CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

A pension scheme exists to accumulate contributions during an individual's working life and to convert these into an adequate stream of retirement income, a task that lies at the heart of actuarial science (Bowers et al., 1997). In Nigeria, the pension industry has undergone significant reform since the Pension Reform Act of 2004 replaced the largely unfunded defined-benefit arrangements previously in place with a funded, defined-contribution Contributory Pension Scheme, under which employees and employers each contribute a minimum of 7.5 per cent of monthly emoluments into individual Retirement Savings Accounts managed by licensed Pension Fund Administrators and held in custody by Pension Fund Custodians, all under the supervision of the National Pension Commission (Pension Fund Operators Association of Nigeria, n.d.).

Under this arrangement, investment and longevity risk that were formerly borne by employers are now largely transferred to individual contributors, making the actuarial and financial performance of pension fund assets a matter of direct consequence for retirees' welfare (Oyerinde et al., 2024). As of early 2025, the industry held more than fourteen trillion naira in Federal Government securities alone, representing well over sixty per cent of total pension assets under management, alongside smaller allocations to corporate debt, money market instruments, domestic equities and mutual funds, with the number of registered Retirement Savings Accounts exceeding ten million.

Studies of the technical efficiency of Nigerian Pension Fund Administrators using stochastic cost frontier techniques have found considerable variation in performance, with mean efficiency scores of around 75 per cent and evidence that profitability, contributor numbers, investment strategy, and merger and acquisition activity affect an administrator's operating efficiency (Ololade et al., 2019). Similarly, macroeconomic factors such as inflation, interest rates and exchange rate movements, together with asset-liability management practices, have been found to significantly affect the performance of pension fund administration in Nigeria (Oyerinde et al., 2024). Given the growing size of pension assets, the shift of investment and longevity risk onto individual contributors, and the mixed evidence on the efficiency of pension fund administration, there is a clear need for a rigorous actuarial analysis of pension fund performance in Nigeria.

1.2 Statement of the Problem

Although the Contributory Pension Scheme was designed to guarantee retirees a reasonably adequate and sustainable income in old age, concerns persist over whether the actual investment performance of pension funds under this scheme is sufficient to meet contributors' future retirement needs. Existing studies show considerable variation in the technical efficiency of Pension Fund Administrators (Ololade et al., 2019) and confirm that macroeconomic volatility can materially affect pension fund performance (Oyerinde et al., 2024), yet many contributors and even industry observers still lack a clear, actuarially grounded picture of how well pension funds are performing relative to the liabilities they are meant to cover. This creates uncertainty about the long-term adequacy of retirement benefits under the current scheme and about which factors most significantly drive differences in performance among administrators. This study, therefore, undertakes an actuarial analysis of pension fund performance in Nigeria in order to provide clearer evidence on this question.

1.3 Objectives of the Study

The main objective of this study is to carry out an actuarial analysis of pension fund performance in Nigeria. The specific objectives are to:

i. examine the trend in the growth and asset allocation of pension funds in Nigeria over the study period;

ii. evaluate the investment returns and net asset value performance of selected pension funds;

iii. assess the efficiency of Pension Fund Administrators in managing pension assets;

iv. determine the effect of selected macroeconomic factors on pension fund performance; and

v. recommend measures for improving the actuarial soundness and performance of pension funds in Nigeria.

1.4 Research Questions

The study is guided by the following research questions:

1. What is the trend in the growth and asset allocation of pension funds in Nigeria?

2. How have investment returns and the net asset value of selected pension funds performed over the study period?

3. How efficient are Pension Fund Administrators in managing pension assets?

4. What effect do selected macroeconomic factors have on pension fund performance in Nigeria?

5. What measures can improve the actuarial soundness and performance of pension funds in Nigeria?

1.5 Research Hypotheses

The following null hypotheses are formulated to guide the study:

H01: There is no significant growth in the net asset value of pension funds in Nigeria over the study period.

H02: Pension Fund Administrators do not differ significantly in operating efficiency.

H03: Selected macroeconomic factors have no significant effect on pension fund performance in Nigeria.

1.6 Significance of the Study

This study will benefit contributors and retirees by providing an evidence-based assessment of how well pension funds are being managed on their behalf. It will assist the National Pension Commission in strengthening supervisory and policy frameworks for pension fund management. Pension Fund Administrators will find the study useful for benchmarking their performance against peers and identifying areas for improvement. Actuaries and researchers will gain an updated evidence base for pension valuation, product design and further research, while the study will also add to the Nigerian literature on pension fund performance and actuarial practice.

1.7 Scope and Limitation of the Study

The study covers the actuarial and financial performance of the Contributory Pension Scheme and/or selected Pension Fund Administrators in Nigeria, using secondary data obtained from the National Pension Commission and the audited financial statements of Pension Fund Administrators over a defined period. The study is restricted to publicly available performance data and does not extend to a full actuarial valuation of individual retirement liabilities; findings may also be affected by differences in reporting practices among administrators.

1.8 Definition of Terms

Pension: A regular income payable to an individual following retirement from active employment.

Contributory Pension Scheme (CPS): A pension arrangement, introduced in Nigeria by the Pension Reform Act, under which both employer and employee make regular contributions towards the employee's retirement benefits.

Retirement Savings Account (RSA): An individual account maintained by a Pension Fund Administrator into which an employee's pension contributions are paid.

Pension Fund Administrator (PFA): A licensed company responsible for managing and investing the pension contributions of scheme members.

Pension Fund Custodian (PFC): An entity responsible for the safekeeping of pension fund assets on behalf of a Pension Fund Administrator.

Defined Contribution Scheme: A pension arrangement in which retirement benefits depend on the amount contributed and the investment returns earned, rather than on a pre-determined formula.

Defined Benefit Scheme: A pension arrangement in which retirement benefits are determined by a formula based on factors such as salary and years of service, regardless of investment performance.

Net Asset Value (NAV): The value of a fund's assets minus its liabilities, often expressed on a per-unit basis.

Actuarial Valuation: An assessment, using statistical and financial techniques, of a pension scheme's assets and liabilities to determine its funding position.

Annuity: A financial product that provides a series of regular payments, often used to convert a pension fund into a retirement income stream.

REFERENCES

Bowers, N. L., Gerber, H. U., Hickman, J. C., Jones, D. A., & Nesbitt, C. J. (1997). Actuarial mathematics (2nd ed.). Society of Actuaries.

Federal Republic of Nigeria. (2014). Pension Reform Act, 2014.

National Pension Commission. (2024). PenCom annual report. PenCom.

Ololade, B. M., Adegboye, A. A., & Salawu, R. O. (2019). Contributory pension fund administrations in Nigeria: Stochastic frontier analysis of its efficiency and implications for policy designs. Journal of Financial Risk Management, 8(4), 333–348. https://doi.org/10.4236/jfrm.2019.84023

Oyerinde, M. T., Olowokudejo, F. F., & Obalola, M. A. (2024). Assets liability management, macro-economic factors and performance of pension funds administration in Nigeria. International Journal of Research and Innovation in Social Science, 8(6), 2429–2440.

Pension Fund Operators Association of Nigeria. (n.d.). Contributory pension scheme. https://www.penop.com.ng/contributory-pension-scheme