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Financial sustainability of pension funds are often cited as essential determinants for ensuring the provision of safe and reliable pension for retirees and pensioners. Whether pension fund administrators will become part of a lasting solution to the pension financing problems in Nigeria or not depends on their ability to continue to grow, expand and sustain themselves over the course of time. Contemporary literatures on pension reforms identified financial sustainability as the key challenge of Pension Fund Administrators. This study, therefore, examines the determinants of financial sustainability of pension fund administrators in Nigeria. A positivism thought to epistemology guided by quantitative parametric pooled regression were used as paradigm and technique of analysis respectively . A data set of fifteen sampled pension fund administrators taking cognizance of Contribution, Size, Net income, Age, Board size And composition and GDP as independent variables were pooled and regressed against Sales scaled by total assets. The results indicate a positive and significant contribution of age, size, net income and contribution to financial sustainability of pension fund administrators. On the contrary, GDP, Board composition and board size, though, not significant displayed a negative contribution to financial sustainability of pension fund administrators in Nigeria. Conclusively, the result inferred that the level of sustainability today will affect the sustainability tomorrow regardless of where the pension fund administrator stands in its life cycle or developmental stage. Therefore, the study recommends amongst others a close monitoring and swift actions to remedying any weakness in Pension Fund Administrators.



itle Page – – – – – – – – – i Declaration – – – – – – – – – ii Certification – – – – – – – – – iii Dedication – – – – – – – – – – iv Acknowledgement – – – – – – – – v Abstract – – – – – – – – – vii Table of Contents – – – – – – – – viii List of Tables – – – – – – – – – xi List of Appendices – – – – – – – – xii Acronyms and Abbreviations – – – – – – xiii CHAPTER ONE: INTRODUCTION 1.1 Background to the Study – – – – – – 1 1.2 Statement of the Problem – – – – – – 7 1.3 Research Questions – – – – – – 9 1.4 Objectives of the Study – – – – – – 10 1.5 Statement of the Hypotheses – – – – – 10 1.6 Scope of the Study – – – – – – – 11 1.7 Significance of the Study – – – – – – 11 CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Introduction – – – – – – – 12 2.2 Concept, Aims and Reform of Pension System – – 12 2.3 Concept of Sustainability and Financial Sustainability – 15 2.4 Concept of Pension Funds – – – – – 17 2.5 Investment Strategy Considerations by PFAs – – 26 2.6 Pension Fund Development Stages and Sustainability – 39 2.7 Pension Fund Efficiency and Financial Sustainability – – 40 2.8 Profit and Financial Sustainability – – – 42 2.9 Pension Fund Financial Sustainability Approaches – 43 2.10 Theories of Pension Funds – – – – – 45 2.11 Empirical Studies on Determinants of Financial Sustainability 56
2.12 Theoretical Framework – – – – – – 65 2.13 Summary – – – – – – – – – 67 CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction – – – – – – – – 68 3.2 Research Design – – – – – – – 68 3.3 Population Design – – – – – – – 68 3.4 Sample Size and Sampling Techniques – – – 69 3.5 Methods of Data Collection – – – – – 70 3.6 Data Analysis Techniques – – – – – 71 3.7 Justification of the Methodology – – – – 72 3.8 Summary – – – – – – – – – 73 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction – – – – – – – 74 4.2 Descriptive Statistics and Normality Tests – – – 74 4.3 Hypotheses Test Results – – – – – – 77 4.4 Implications of the Findings – – – – – 84 4.5 Summary – – – – – – – – – 85 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 Summary – – – – – – – – 87 5.2 Conclusion – – – – – – – – 89 5.3 Recommendations – – – – – – – 89 5.4 Limitations of the Study – – – – – – 91 5.5 Areas for further Studies – – – – – – 91 5.6 Contributions to knowledge by the study – – – – 92 Bibliography – – – – – – – – 93 Appendices – – – – – – – – 127




INTRODUCTION 1.1 Background to the Study Before April 1974, gratuity and pension for public servants were not treated as rights but as privileges in Nigeria.. However, from 1974, with the amendment of section 6 (1) of the pension law, they became rights which an entitled public servant could claim from the government. This general Pension scheme for civil servants was financed from government general revenue on a ‗pay –as-you-go‘ basis and not from a special fund established for the purpose. Under the pensions Act of 1979, both gratuity and pension were salary rate related and were financed wholly by the government without any contribution by the workers. In contrast, government parastatals tended to operate separate funded schemes which required setting aside on an annual basis, a percentage of the total basic salaries of their staff in a special fund under the management of a board of trustees. The National Provident Fund (NPF) Act provided for private sector pension schemes. Originally,NPF, a contributory scheme, which was established in 1961, also covered public servants. It was wound up for public servants after it has lost N17bn in corruption. Unlike the public sector, most in-house pension schemes in the Nigerian private sector were funded by both the employers and employees (Ije, 2001). The employees contributed a percentage of their monthly salaries, subject to a maximum and the employers also contributed certain percentage of employees‘ salary to the scheme. Considering the benefits resulting from the statutory scheme, individual companies tended to operate their own company and administered contributing gratuity schemes to supplement the statutory retirement gratuity scheme.
