AN EVALUATION OF THE NIGERIAN PENSION REFORM
AN EVALUATION OF THE NIGERIAN PENSION REFORM
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Date
2006-10
Authors
YUSUF, ISAH MAIKUDI
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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.
Description
THESIS SUBMITTED TO THE
POSTGRADUATE SCHOOL,
AHMADU BELLO UNIVERSITY, ZARIA,
NIGERIA
IN PARTIAL FULFILLMENT FOR THE AWARD
OF MASTER OF SCIENCE DEGREE IN
ECONOMICS
DEPARTMENT OF ECONOMICS
AHMADU BELLO UNIVERSITY, ZARIA
NIGERIA
Keywords
EVALUATION,, NIGERIAN,, PENSION,, REFORM