CONTRIBUTORY PENSION SCHEME AND WORKERS SAVING IN NIGERIAN RAILWAY CORPORATION

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1 CONTRIBUTORY PENSION SCHEME AND WORKERS SAVING IN NIGERIAN RAILWAY CORPORATION Abdullahi Yusuf and Aishat O.AbdulKareem Department of business administration, Ahmadu Bello University, Zaria Abstract The topic of this research is impact of the contributory pension scheme on workers savings in Nigeria. The population of the study was the staff of Nigerian railway corporation plc. Zaria. The type of the research design used was the survey research method. The researcher used primary source of data in obtaining the relevant data used in the course of the study. The researcher made use of spss (version 17) to run and test the hypothesis formulated. The finding of the research study was that the contributory pension scheme has an effect on workers saving and that as pension contribution increases, the workers savings reduces. The researcher recommended among others that government and pension fund administrators should enlighten workers about how the contributory pension operates as well as feed them their annual statement of account in order to assure them that their fund is not being mismanaged. Keywords: Contributory, pension scheme, benefits, retirement, savings Introduction All over the world, pension matters have become a pressing matter as poor administration, early retirement and unaffordable benefits have strained pension balances and overall public finances. Pension is therefore one of the biggest challenges facing national government across the globe.pension is defined as the amount paid by government or an organization to an employee after working for some specific period of time or the employee have reached retirement age.a pension scheme is a planned program which enables organization set aside fund to cater for the wellbeing of their staff after retirement from active years of service from the organization. The scheme enables pension benefit to be paid regularly to employees or their beneficiaries at the time of retirement. Series of pension schemes have emerged in Nigeria before and after independence. The first of these pension schemes in Nigeria was the Pension ordinance of 1951 while the most recent scheme is the Pension Reform Act of 2004 which is also known as the Contributory Pension Scheme. Prior to the emergence of the Contributory Pension Scheme, pension schemes in Nigeria were largely in a state of constant change. The schemes were either underfunded or unfunded, the pension administrations were weak and inefficient and most workers in the private sector were not covered by any form of retirement benefits. The last pension scheme before the contributory pension scheme in Nigeria was the Defined Benefit scheme which was largely unfunded and non-contributory. The scheme was also referred to as the Pay-as-You-Go (PAYGO) scheme since retirees were to be supported by annual budgetary provisions. An employee pension entitlement is determined by the employees years in service and earnings and this entitlements are made to employees in the private sectors by their employers while in the public sector either the federal government, state government or local government are responsible for the payment of pension benefits to the civil servants. Nigeria is emulating the Chilean pension system which introduced the contributory pension system in late 1980 and early 1981 to replace its Pay As You Go regime with a fully funded pension system based on individual capital accounts managed by private companies known as the Administrator as de Fondos de Pensiones (AFPs).The reform emphasizes uniformity of contributions and its structure of benefits covers old age, disability and survivor pensions (Organization for Economic Co-operation and Development,1997). Nigeria introduced the Contributory Pension Scheme on June 2004 during the administration of President Olusegun Obasanjo to correct the deficiencies and weaknesses of the old schemes and also make sure that employees get their retirement benefits as and when due. The Contributory Pension Scheme is contributory, fully funded and is based on individual accounts that are privately managed by Pension Fund Administrators (PFAs) with the pension fund assets held by Pension Fund Custodians (PFCs). The scheme requires contributions to be made by both employers and employees into the employee Retirement Savings Account (RSA) opened by the employee with a Pension Fund Administrator of his choice. In the private and public sector, an employee and his employer are required to make a contribution of 7.5% of the employee s monthly emolument each into the employee Retirement Savings Account while a military