According to Ije (2001) in the last two and a half decades, most pension schemes in the public sector had been poorly funded, owing to inadequate budget allocation. The
administration of the scheme was generally weak, inefficient and non-transparent. There was no authenticated list or data-based on pensioners, while about fourteen different documents were required to file pension claims. Also, restrictive and sharp practices in the investment and management of pension fund exacerbated the problem of pension liabilities to the extent that pensioners were dying on verification queues and most of the over three hundred parastatals schemes were bankrupt before the new scheme (contributory pension scheme) came on board. The private sector (The Nigeria Social Insurance Trust Funds) schemes had been characterized by very low compliance ratio due to lack of effective regulation and supervision of the system. Many private sector employees were not covered by any form of pension scheme. Based on the enumerated pension problems, the federal government constituted committee to look into the menace of pension schemes and proffer solutions. Thus, the Pension Reform Act 2004 was signed into law in 2004 and effective from January, 2005. The Act brought a Defined Contribution System that is fully funded, privately managed and based on individual accounts for both the public and private sector employees. The Act also establishes the National Pension Commission (NPC) as the sole regulator and supervisor on all pension matters in the country. The contributory pension scheme is a marked departure from the pay-as-you-go Defined Benefit (DB) schemes that existed in the public sector and it improves the pension situation in both the private and public sectors by making full funding of all schemes compulsory. The new scheme is a defined contribution scheme in which monthly funded contributions are made by employers and employees. These contributions are held by a Pension Fund Custodian (PFC) and managed and administered on the contributor‘s behalf by a Pension Fund Administrator (PFA) of the employee‘s choice.
National Pension Commission, as one of its primary roles and responsibilities under ―the Act‖, has developed investment guidelines after due consultation with the key operators of the schemes (PFAs and PFCs) to control investment activities of the Pension Fund Administrators in order to ensure that the pension funds are invested safely and securely in accordance with international best practices in investment management and also to ensure the growth and protection of retirement benefits under the Act. The underlying principles behind the guidelines are to ensure a broad asset allocation, diversification within asset classes, risk management, liquidity, opportunities and competitive returns on investment. As at December 2012, the pension commission has issued licenses to 35 operators comprising 24 PFAs, 7 Closed Pension Administrators, and 4 PFCs. It has also given approval to 18 organizations to continue with their existing schemes. To ensure that only fit and proper persons managed and keep pension assets, the commission sought and obtained the support of various regulatory authorities, law enforcement and security agencies before issuing the licenses. The commission supervises the investment of pension assets on a daily basis. The PFAs render electronically daily returns to the commission on how the pension assets are invested. That has availed the commission the opportunity of monitoring pension fund investments to ensure compliance with stipulated rules and regulations and take prompt corrective actions where the need arises. The commission also raised the capital requirement of PFA from N150m to N1b and demanded compliance by June, 2012 (Ahmad, 2011).
Over the past few years, many countries including Nigeria have recognized the urgency of making pension systems financially stable in view of the limited window of opportunity that exists before the large population takes effect. In this context, an approach based on raising employment rates, reducing public debt levels and reforming pension system had been widely incorporated in countries‘ strategies. A few countries have changed their public pension systems to notional defined contribution system, with the aim of stabilizing
contribution rates across generations and incorporating better incentives to work, thus contributing also to meet the objective of higher employment rates. Sustainability has become a major issue for corporations to consider today as they try to reconcile financial goals with environmental and societal goals. The movement towards sustainability has been developing over a number of years ( Hart, 1995). A business can be described as sustainable if it can sustain itself indefinitely and create profit for its shareholders, while protecting the environment and improving the lives of those with whom it interacts (Savitz & Weber, 2006). Nidumolu, Prahalad & Rangas-wami (2009) suggest that sustainability, when considered strategically, can be a source of competitive advantage and a key drivers of innovations for firms. According to Thapa, Chalmers, Taylor & Convoy ( 1992) , Financial sustainability refers to the ability of pension fund to cover all its costs from its own generated income from operation without depending on external supports. Financial sustainability of funded provision , therefore depends on the sound governance of the funds and on the performance of financial markets. The risks for funded pension provision can be greatly reduced through effective supervision and prudent asset management. The financial sustainability of public pension systems is, also, to a large extent linked to the sustainability of public finances as a whole. This is due to the fact that pensions are a major component in the total expenditure of all federal governments and the financing of pensions often involves interventions from the federal government budgets.
