ABSTRACT
This study seeks
to evaluate whether or not the Contributory Pension Scheme has an impact on
employee retirement benefits of quoted firms in Nigeria and; to determine the
relationship that exists between the Impact of the Contributory Pension Scheme
on employee retirement benefits and standard of living in Nigeria. The study
also assessed the relationship between pension costs and independent variables:
total assets and profitability of quoted firms in Nigeria. In line with the objectives,
three hypotheses were formulated. The population of the study is the one
hundred and eighty-two (182) firms quoted on the first- tier market of the
Nigerian Stock Exchange and ten (10) quoted firms selected as sample size based
on judgmental sampling. The study utilized data from secondary source. Data
were obtained from the annual accounts and reports of the (10) quoted firms
that made up the sample of the study and the World Bank data profile on gross
national income per capita in Nigeria.
The time frame for the study is ten years, covering the period of 1998 to 2007.
The techniques of analysis used in the study were the Student’s T-test,
qualitative grading, the Pearson Correlation Coefficient and Multiple
Regression Analysis. We concluded that even though the Contributory Pension
Scheme has positive impact on employee retirement benefits of quoted firms in
Nigeria, variation in application still exists among them. The study also
established that the ability of quoted firms to fund their pension assets has
direct relationship with their assets sizes and respective profitability. The
study recommended an effective monitoring/supervision and enforcement of the
provisions of the Pension Reform Act, 2004, in addition to effective
implementation of the penalties provided by the Act on non-compliers regardless
of their status or origin. The study calls on the appropriate authorities such
as the government, professional accountancy bodies on academics to commission
research and activities geared towards developing not only accounting policies
that would ensure swift compliance with Statement of Accounting Standards (SAS
8), but strategies that would ensure optimum investments that enhance net worth
and profitability of firms.
TABLE OF CONTENT
Title Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract vi
Table of Content vii
List of Tables x
CHAPTER ONE: INTRODUCTION
1.0 Background of the Study 1
1.1 Statement of Problem 5
1.2 Objectives of the Study 7
1.3 Research Questions 7
1.4 Statement Research Hypotheses 7
1.5 Scope of the Study 8
1.6 Significance of the Study 8
1.7 Definition of Terms 9
References
CHAPTER TWO: REVIEW OF RELATED LITERATURE
- Pension Scheme in Nigeria: An Overview 14
- Prior Studies on Compliance With Pension Standards 16
2.1.1 Concept of
Pension Plans 18
2.1.2 Objectives of Pension Plans 21
2.1.3 Determination of Retirement Cost 22
2.1.4 Pension Costs Recognition and Future Pension Liabilities 23
2.1.5 Concept of
Assets 24
2.1.6 The
Concepts of Profits 25
- The Emergence of Pension Reform Act 2004 25
- The Objectives of the New Pension Reform 27
- Elements of the New Contributory Pension Scheme 27
- Institutional Framework 29
2.5.1 The National Pension Commission (PenCom) 30
2.5.2 Pension Fund Administrators and Pension Fund Custodians 30
2.6 Investment of Pension Assets under the New Contributory Pension Scheme 31
2.6.1 The Investment Guidelines 32
2.6.2 The Assets Allocation Structures by National Pension
Commission (PenCom) 33
- Risk Management Under the New Contributory Pension Scheme 35
2.6.5 Pension Risk Management Operation Process 42
2.7 The Benefits of the Contributory Pension Scheme 43
2.8 The Implications of the Contributory Pension Scheme on Nigerian Workers 45
2.9 The Challenges of the Contributory Pension Scheme in Nigeria 46
References
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction 53
3.1 Research Design 53
3.2 Sample Size and Sampling Technique 54
3.3 Nature and Sources of Data Collection 54
3.4 Techniques of Data Analysis 55
References
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
- Introduction 61
- Data Presentation and Analysis of The Student T-Test Result 61
- Data Presentation and Analysis of Pearson Correlation Coefficient Result 66
- Data Presentation and Analysis of Regression 69
References
CHAPTER FIVE:
SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
References
Bibliography
Appendix I: SPSS
Student Test Results
Appendix II: SPSS
Results of Correlation Coefficient
Appendix III: SPSS
Aggregate Regression Results
Appendix IV: Criteria for Grading Application of Requirements of
Statement of Accounting Standards 8 (SAS 8) by Firms in Nigeria
Appendix V: Summary of Comparison
of SAS 8 (Level of Compliance) with Annual Reports and Accounts of Quoted
Firms, 1998 – 2007
Appendix VI: Aggregate Average
Level of Compliance with SAS 8 for 1998 – 2004 (Before Pension Reform Act,
2004) (After Pension Reform Act, 2004)
LIST OF TABLES
Table 2.1: Pension Investment Guidelines 34
Table 4.1: Requirements of Statement of Accounting Standard 8 (SAS 8) 62
Table 4.2: SAS 8
Compliance Index 63
Table 4.3: The Student’s T-Test Data 64
Table 4.4: Student’s T-Test Result 65
Table 4.5: SAS 8
Compliance Index 67