2 personnel is to make 2.5% contribution and his employer will make 12.5% contribution into his Retirement Savings account. The Contributory Pension Scheme also established the National Pension Commission (PENCOM) to regulate, supervise and ensure the effective administration of pension matters in Nigeria. The National Pension Commission is responsible for the safety of pension funds, and they establish standard rules and regulations for the management and investment of the pension funds. The Contributory Pension Scheme is designed to create a system that is financially sustainable, transparent and simple as well as encourage savings among workers. Thus, the new scheme is created to ensure that employees receive pension benefits generated by their own savings as and when due in other to reduce old age poverty after retirement. The aim of this study is to evaluate the impact of Contributory Pension Scheme on employee savings in Nigeria Railway Corporation Plc. Zaria, Kaduna state. Statement of the problem Although the Contributory Pension Scheme is a fully funded and contributory scheme which is guided by the principles of accountability, equity and sustainability employees still show fear that the funds contributed in their Retirement Savings Account will be mismanaged by the trustees which might leave them with little or no money during their retirement years. Thus, some employees are reluctant to participate in this new scheme due to the lack of trust in their Pension Fund Administrator not managing their pension funds properly as the scheme requires a percentage of their monthly emolument to be saved in their Retirement Savings Account thereby reducing their monthly salary. Herein lays the need to access the impact of the Contributory Pension Scheme on employee savings in the Nigerian Railway Corporation. This study was undertaken in other to answer the question: What is the effect of the Contributory Pension Scheme on employee savings? The hypothesis for this project is designed to test; Literature review In Nigeria, The contributory pension scheme was established to correct the failures of the old Pay-As- You-Go (PAYGO) scheme, the scheme requires the contribution of funds from both employers and employees participating in the scheme and this contributed funds can be withdrawn by the employee upon reaching retirement age only. Therefore in this section, the researcher discussed the Contributory Pension Scheme, the regulation of the Contributory Pension Scheme, the objectives of the Contributory Pension Scheme, the problems of the Contributory Pension Scheme as well as the concept of savings. The country has been classified by the World Bank as a lower-middle-income country rather than a lowincome country. However, the large gap in development between Nigeria and countries with a more developed financial market such as South Africa continues to exist. (Catalan, Impavido, and Musalem, 2000)acknowledged that their sample of developing countries consisted of only three cases including Chile out of which two, Malaysia and Singapore, exhibit little if any causality between institutions and markets. Similarly, some authors have also pointed to the potential of contractual savings, such as funded pensions, to be more beneficial in the context of developing rather than developed countries (Davis & Hu, 2006). This is the case of Nigeria but for the lack of continuity in governance and maintenance of good and well-focused programs. However, the literature uses the term developing countries for countries that are more advanced than Nigeria and the sample is too limited to allow for any generalization (Catalan et al. 2000). Thus, if regulation is poor and promising investment opportunities are limited, enforced long-term saving might fail to develop financial markets. In addition, contributions into individual funded accounts can affect national savings and the rate of growth in different ways. The contributions do not need to increase and might even decrease national savings if assets are primarily invested in newly created government bonds. Placing these bonds into individual accounts only increases public debt. On the other hand, savings might increase if existing bonds are purchased from the public, and that is the difference between narrow funding and broad funding (Holzmann and Hinz 2005; Barr and Diamond 2008). However, both authors could not see contribution as a variable as it affects GDP. In the last one decade, since pension reforms became very prominent, a number of studies, particularly the work of Hu wei (2005) have established a positive relationship between economic growth and pension reform in the long run, while indicating a negative relationship in the short run but, Hu Wei (2005) could not look at funds contributions in the light of savings component within the economy. Specifically on pension fund assets and economic growth, several studies have found a positive link between these two variables. In other words, there is evidence that pensions are a good predictor of economic growth like the study carried out by (Maiturare, 2011).

3 Gunu et al(2012), the pension reform act 2004 is aimed at addressing the problems of the old pay as you go scheme by establishing a uniform pension system for both the public and private sectors. He also said that in the history of the country, a single authority has been established to regulate all pension matters in Nigeria. Therefore, contributory pension scheme is best for any economy that hopes to be able to meet future obligations to its population and ensuring the population comfort after retirement (Sule and Ezugwu, 2009). However, according to Omoni (2013), there is need for enlightenment campaigns to be carried out to workers to enable them understand the policy and implementation of the contributory pension scheme so that the scheme would be given a chance to grow in Nigeria. Through its contributory features, the funded scheme has the inherent potential to boost savings (Edogbanya, Adejoh 2013). These past reviews, were not research conducted on the impact of contributory pension scheme on workers savings. Therefore, the aim of this research is to study the impact of the contributory pension scheme on workers savings in Nigeria with Nigeria Railway Coporation, Zaria. Theoretical framework According to Misbau 2012, the contributory pension scheme is related to the tax deferred savings account where research is carried out on developed countries and it is noted that tax deferred mechanisms such as Individual retirement Account (IRA) lead to a net increase in savings. The contributory deducted from employee s monthly salary appear to be a reduction on the employee s saving from the employee s point of view since there are little or no information passed out to employees about the contributory pension scheme by the regulatory body of the scheme, so there is fear that their fund will be mismanaged by their pension fund administrators. It is as a result of this fear that the Where: n = sample size N = size of the population e =level of exactness required which is usually 5% 1 = constant researcher seeks to study and conduct a research on the impact of the contributory pension scheme on workers savings in Nigeria. Research methodology The process involved in getting a solution to one s problem include the collection of raw data related to the particular problem, analyzing it and drawing of conclusion to arrive at a solution. Thus, the researcher has looked at, the source of data collection and design of tools. In this study, the survey method was adopted as a collection of sample opinions, attitudes or feelings in order to estimate the overall situation. A representative or proportion of the population called sample is selected for the study and is expected to cover all the population that is being studied. This means the total number which by virtue of common characteristics may be defined as belonging to the population. The Nigerian Railway Corporation Plc. was chosen as the case study, therefore the research is limited to the workers in the railway corporation, Zaria. The population of which the researcher used good human relation skill to get the questionnaire answered. The choice of this method is justified by the fact that the study can only be properly undertaken when a sample is drawn out of the population with the aim of undertaking thorough study of the sample. Hence, this method allow for the distribution of questionnaire with the aim of generalizing the findings to cover the entire population. From the population of 150, a sample of 99 was obtained usin the Yamane sample size formula. 120 questionnaires were distributed, but, 104 were returned and 4 were badly filled, thus rendering them missing from the SPSS system. Sampling size is most times necessary in research because of difficulties in reaching the entire population. In view of this, the sample size would be calculated using Yamane formula and the sample is calculated as follows therefore n is approx. =99 For a research work to be significantly useful, its data must be presented and analyzed in order provide to answer questions initiating the research. In this research, therefore, the method of data analysis to be used for this study is the Statistical Package for Social Sciences (SPSS). In this study, the researcher made use of the survey method of research.