International Federation of Pension Fund Administrators (2003), observe that in a few countries, public pension systems are organized almost completely within the federal government sector, while, in some other countries, the administration of public pension systems is organized jointly for the whole social security sector. Even in the case where pensions are financed by ear-marked contributions and managed separate funds, these
contributions are part of the total tax burden, and their increase would be equivalent to a tax increase, unless they give rise to better benefit entitlements. Challenges faced by countries in their public pension systems varies. This is due to many factors, such as different underlying designs of the pension system, the strength and nature of reforms taken to date, the overall situation of public finance and the size and timing of demographic changes ahead. Nonetheless, all the countries recognize the challenges in their national strategy reports and are preparing strategies for the future. Borella & Fornero (2007) remarks that in all countries, the earnings-related part of the public pension system is generally financed by contributions levied on earned income. In Ireland, the Netherlands and the United Kingdom, the flat rate basic pensions are financed by contributions and only Denmark finances first pillar pensions through taxes. Under current policies, additional needs for public financing will arise in almost all countries which will require increased contributions, higher retirement age, lower benefit, larger transfers from the general budget or other measures to support financial sustainability. The strongest commitment to preventing increases in taxes and contributions can be found in Sweden where the contribution rate to the new system is fixed and necessary adjustments can only be made on the benefit side. Germany is committed to keeping contribution rates below 22% and government is obliged to propose appropriate measures to parliament if the fifteen- year projections indicate that this objective will not be reached. The Netherlands intends not to raise the contribution rate above 18.25%. The deficit in the pension system will be covered by transfers from the reserve fund or the general budget. The adjustment of the Luxembourg pension system will be made through the contribution rate which is very sensitive to a possible decline in the number of cross-border workers: if the system can maintain a relatively high growth trend in terms of the number of contributors, the impact of the ageing national population can be offset to a large extent.
In some countries, the strategy regarding the contribution rate is not very clear. The National Strategy Reports do not provide precise information on the expected evolution of the contribution rate and appear to suggest that the contribution rate is one parameter which can be adapted according to financial need. In many countries, an increase in contribution rates on wages of between five and ten percentage points would be required, corresponding to an increase in the total tax burden by several percentage points of GDP. According to projections by the International Federation of Pension Fund Administration (2003), public pension spending will rise by between three and five percentage point of GDP in most countries over the next few decades under the baseline scenario which assumed that the policies in place in 2000 would remain unchanged. Whitehouse (2000) notes that sustainability comprises not only financial sustainability, but also adequate organization and management, planning, and policy making. However, in the case o f pensions, concerns about financial sustainability are particularly acute. Factors intrinsic to many pension funds which may affect their financial sustainability include: small risk pools which mean that a relatively small number of expensive cases could damage pension finances; and, weak financial management systems which may leave pension funds particularly prone to fraud and financial abuse. There has been recent interest in the potential of social reinsurance for helping to stabilize the finances of pensions. Whelan (2004) discusses potential sources of financial instability of pension schemes, arguing that reinsurance would only be effective in protecting schemes from random sources of risk, whereas there were multiple random factors (such as scheme management) which substantially influence financial stability. Furthermore, in order to promote scheme sustainability, it is important to have a clearer empirical understanding of the sources of financial instability.
Whether pension fund administrators will become part of a lasting solution to the pension financing problems in Nigeria or not depends on their ability to continue to develop, expand and sustain themselves over the course of time. They will have to prove that they are not simply pension development ―meteors‖ that are destined to shine brightly for a while but are ultimately not sustainable. This therefore, prompted the need to evaluate the situation empirically. 1.2 Statement of the Problem Financial sustainability of pension funds are often cited as essential determinants for ensuring the provision of safe and reliable pension for retirees and pensioners. Yet, the concept of financial sustainability and how it translates into estimates for revenue requirements are frequently misunderstood. The reason is that financial sustainability can take on different levels, particularly if one makes a distinction between a short and long-term horizon. Thus, financial sustainability of pension systems is a necessary precondition for an adequate provision of pensions in the future, while ensuring adequacy is a precondition for obtaining political support for the necessary reforms of pension system. Nigeria is moving towards financially sustainable pension systems that will be able to provide adequate pensions in future, in particular at the time when population ageing accelerates.
