaluating its contributions, challenges, and future prospects.

1.3 Aim and Objectives of Study

The study aims to examine the impact of the Contributory Pension Scheme (CPS) on the Nigerian economy. To achieve this aim, the study seeks to:

1. Examine the level of compliance among employers in remitting pension contributions and its effect on the scheme's sustainability.
2. Analyze the impact of inflation and other economic factors on the value of pension funds and retirees' purchasing power.
3. Evaluate the contributions of pension funds to national economic growth and infrastructural development.
4. Assess the role of the Contributory Pension Scheme in improving the financial well-being of retirees in Nigeria.
5. Identify the challenges affecting the implementation and efficiency of the scheme.
6. Provide policy recommendations for enhancing the effectiveness and long-term viability of the Contributory Pension Scheme in Nigeria.

1.4 Research Questions

Based on the stated objectives, this study seeks to answer the following research questions:

• How does the Contributory Pension Scheme improve the financial well-being of retirees in Nigeria?
• What are the contributions of pension funds to national economic growth and infrastructural development?
• What challenges affect the implementation and efficiency of the Contributory Pension Scheme in Nigeria?
• How does inflation and other economic factors impact the value of pension funds and retirees' purchasing power?
• To what extent do employers comply with the remittance of pension contributions, and how does this affect the scheme's sustainability?
• What policy recommendations can enhance the effectiveness and long-term viability of the Contributory Pension Scheme in Nigeria?

1.5 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

• H₀1: The Contributory Pension Scheme improves the financial well-being of retirees in Nigeria.
• H₀2: Implementing effective policy reforms can enhance the long-term viability and effectiveness of the Contributory Pension Scheme in Nigeria
• H₀3: Pension funds contribute significantly to national economic growth and infrastructural development.

1.6 Significance of Study

The findings from this research will serve as a useful resource for policymakers by identifying challenges affecting the implementation of the scheme and offering recommendations for improving its efficiency. It will help the government and regulatory bodies such as the National Pension Commission (PenCom) in formulating policies that will enhance pension fund management and ensure better compliance among employers.

For employees and retirees, this study will provide a clearer understanding of how the CPS works and the factors that influence their retirement benefits. It will also raise awareness about the importance of timely contributions and proper financial planning to ensure a secure post-retirement life.

Furthermore, the study will benefit financial institutions and Pension Fund Administrators (PFAs) by shedding light on investment opportunities that will maximize returns on pension funds while ensuring sustainability. It will also contribute to academic knowledge by providing empirical evidence on the impact of the CPS on the Nigerian economy, serving as a reference for future research in pension management and economic development.

1.7 Scope of Study

The scope of this study will focus on the impact of the Contributory Pension Scheme (CPS) within Nigeria, specifically examining its implementation and outcomes in Lagos State. Lagos is a major economic hub and one of the states where the CPS has been actively implemented across both the public and private sectors.

The study will assess the performance of the CPS within Lagos' diverse industries, including both formal and informal sectors, with particular attention to how it influences economic growth, financial security for retirees, and the efficiency of pension fund management.

1.8 Limitations of the Study

This study was limited by several factors that impacted the depth and comprehensiveness of the research.

1. Insufficient Data: The study relied on secondary data and responses from various stakeholders, but the unavailability of updated and complete data on pension fund contributions and their utilization, especially from some organizations, restricted the analysis.
2. Delays in Receiving Response from Respondents: Many respondents took longer than expected to provide the required information, which resulted in time constraints that impacted the study's overall scope.
3. Financial and Time Constraints: Due to limited funding, the research was confined to Lagos State, which might not fully represent the nationwide implementation and effects of the Contributory Pension Scheme. The time allocated for the research was also restrictive, preventing the exploration of long-term impacts or more extensive surveys of various sectors and regions.

1.9 Definition of Terms

Contributory Pension Scheme (CPS):

The Contributory Pension Scheme is a mandatory retirement savings scheme that requires both employers and employees to contribute a percentage of the employee's monthly salary into a pension fund. In Nigeria, it was established under the Pension Reform Act of 2004, aiming to provide a sustainable pension plan for employees in both public and private sectors. The scheme is designed to ensure that individuals save towards their retirement, thereby providing them with financial security once they retire (National Pension Commission, 2020).

Pension Fund:

A pension fund refers to a pool of financial resources gathered from the mandatory contributions of employees and employers. These funds are managed by Pension Fund Administrators (PFAs) and are primarily invested in various financial instruments, such as stocks, bonds, and real estate, to generate returns for the benefit of the contributors. The ultimate goal of a pension fund is to provide retirees with adequate financial support in their old age (Adeyemi, 2017).

Pension Fund Administrators (PFAs):

Pension Fund Administrators are licensed institutions responsible for managing the pension funds in Nigeria. They oversee the collection, investment, and disbursement of pension contributions made under the Contributory Pension Scheme. PFAs are required to ensure the efficient growth and protection of pension funds for the beneficiaries (PenCom, 2020).