A Review of Babatunde Alayande’s Article: “Funded Pension, Financial Sector
Development and Economic Growth in Nigeria”
in
Alayande, Babatunde (2012), “Funded Pension, Financial Sector Development and Economic
Growth in Nigeria” in: Financial Sector Issues and Economic Development in Nigeria (eds:
Olanrewaju Olaniyan, Akanni O. Lawanson and Babatunde Alayande). Ibadan: Ibadan University
Press, pp. 301-323.
Introduction
The main contribution of Babatunde Alayande’s paper titled “Funded Pension, Financial Sector
Development and Economic Growth in Nigeria” is to develop new evidence that helps
understands the critical role of funded pension in financial sector development and by extension,
in economic growth with particular reference to Nigeria. In my review on the paper, I emphasised
why that objective is a worthy one.
Social security system all over the world has become a dynamic tool in addressing socio-economic
challenges. While the tackling of poverty have become a challenge from the point of view on the
younger generation, the focus has rather now been cast on addressing old age poverty. Amid the
quest for addressing development inequality is the need to cash-in on the multiplier effects this
noble policy could have on the larger economy. And since the passage of the Pension Reform Act
(PRA) in Nigeria in 2004, research in this area has mushroomed. Such studies on the movement of
funds in the economy and how the funds from pension savings could be moved to the deficit side
of the economy.
Poor social security structure imposes large costs on government and an attendant economic cost.
Consequently, large fiscal deficits are experienced along with a high poverty rate. Much has
though been done by the government to address old age poverty and bring dignity to labour for
Nigerian workers who deserved to enjoy their retirement; the Pay-As-You-Go (PAYG) scheme has
left so little impact to desire.
With the 2004 PRA was the evolvement of the fully funded contributory pension scheme (CPS)
with great benefits for the country’s socio-economic wellbeing. This, along with the concerns on
its financial sustainability and the quest to chart development pathways in addressing the poverty
challenges faced at the old age period led to the PRA 2004.
A major problem of the PAYG defined benefit scheme is that it creates capital flight that could
have been available for other uses like funding developmental projects, retirees do not have direct
access to benefits and idle funds that could go into the capital market for economic use are not
made available.
Summary
Nigeria’s Pension Reform: from the PAYG to the CPS
Nigeria has overtime operated the defined benefit scheme (also referred to as the unfunded or
PAYG) which for the civil service, was funded by the government. The private sector,
notwithstanding its small size (including the informal sector), also operated a variant of pension,
paid as severance benefits to either their apprentices or workers.1 One peculiarity of the
government- or employer-funded pensions is that it is more of a transfer device; the pensions are
the resources levied on the wages of the workers from the retirees’ generation. The benefits also
depend on the grade level on retirement which is paid monthly.
The clear address of low savings in the CPS raises hope of effective reduction in old-age poverty