Table 4.6: Correlation Coefficient Data 68
Table 4.7: Pearson Moment Correlation Coefficient Results 68
Table 4.8:
Pension Funding Disclosure in Relation to Total Assets and Profitability 70
Table 4.9: Aggregate
Values of Pension Funding Disclosure in Relation to Total Assets and Profitability 73
Table 4.10: Aggregate Regression Analysis for Hypothesis 3 74
CHAPTER ONE: INTRODUCTION
- BACKGROUND
OF THE STUDY
Pension as a
scheme is designed to cater for the welfare of the pensionable retired workers
both in the public and private sectors. The working lives of employees move
continuously towards a certain direction that is, from employment, to grow, to
retirement, some are fortunate to save enough money to take them through the
retirement period; while a majority leaves the service with little or no
savings at all. Ideally, there,
governments and organizations need to identify a way of accommodating and adequately
rewarding employees’ past efforts through organized pension plans, so that it
can achieve the goals of their existence (Rabelo, 2002). Essentially, this is
often thought different retirement policies which include the Defined Benefit
(pay-as-you-go) Scheme, the National Provident Fund Scheme and in particular
the new Contributory Pension Scheme that is expected to be fully funded.
However, some of
the existing Pension Schemes seem inadequate and/or ineffective. In Nigeria,
for instance, Statement of Accounting Standards number 8 (SAS 8) was issued in
1991 to direct and guide businesses on the determination and reporting of
pension and retirement benefits. Its
growing tribute, however, emerges from divergent schools of thought namely, the
contributory, the noncontributory and the hybrid schools of thought (Kantudu,
2005). The first school of thought,
emphasizing on contribution, is advocated by most accounting standards setting
bodies as well as by writers (Campbell and Feldstein, 2001). These scholars argued that should the
employees contribute a certain percentage to the plan the employee will be able
to receive the entire or part of the benefits at retirement, or in case of
termination of appointment or dismissal.
The hallmark of the contributory theory is operational efficiency in
computation and funding.
The second
school of thought (the non contributory) also advocated by some accounting
setting bodies (McGill, 1984; and Byrne, 2003).
According to the school, employers alone should fund the pension
asset. The belief of this school was
that the singular funding made by the sponsor encourages and attracts more
qualified and dedicated employees into the organization. Under this arrangement, the benefit is
defined by a formula, and pension at retirement is paid either as a lump sum
amount or as a life annuity (SAS 8, 1991). In between the two extremes lies
another school – the hybrid, with the view that on an aggregate basis, the
active working employees of the firm should always provide the funds for the
firms’ pensioners (Feldstein, 1996). In other words, companies should pay
pensioners out of the company’s cash flow (Hendriksen and Van Breda, 1992). This
is because the cash flows generated are as a result of the employees’ efforts
and contributions, and hence they deserved a share of it especially now that
they are unproductive. But an apparent
limitation of this argument is that it can only hold if current employees are
not out numbered by pensioners (Klumpes and McCrae, 1999).
Pension Accounting
has also been subjected to further controversies and criticisms particularly in
the area of actuarial valuation methods to be used in computing pension costs.
The result has been the emergence of two schools of thought. Hagerman and
Zmijewski (1979); Bowen (1981); Daley and Vigeland (1983); and Ghicas (1990)
contended that the prescription of one best method which posters comparability
among annual accounts of firms and one that eliminated chances of earnings
management by firms at the detriment of the pensioners, should be the goal of
pension standards. This school argued that the laxity which must pension
standards allow in the selection and application of actuarial valuation methods
must often than not gives firms an advantage to reduce pension liability, and
hence pension contribution, which by extension increases their earnings per
share and executive compensation. For instance, a study by Gopalakrishnan and
Sugrue (1995) revealed that a 1% increase in discount rate will lower the
pension liability by about 20%.
The other school
of thought argued that firms should be allowed to switch actuarial valuation
methods, because whatever they do will be in the best interest of the firms and
other stakeholders. What is important, according to this school of thought, is
that voluntary application of the requirements of the standards would be
affected by political visibility of making the disclosure and the proprietary
costs associated with application (Ghicas, 1990; Klumpes and McCrea, 1999;
Klumpes and Manson, 2000). Consequently, Pension has in recent times
increasingly attracted the attention of policy makers in many countries as a
means of facilitating privately funded retirement income savings by an ageing
workforce (World Bank, 1994).
