Determinants of Financial Sustainability of Pension Fund Administrators in Nigeria
CHAPTER ONE
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:
- determine the effect of age of pension funds administrator on its financial sustainability in Nigeria.
- find out whether pension fund contribution has significant on financial sustainability of PFAs in Nigeria.
- determine the impact of size of pension fund administrator on its financial sustainability in Nigeria.
- examine the effect of net income of pension fund administrator on its financial sustainability in Nigeria.
- assess the effect of GDP growth rate on financial sustainability of PFAs in Nigeria
- determine the effect of board attributes on the financial sustainability of PFAs in
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter brings to clarity the determinants of financial sustainability of pension fund administrators in Nigeria. The investment of the pension fund has been assessed through the review of the relevant literature. The various theories of determinants of financial sustainability as it relates to pension fund are also be critically analyzed. To make this chapter what it is supposed to be, various authorities that have worked in the theory and operations of pension scheme are brought into light.
The Concept, Aims and Reform of Pension System
A pension system is essentially an income security program which provides benefits to beneficiaries who may be retirees, pensioners or the destitute. The benefits may be defined or flat. A defined benefit is benefit whose value payments vary according to established rules for participation whereas a flat benefit is one that pays a unitary value to beneficiaries (Ako, 2006).
Furthermore, within pension programs, a distinction exists between a defined benefit plan and a defined contribution plan. In a defined benefit plan, only the employer is responsible for funding of the plan whereas in a defined contribution plan, both the employer and the employee make defined contributions to fund the plan. As such, pension systems can be broadly categorized as contributory and noncontributory. In Nigeria, the contributory pension system has been adopted and this is the focus of this research.
The primary aims of a pension system should be to provide adequate, affordable, sustainable and robust retirement income while seeking to implement welfare-improving schemes in a manner appropriate to the individual country. An adequate system is one that provides benefit that are sufficient to prevent old age poverty on a country specific absolute level in addition to providing a reliable means to smooth lifetime consumption for the vast majority of the population (Horts Orzmann & Hinz, 2005). An affordable system is one that is within the financing capacity of individual and the society and does not unduly displace other social or economic imperatives or have untenable fiscal consequences (Andrew, 2004). A sustainable system is one that is financially sound and can be maintained over a foreseeable horizon under a broad set of reasonable assumptions (Gbitse, 2006). A robust systems, according to Les (2003), is one that has the capacity to withstand major shocks, including those coming from economic, demographic and political volatility.
The design of a pension system or its reform explicitly recognizes that pension benefits are claims against future economic output. To fulfill their primary aims, pension system must contribute to future economic output. Reforms should, therefore by designed and implemented in a manner that supports growth and development and diminishes possible distortions in capital and labour markets.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
An adequate research methodology is necessary at this level to indicate the pathway to be undertaken in carrying out this study. This chapter therefore, presents the plan or blue print which specify how data relating to the research is been collected and subsequently analyzed.
Research Design
The design of this research is correlation. The design is employed because it enables an assessment into the nature and extent of relationship between two or more variables. In this case, correlational research design will provide a basis for understanding the relationship between financial sustainability of pension Funds Administrators and its determinants.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Introduction
This chapter presents and descriptively analyses the data collected for this research. It further tests the research hypotheses formulated earlier and discuses the findings of the research as well as highlights the policy implications of the result.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
This study examines the determinants of financial sustainability of PFAs in Nigeria. In accomplishing this, the study has carried out a conceptual and theoretical, as well as an empirical review of financial sustainability studies. Various techniques available for detection and measurement, as well as the findings of previous researches, on the relationship that exists between financial sustainability and other variables were also examined. Before the review the study developed five objectives and five hypotheses.
In line with major findings of the study and the associated deductive discussions, the study finds that there exists significant relationship between financial sustainability and contribution of pension fund administrators. The study also establishes significant positive impact of size on the financial sustainability of PFAs in Nigeria. The study confirms that Net Income also has a significant impact on the financial sustainability of PFAs in Nigeria. In addition, the study confirms that age as a variable also affects financial sustainability of a pension fund administrator in a significant manner. The study on the other hand, finds that GDP has a negative impact and not significant.
While the board size has positive impact on financial sustainability but not significant, the board competence has negative impact and not significant too. The study documents that empirical evidence obtained from the econometric result reveals that pension fund administrator contribution affects the financial sustainability.
