Funded Contributory Pension Scheme, Financial Deepening and Economic Growth: what does the evidence say so far about the Nigerian economy?

Abstract

The fully funded defined contributory benefit pension system was introduce in Nigeria in July, 2004 to replace the old fiscally unsustainable defined benefit (Pay-As-You-Go) pension system. The new pension scheme, coming at the heels of earlier reforms in Nigeria's financial sector, could be deemed to serve as a further boost toward savings mobilization, increased financial instruments acquisition and economic growth. After a survey of relevant literature was conducted, secondary data on relevant macroeconomic indices in the Nigerian economy were collected. The data were descriptively analysed. The results showed that TDS (total domestic savings) increased during the post-pension reform period and the increased TDS was not GDP growth induced. Some measures of financial deepening such as DCP/GDP (domestic credit to the private sector as a share of GDP), TBD/GDP (total bank deposits divided by GDP) and CIM (contract intensive money) did not improve appreciably during the period which hints at poor intermediation in Nigeria's banking sector. However, the DCP/GDP+SMC/GDP (the domestic credit to the private sector as a share of GDP plus stock market capitalization as a share of GDP) measure showed a remarkable improvement during this period due largely to the performance of the SMC/GDP measure. This suggests that the Nigerian capital market achieved some measure of deepening during the post-pension reform period. It is therefore the recommendations of this paper that despite the increased TDS which may have been contributory pension funds derived, efforts must still be intensified to increase the participation rate of the scheme by including states' employees and the informal sector workers in the scheme. The poor performances of DCP/GDP, TBD/GDP and CIM measures must be reversed through a rigorous enforcement of banking regulations and the Nigerian judiciary must be truly reformed such that it can be enabled to enforce contract laws and protect property rights. In order to further deepen the Nigerian capital market, PenCom must be made to relax the stringent portfolio diversification guidelines that the PFAs are required to comply with. This must be quickly followed by the internationalisation of the Nigerian capital market.