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This study x-rayed the effects of pension contributions on national income and savings in Nigeria. This research work, with two objectives, therefore set out to determine the effects of pension contributions on national income and savings in Nigeria. The first objective was to ascertain the impact of pension contributions on national savings in Nigeria. The second was to determine the extent to which pension contributions have impacted on national income in Nigeria. A study of this nature became of essence due to a general deduction and findings of previous studies that the higher the level of pension contributions in an economy, the higher the national income as well as savings. However, others found that pension contributions in the Philippines have negative effects on household savings. To this effect, research questions and hypotheses were all formulated. The variables used for this study included contributory pensions, national savings rate, interest rate and consumption. The core variable for the study (contributory pension) is in time series form and starts from 2006 and the ordinary least squares estimation technique was used for the study. On national savings, the findings show that the Nigerian pension contributions have positive effects on national savings, and the relationship is statistically significant. On income, the findings show that pension contributions have positive and slightly significant effects on national income. In conclusion, the study states that Pension contributions have positive and significant effect on savings rate in Nigeria for the period reviewed, while the researcher made recommendations, two of which are; to enhance pension saving mobilization, efforts should be intensified to encourage employers/ employees in informal, governmental and non-governmental sectors to participate actively in the contributory pension scheme. There should be more emphasis on the management of pension assets in the capital market as well as government bond, real estate, investment trust to boost Gross Domestic Product (GDP) of the country (Nigeria)



1.1     Background to the Study

Over the years, pension reforms have been enacted by different administrations in Nigeria, in bids to save the subservient plight of pensioners in the country. Umar and Emmanuel (2012) posit that the silent idea behind the introduction of  new pension system is to serve as a tool towards realisation of the goal of savings mobilisation, which can lead to Capital Market development, thereby fostering economic growth in Nigeria. The first attempt at pension legislation in Nigeria was enacting the Pension Ordinance of 1951 which allowed the Governor-General to grant pensions and gratuities applicable to public sector employees, in accordance with the regulations, which were reviewed from time to time with the approval of the Secretary of State for Colonial Affairs in the UK government. In 1961, the National Provident Fund (NPF) now the Nigerian Social Insurance Trust Fund (NSITF) was established by an Act of Parliament. It was established in line with the International Labour Organization’s (ILO) Social Security (Minimum Standards) Convention 102 of 1952 and sought to cater to employees in the private sector of the Nigerian economy (Adeyinka 2007).

Subsequently there were; the existing Civil Service Pension Scheme covered by the Basic Pension Decree 102 of 1979, the Local Government Pension Scheme which was established in 1977 and the Armed Forces Pension Scheme created through Decree 103 of 1979 by the Murtala-Obasanjo administrations. There was also the Pensions Rights of Judges Decree No.5 of 1985 as amended by Decrees Nos. 51 of 1988 and No. 29 and 62 of 1991. The Police and other Agencies Pension Scheme Decree No. 75 of 1993 which took retroactive effect from 1990 represented another landmark development in the history of the Nigerian pension system and sought to cover the largest public sector organization in Nigeria.

In 2004, the Federal Government came up with a new Pension Reform Act, restructuring the system so as to improve the living conditions of civil servants in Nigeria and probably inculcate good saving culture in them and with this reform came an urgent need to encourage Nigerians to change their current attitude towards saving (Samuel, 2012). Also with the latest Pension Reform Act of 2014, the federal government also created a more savings encouraging amendments from the 2004 reform, all for the purpose of creating more national income and savings for the workers and the retiree.

Whenever we discuss pension scheme, we always note that there are Defined Benefit (DB) Pension Scheme and a Defined Contributory (DC) Scheme. Umar and Emmanuel (2012) records that one major distinction between a Defined Benefit (DB) Pension Scheme and a Defined Contributory (DC) Scheme is that in the former, the scheme sponsor, usually the government or employer set aside funds to provide retirement benefits while in the later, retirement benefits are financed by individual and collective savings. According to Barrow cited in Umar and Emmanuel (2012), individual and collective savings are key to individual and family development as well as national development. Contributory Pension System (CPS) ensures that a saving culture is imbibed by the workers, which leads to the accumulation of capital that is needed for societal development. In addition, the incentives provided by CPS like tax incentives for both employers and employees as well as for voluntary contributions further encourage savings among the employees

According to the federal government of Nigeria, the value of pension assets in Nigeria is about 4.21 trillion Naira at the end of March 2014 (Ayodele, 2014). On one hand, what we have achieved in Nigeria is worthy of celebration given that we were in a deficit position of over 2 trillion Naira before the 2004 pension reform. On the other hand, the revelation that there are only about 2.4 million contributors to the pension scheme leaves a lot to be desired. Based on the information by the Bureau of Statistics, there are about 60 million Nigerians of working age. Effectively, this means less than 5% of Nigerians are covered leaving over 95% exposed to social insecurity in their old age.