The study reveals positive statistically significant relationship between the financial sustainability and the outreach of a PFA in Nigeria. This implies that a PFA that is financially sustainable will perform better in outreach than the PFA which is not. That is, the more profitable the PFA becomes, the higher it will achieve the outreach. We therefore conclude that, financial sustainability improves the breadth of outreach.
The procedures employed in testing each of the five hypotheses were guided by the requirements of the methodologies we adopted for each. Prior to the hypotheses tests, we subjected our data to some tests, one of which is normality test.
In testing for hypothesis one, the result indicates that the coefficient of age is positive and statistically significant at 5%, indicating that older PFAs are more financially sustainable. Looking at size as our second hypothesis, it has a positive co-efficient and a significant Z- score. Also, on the third hypothesis (Net income), the result shows that net income has a positive impact on financial sustainability of Nigerian PFAs and the likelihood of such a happening by chance is 5%. While the coefficients of contribution shows positive impact, that of GDP reveals negative impact on the variable being explained. It is the Z-score of contribution that is significant at 1%, GDP is not significant even at 10%.
The fact that our data-sets were initially proved to be not normal we first went for corrective transformation of the data and a re-run of the five equations. The first option (Logarithmic Transformation) proved not forthcoming, as one of our variables was deleted when the transformation command was issued. We thus, resorted to transforming the remaining independent variables and re-run the five hypotheses test-equations using logistic regression. The null hypothesis in this test (HO: constant variance) was retained owing to the lack of probability significance.
Based on the findings, we observed that, with positive impact results obtained on the financial sustainability, accounting researchers could be encouraged to search more on this phenomenon. The results obtained also has put to rest, our fears that none of the variables was likely to come out positively. With this, it has been evidently confirmed that the variables adopted for the study are adequate and reliable.
Conclusion
This study focuses on the determinants of financial sustainability of Nigerian PFAs with the aims of ascertaining the significant relationship that exists between the financial sustainability and the variables employed. Having seen the results of the relationship, the following conclusions are made based on the outlined objectives viz-a-viz the hypotheses formulated to test the said objectives.
As revealed from the table 4.3 above, the sign of most of the parameters of the model are in line with a priori expectation. The age, size, net income, contribution and Bsize are positive as expected, and, as such, we therefore, conclude by rejecting the hypotheses formulated in their respect. The rejection is so because the relationship is strongly significant at 1% and 5% respectively. GDP and Bcomp are negative but insignificant. Based on this, the study could not obtain sufficient evidence to reject the hypotheses raised in respect of GDP. The study concludes that improvement in the five positive variables can give rise to improvement in financial sustainability.
Recommendations
Based on the findings and conclusions, the following recommendations are forwarded:
As implied in the findings, attaining financial sustainability is not a one shot
The level of sustainability today will affect the sustainability tomorrow regardless of where the PFA stands in its life cycle or development stage. The factors that affects financial sustainability at start-up and growth stage, affects even more the sustainability at maturity stage. Thus, financial sustainability needs to be ensured and monitored throughout the life time of PFAs. That is, any weakness noticed at any stage must be addressed immediately.
- As the study has shown the extent at which contributions had made a pension fund administrator to be financially sustainable, the more contributions a pension fund administrator could obtain from the contributors, the better for it. Thus, PFAs must geared efforts to ensure that, this is always on the
- When looking into the future, the policy makers and contributors need to reassure themselves not only that pressure on constraints is being managed properly, but also that the pension system remains effective and is in a position to achieve the goals for which it is devised.
- The conclusion made on the finding implies that, to be financially sustainable, pension fund administrators in Nigeria should first make sure that their income always outweighs the expenses. This will enable them to earn enough profits that will lead to financial sustainability. However, this should be done with caution considering the impact of omitting some expenses relevant to the operations of pension fund This may lead to excessive profits.
- Investment criteria issued by the PenCom should be carefully observed so as not to risk the contributions of the contributors. Moreover ,for the policy makers and those advocating the replications in the pension fund best practice, the finding of this study implies the need to scrutinizing what is applicable and what is not before embarking on the replications.
- The conclusions made on how the determinants of financial sustainability affect the sustainability at early stages of development imply the following for the sustainability of pension fund administrators at start-up stage: for higher net income, PFAs in Nigeria should strive to keep lower the portfolio at risk, improve staff productivity, strive to operate at relatively costs, maintain higher liquidity to meet short-term obligations, as they fall due and for the smooth running of the PFAs.