Whether future pensions will be adequate depends on the ability to secure a sustainable financing of pension systems in the face of rapidly ageing societies. The future of pension fund administrators in Nigeria to the contributors looks uncertain as they fear the safety of their contributions. While some contributors of pension fund believe that the level of contributions to pension fund is not adequate enough to take care of the retirees and the profit being declared by the PFAs does not guarantee any reliable assurance, others assert that lack of sound administration of pension funds has led to financial insustainability. Hence, an important question here is what should be done to make these pension fund
administrators sustainable and to ensure sustainable provision of pension fund services and sustainable poverty reduction through outreach after retirement. Several studies such as Christen (2002) , Woller (2000), Christen (2000) and Woller & Schreiner (2002) have attempted to determine the factors affecting financial sustainability of pension fund administrators using large and well developed pension funds in various countries. However, most of the previous studies like Christen (2002), CGAP (2005) amongst others were biased as they examined only successful pension funds. The number of the observations were also too small to draw statistically reliable conclusions. Some other studies combined both pension fund custodians with pension fund administrators. In this regard, differences in pensions fund backgrounds and operations are likely to make such their studies to be biased as more than 60% of the studied pension funds were representing pension custodians which used a model different from other pension fund administrators studied. Notwithstanding the above, no study, to the best of our knowledge, has been conducted in Nigeria on sustainability of pension fund administrators. The literature on social reinsurance has not been based on empirical evidence of the determinants of financial sustainability of pension schemes. In other words, despite all the arguments about the sustainability of pension schemes, there is very little empirical evidence using Nigerian data to rationalize the discourse. The studies so far conducted in Nigeria on pension fund such as Ije, (2001); Arun (2005), Gbitse (2006), Maude (2006) and Sulaiman (2006) seemed to ignore the aspect of financial sustainability of pension fund administrator. This study, therefore, is a modest attempt to bridge this knowledge gap.
1.3 Research Questions The following research questions are raised:
i. What is level of dependence of financial sustainability on age of pension fund administrator in Nigeria?
ii. To what extent is financial sustainability of pension fund administrator dependant on pension fund contributions in Nigeria?
iii. To what extent does size of pension fund affect financial sustainability of pension fund administrators in Nigeria?
iv. How does net income of pension fund Administration (PFAs) affect their financial sustainability in Nigeria?
v. To what extent is financial sustainability dependent on GDP growth rate in Nigeria? vi. What is the effect of board attributes on financial sustainability of PFAs in Nigeria? 1.4 Objectives of the Study The overall objective of this study is to examine the determinants of financial sustainability of pension fund administrators in Nigeria. However, the specific objectives are to:
i. determine the effect of age of pension funds administrator on its financial sustainability in Nigeria.
ii. find out whether pension fund contribution has significant on financial sustainability of PFAs in Nigeria.
iii. determine the impact of size of pension fund administrator on its financial sustainability in Nigeria.
iv. examine the effect of net income of pension fund administrator on its financial sustainability in Nigeria.
v. assess the effect of GDP growth rate on financial sustainability of PFAs in Nigeria.
vi. determine the effect of board attributes on the financial sustainability of PFAs in Nigeria.
1.5 Statement of the Hypotheses From the objectives of this study, the following hypotheses have been formulated: H01: Pension fund administrator‘s age has no significant effect on its financial sustainability in Nigeria. H02: Pension fund contributions has no significant impact on its financial sustainability in Nigeria. H03: Pension fund administrator‘s size has no significant impact on its financial sustainability in Nigeria. H04: Net income of pension fund administrators has no significant impact on its financial sustainability in Nigeria H05: GDP growth rate has no significant impact on PFAs‘ financial sustainability in Nigeria. H06: Board attributes has no significant impact on financial sustainability of PFAs in Nigeria. 1.6 Scope of the Study This research work centers around the determinants of financial sustainability of Pension Fund Administrators in Nigeria. The research covers the activities of Pension Fund Administrators for seven years, 2006 to 2012 to enable critical assessment to be carried out. This time is chosen because the payments and registration of the PFAs commenced from 1st January, 2005. Further, the study is restricted to financial sustainability of PFAs in view of the fact that contributors are entertaining fears on the sustainability of the PFAs in Nigeria.
1.7 Significance of the Study There have been numerous studies on sustainability of pension fund in other countries where pension funds are relatively large and well developed with clear evidence on what affect their financial sustainability, but this is not available in Nigeria. Understanding the factors that affect the financial sustainability of pension funds administrators in Nigeria is a prerequisite to providing a guide on achieving financial sustainability. The findings of this study help to unveil the nature of the relationship and clearly depict what affects the financial sustainability and how.