Saving money is usually planned and strategic. The saving culture of a man and his impetus to save, to a large extent, depend on his desire to get richer and probably live a better life (Kelly, 2011). It is often one of those things many people resolve to do by the end of each year as they make their New Year resolutions. Some people desire to save just for them to survive while others save for investments purposes. There are also those who have no choice but to save because their income greatly exceeds their expenditure. So often, there is a significant amount of money that passes through our hands in say, a year and we spend most of it or pass it on to others. We can hardly save what we do not have and a saving culture is partly supported by increased employment rates and incomes as well as reduced costs of living. If none of these happens, we may have to exercise self-discipline in order to reduce our expenditure.

Gale and Orszag (2004), Weale (2009), Rose (2013), are of the opinion that a country’s national income in one way or the other affect the national, state and the individual levels of savings. They believe that, for the fact that pension contributions increase national income, it leaves us with no alternative than to save as we will have enough money at our disposal. However, Lipsey and Harbury (1992), Gillespie (2007), and others think otherwise, stating that those who are determined to save will save despite the level of the country’s income. This set of authors has views that are in agreement with those who say that the amount of money a man earns does not determine the amount he saves. One of the rules that would help make some savings is setting aside any amount of money that we receive which we did not expect to. It could be from gifts or appreciation tokens. We can also save part of any allowances that we get in addition to the basic pay. Some basic expenses like rent and food have to be catered for periodically but cutting down expenses on other items may help us save too. Saving is a practice that has to be cultivated over time and the culture should be instilled even in children. Where to save is a crucial detail, we are better off saving in a place where we have minimal access to our money. We could opt to have a normal savings account and a fixed deposit account to ensure that we have access to part of our money when we need it yet the rest continues to grow in value. We could also invest money in the securities market and the options can be made known to us by commercial or investment banks (Paul, 2005).

Good saving culture is crucial if we must break out of the cycle of poverty. Many people are not poor today because they do not earn a significant amount of money. They are poor because even as they make such money, they do not have good saving culture and therefore lavish their monies carelessly. Hailesellasie, e tal (2013), have argued that the income of a civil servant and that of his counterpart in the private sector is not buoyant enough to carter for an average home therefore, poses as disincentive to save for the future. The income can barely take care of a family’s day to day needs, stressing that almost every Nigerian worker lives from hand to mouth with mounting cost of basic necessities. Many civil servants have more than their fair share of dependants that make it impossible for them to save (Kelly, 2011).

However, experts have advised Nigerians to save, no matter how low their income may be. The ability to save, they say, is based on principles. There is a popular saying that, the amount saved is the amount invested. This statement gives us the picture of what good saving culture can do to drag individuals out of poverty. Deciding to save is a major step towards the achievement of our individual economic goals. Knowing what proportion of income or allowances to save is equally important as knowing where to save them. One can make great saving and investment decisions by discussing his goals with your banker or financial advisor.

Nevertheless, the right saving instincts must be put in place by institutions and regulatory agents who influence the decisions of households, firms and governments. In this regard, there is need to put in place a coherent economic policy which is capable of providing the much needed enabling environment. This includes job creation, poverty alleviation and infrastructural development. One question begging for an answer is: What is the impact of saving and investment on growth? It has been argued that saving affects investment, which in turn influences growth in output, giving an increase to national income.

The transformation of initial growth into sustained output expansion requires the accumulation of capital and its corresponding financing. An output expansion in turn sets in motion a self-reinforcing process by which the anticipated growth encourages investment, which supports growth, as well as financial development. It is certain that without a significant increase in the level of investment (public and private), no meaningful growth in output would be achieved. Indeed if private investment remains at the current low level, it will slow down potential growth and reduce long run level of per capita consumption and income, thereby leading to low savings and investment.

An individual’s saving culture is directly or indirectly affected by many factors ranging from; instability in the banking sector, ostentatious lifestyle and harsh economic atmosphere among others. All these factors, to a great extent affect an individual’s saving culture in one way or the other.

1.2     Statement of the Problem

Pension contributions have been described as one of the biggest steps towards national income and savings. Dom (2010) states that the higher the level of pension contributions in an economy, the higher the national income as well as savings. However, Greg (2014) argues that a country’s national income may be growing as a result of pension contributions, yet the level of savings remains poor and sometimes even decreases. To affirm this, Rouselle, (2006) using the data in the Filipino Report Card Survey, found that pension contributions in the Philippines have negative effects on household savings.

The importance of savings to the maintenance of strong and sustainable growth in the world economy cannot be overemphasized. The savings rate and investment in human capital are related and indeed closely linked to economic growth. The relationship among saving, investment and growth has historically been very close; hence, the unsatisfactory growth performance of several developing countries has been attributed to poor saving and investment.