Pension has been
defined in various ways viz: Uzoma (1987) is of the view that Pension is a
series of regular payment provided by a former employer to a retired
employee. Also, pension is basically a human
affair that employees are expected to enjoy a retirement benefit that
corresponds with the amount of commitment they have investe in the achievement
of the profit maximization or service oriented goals of the organization or
government (Bunmi and Obaro, 2007).
Furthermore, paragraph 9, Statement of Accounting Standards (SAS. 8)
states that pension involves an agreement between employers and employees upon
attainment of a specified retirement age.
In the same vain, Ako (2006) views a pension
system as essentially an income security program which provides benefits to beneficiaries
who may be retirees, pensioners or the destitute. However, the establishment of different Pension
Schemes in Nigeria did not achieve their aim, these were characterized by many
problems that really constituted a set back for the scheme. These include
non-availability of records, uncoordinated administration, inadequate funding,
out right fraud, irregularities and conflicting laws, diversion of remitted or
allocated fund, presence of ineligible pensioners on the pension’s payroll, and
incapacity to effectively implement its budget and make adequate
provisions. This has given rise to
untold hardship faced by retired workers, for example frustration, lack of
sustenance, health problems and in some cases death.
Therefore, the
gross in adequacies and mismanagement of the most of our adopted pension
policies with their attendant frustrating effects on the sustenance of both the
retired workers and the economy at large has often call for their constant
review in Nigeria as obtains in other part of the world. Pension Schemes exist
to provide post-retirement benefits to employees. Pension Scheme was introduced into Nigeria during
the colonial era to provide old age income and security to British citizens
working in the country upon retirement.
All along, and until very recently, Nigeria embraced and adopted the
traditional Defined-Benefits (D-B) plan that has failed to yield the desired
benefits for most workers and several economies where it has been adopted. The Defined-Benefits (D-B) plan, which usually
specifies the entitlements of workers after a minimum qualifying year of
service, has lost favour with most countries, including the most developed
countries of Europe and North America. In fact, Ambachtsheer (2007) noted that many
corporate employers are abandoning their traditional Defined-benefit plans,
while many of the Defined Benefits plans that remain are financially important
to offset the huge indebtedness.
Thus, it is
imperative that the privilege of receiving gratuity and pension appears the
greatest manifestation of the victory of labour in his fight with the employer
over his exploitation after several years of productive services. Hence, pension reform became necessary as a
result of the malady which ravaged Pension Schemes through the activities of
the old Pension Board. With the bad
administration of Pension Schemes in Nigeria, the hope of the pensioner
became bleak, as many verification exercises were embarked by old Pension Board
to mock the pathetic pensioners. This
eventually escalated their agony as their labour became in vain. Many of these
pensioners lost their lives as a result of these exercises which do not yield
any good dividend. Indeed, today people have resorted to self-help to secure
their life in retirement. Thus fueling
corruption and other vices (Fanimo et al, 2007).
Pension Scheme
which was meant to provide for old age when one has retired from service has
turned out to become a burden on the people and the government. These Nigerian workers who have worked tirelessly
for the growth and development of the country will end up passing through many
hurdles to get their retirement benefits.
It should be noted that the Federal Government still owes pension
obligation areas in excess of N2 trillion national pension deficits as at 12004
and 216,000 retirees from the Federal public service being owed a whopping N56
billion retirement benefit (Moddibo 2007).
From the
foregoing, in order to reposition and refocus the Nigeria Pension Scheme to be
alive to its responsibility and to address some of the problems associated with
Pension Schemes in Nigeria.
The Federal Government signed into law
the Pension Reform Act 2004 which introduced the New Contributory Pension
Scheme and it covers employees in the public sector, the Federal Capital
Territory and the private
sector.
The Pension Act repeals all previous legislations regulating the administration of pension benefits in Nigeria. The Pension Reform Act, 2004 appears to be a neoliberal piece of legislation which ideas are relevant in explaining the evolution and development of pension system in Nigeria (Aborisade, 2008). With the virtual collapse of the African Welfare System, the new Pension Act attempts to have as its primary objective, the encouragement of savings among employees so that in retirement they are not impoverished and the establishment of a uniform set of rules regulations and standards in the public and private sectors of the Nigerian economy on matters of pensions. Fundamentally, the Pension Reform was designed at ensuring that all employees receive their entitlements as and when due, assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age. The question remains, what is the impact of the application of the Contributory Pension scheme on employee retirement benefits and standard of living. In the same vein, the new Contributory Pension Scheme will save the economy much of its heavy debt burdens inherited from previous schemes, facilitate adequate funding of employers pension pans, create enhanced opportunity for the citizens in all works of life, add more value to the final entitlements of