For the growth stage, the conclusion implies the need for the pension fund administrators to promote higher staff productivity and to reduce staff costs per naira. To combat the high cost per collections of contributions associated with higher average disbursed pension size, the PFAs, should promote higher contributions to reduce higher defaults. Moreover, how successful the start-up stage is will influence the success in the growth and maturity stages. This implies that sustainability needs to be built from an initial stage (start-up stage).
Limitations of the Study
The following are the limitations of the study: first, the study intends to examine the determinants of financial sustainability of pension fund administrators in Nigeria. The fact that contributory pension fund in Nigeria is still at its embryonic stage, and the achievement of regression line requires a wide range of data, the use of samples for the study did not permit taking all the variables the study intends to examine into consideration. Based on this, the parameter estimates of the regression equation are restricted.
Second, the study adopts only secondary data which are directly collected from the financial statements of the observed PFAs in Nigeria. Notwithstanding the above listed limitations, the validity of the findings and the reliability of the methodology followed to arrive at the study‘s conclusions are not affected. Users can rely on the study‘s findings for their various applications.
BIBLIOGRAPHY
- Abatemarco, A. (2009). Measurement issues for adequacy comparisons among pension systems, ENEPRI Research Report No. 64. Brussels: Centre for European Policy Studies.
- Abel, A., G. Mankiw, L. Summers and Zeckhauserr R. (1989). ―Assessing Dynamic Efficiency‖, The Review Of Economics Studies, Vol. 56 (1) No. 185, January, P. 1-20
- Achdut, L. and Tamir,Y. (1985). Comparative economic status of the retired and non-retired elderly, LIS Working Paper No. 5. Luxembourg: Luxembourg Income Study.
- Acuña, R. and Augusto I. (2001). ―Chile‘s Pension Reform After 20 Years,‖ Perspective on Corporate Financial Policies,‖ Working Paper, London Business School.
- Adams, C.A. and Larriga-Gonzalez, C. (2007). ―Engaging with organizations in pursuit of improved sustainability accounting and performance‖. Accounting, Auditing and Accoutability Journal, 20(3), 333-355.
- Adams, C.A. and McNicholas, P. (2007). ―Making a difference: Sustainability reporting, accountability And organizational change‖. Accounting, Auditing and Accoutability Journal, 20(3), 382-402.
- Adema, W. and Ladaique, M. (2005). Net social expenditure, 2005 Edition: More comprehensive measures of social support. Paris: OECD.
- Adongo, J. and Stork, C. (2006). Factors affecting the financial sustainability of selected pension fund administrators in Namibia. The Namibian Economic Policy Research Unit (NEPRU). Research Report No. 39, October 2006.
- Ahmad, M.K.(2011). ―The Contributory Pension Scheme: Institutional and Legal Framework‖: Paper Presented at the Annual Seminar of Nuasa, A.B.U., Zaria.
- Ako, M. R. (2006). ―Contributory Pension Scheme: The Case of Brazil‖ Bullion Central Bank of Nigeria, 30 (2): 42-52
- Allen, F. and Santomero, A. M. (1998). ―The theory of financial intermediation‖, Journal of Banking and Finance, 21, 1461-1485
- Almeida, H., Murillo, C. and Michael, W. (2006). ―Future Financing Costs and their Impact on Today‘s Financial and Investment Policy,‖ Working Paper, University of Illinois.
- Ambachtsheer, K. Capelle R., Lum H., (2006). ―Pension Fund Governance Today: Strength, Weakness, And Opportunities For Improvement‘, Financial Analysts Journal, October 2006. http://www.rotman.utoronto.ca/icpm/2.pdf
- Ambachtsheer, K. Capelle R., Lum H., (2007). The state of global pension fund government today: board competency still a problems‘. Rotman international center for pension management
- http://www.rotman.utoronto.ca/userfiles.departments/icpm/file/october%2020 06/govenonce%20study%20paper_submision_june%202007.pd
- Amidu, M. (2007). ‗Determinants of Capital Structure of Banks in Ghana: An Empirical Approach. Baltic Journal of Management, 2(1), 67-79.
- Andrew, H. (2004). Smart Risk. Macmillan, London.