Available data shows that the level of savings in Nigeria is very poor relative to other developing economies (Adeyinka, 2007). For instance, between 1986 and 1989, domestic savings averaged 15.7 percent of GDP. However, with the distress in the financial sector of the 1990s, the rate of aggregate savings declined significantly. The distress syndrome resulted in a significant fall in domestic savings in the period 1990 to 1994, with the saving to GDP ratio dropping to 6 percent. In 2004, which was Nigeria’s last reformed pension scheme in practice (as the 2014 reform is not yet effective), the savings figure stood at 6.4 percent which is regrettably less than half of what we had in 1989.

In reaction to this poor savings culture of Nigerians, the 2004 Pension Reform Act has aimed at improving the welfare of civil servants and pensioners in Nigeria and probably inculcate a commendable savings culture in them (Dom, 2010). Two of the objectives of the 2004 Pension Reform Act as amended in the 2014 Pension Reform Act which aim at achieving this are to: ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as at when due, and secondly, to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.

The 2014 Act also reviewed upwards the minimum rate of pension contribution from minimum of 15% (7.5% employer & 7.5% employee) to a minimum of 18% (10% by employer and 8% by employee). This will enhance accumulation in Retirement Savings account of employees thereby enhance their monthly pension benefits at retirement. Again the rate of contribution could be different if the employer elects to bear the entire contribution but must not be less than 20%. The act also made provision for the creation of additional permissible investment instruments for national development such as infrastructure and housing without compromising the safety of pension assets. In all circumstance, contributions will have to be made before applying any tax deduction.

Similarly, subject to section 3(2) of the 2004 Pension Reform Act, it is stated that no person shall be entitled to make any withdrawal from his retirement savings account, opened under Section II of this Act, before attaining the age of 50 years. This section as amended in the new 2014 pension Reform Act reduced the period that Retirement Savings Account holder wait to access benefit in the event of job loss from six months to four months. 

Nevertheless, all these objectives and rates of contribution as stated by the reform, coupled with the restriction it placed on employers deduction and /or remittance of pension contributions of their employees within stipulated time of seven days have all been instituted so as to increase the country’s income and improve the level of savings. The question therefore is, how does this pension contribution affect national income and savings in Nigeria?

1.3     Objectives of the Study

The main objectives of this study are;

1.                 To determine the effects of pension contributions on national income and savings in Nigeria.

2.                 To ascertain the impact of pensions contributions on national savings in Nigeria.

3.                 To determine the extent to which pensions contributions have impacted on national income in Nigeria.

1.4     Research Questions

1.       What are effects of pension contributions on national income and savings in Nigeria?

2.What is the impact of pension contributions on national savings in Nigeria?

3.       To what extent has pension contributions impacted on national income in Nigeria?

1.5     Research Hypotheses

The following null hypothesis will guide this research work.

H1      Pension contributions have no significant impact on savings in Nigeria.

H2      Pension contributions have not significantly impacted on Nigeria’s national income.

1.6     Scope of the Study

This research work is only concerned with the task of identifying the effects of pension contributions on the national income and savings in Nigeria. Therefore, the study is restricted to the subject matter of pension’s reforms in Nigeria, national income and national savings of Nigeria. The study will not focus on the entire pensions reforms rather it will be restricted to the 2004 pensions reforms. For the sake of the robustness of analysis, the data scope will cover 2006 to 2014.

1.7     Significance of the Study

A study into pension’s reforms particularly as it relates to savings and income will always be very beneficial. The study will be of great importance to a wide range of end users which includes civil servants, policy makers, and future researchers.

The study will be of great importance to aggregate civil servants in Nigeria as they will come to know how pension reforms affect their saving culture and retirement prospects. Most retirees, through this study, will be reasonably equipped with the knowledge of what a life after active work looks like and how best to structure their policies and live styles in order to avoid hunger later in live. This study will add a lot to the already existing literature and general body of knowledge.

In the same vein, this study will benefit policy makers by providing them with the knowledge of the post retirement challenges faced by both the senior and junior retirees as well as the best strategies to be applied in policy making so as to curb these challenges earlier. This study will, in turn, help government and its officials to adequate and sustainable budgets for retirees. It will also help policy makers to come up with some professional counselling courses to workers to prepare them psychologically and emotionally for the kind of things that await them in retirement. Also the study will expose policy makers to the effects of pensions on savings and national income. This will go a long way redirecting policy towards making the most of the pension’s contribution. 

This research report will also benefit researchers, who will use it for reference purposes in future studies. There is no doubt that the report of a research work, to a large extent serves as a benchmark for young researchers to look into the past and see what other authors have said about what is being studied.

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