4 Data presentation analysis The tables below are presentation of respondents sex, age, years spent in service, income, etc which analysed appropriately relating to the impact on workers savings Table 1: Respondent sex Frequency Cumulative MALE FEMALE Table 2: Respondent age Frequency Cumulative BELOW Table 3: Years spent in service Frequency Cumulative LESS THAN 5 YRS YRS O YRS YRS AND ABOVE Total Missing System Table 4: Income per annum Frequency Cumulative LESS THAN , , , , , ,000 AND ABOVE Total Missing System 8 7.7

5 Table 5: Marital status Frequency Cumulative SINGLE MARRIED Table 6: Family size Frequency Cumulative LESS THAN GREATER From the above analysis, table 1 to table 6 asks questions on the respondent bio data from 100 respondents. In table 1, 30% are females while 70% are males. In table 2, 18% falls below 30 years, 66% falls between years while 16% falls between years. In table 3, 24.5% worked for less than 5 years, 43.6% have worked between 5 10 years, and 26.6% have worked for years while 5.3% have worked from 20 years and above. In table 4, 31.3% earn less than 400,000 per annum, 43.8% earn 400, ,000 per annum, 19.8% earn 600, ,000 per annum while 5.2% earn 800,000 and above per annum. In table 5, 30% are single while 70% are married. In table 6, 43% have a family size less than 4, 55% have a family size of 4 6 while 2% have a family size greater than 6. Table 7: Are you aware of any pension scheme? Frequency Cumulative Yes No

6 Table 8: Are you involved in any pension retirement plan? Frequency Cumulative Yes No Table 9: Are you on any pension? Frequency Cumulative Yes No Table 10 Do you know the percentage of your income that goes for pension? Frequency Cumulative Yes No Table 11 them? Does your pension fund administrator feed you on your account with Frequency Cumulative Yes No

7 Table 12 I am only participating in the scheme because it is compulsory Frequency Cumulative Strongly agree Agree Disagree Strongly disagree Table 13: Contributory pension scheme is actually an improvement on the old Frequency Cumulative Strongly agree Agree Disagree Strongly disagree Table 14 I prefer to save outside any pension scheme Frequency Cumulative Strongly agree Agree Disagree

8 Table 15 scheme My savings has reduced since the introduction of contributory pension Frequency Cumulative Strongly agree Agree Disagree Strongly disagree In table 7, respondent were asked if they are aware of any pension scheme, 88 respondents said they are aware while 12 respondents said they are not aware. In table 8, respondent were asked if they are involved in any pension retirement plan, 51 responded positive while 49 responded negative. In table 9, respondent were asked if they are on any pension scheme, 74 respondents gave a positive answer while 26 gave a negative answer. In table 10, respondent were asked if they know of the percentage of their income that goes for pension, 61 respondent said they know while 39 respondent said they don t know. In table 11, respondent were asked if their pension fund administrator feed them on their account with them, 43 respondent answered yes while 57 respondent answered no. In table 12, respondent were asked if they were participating in the scheme because it is compulsory, 68 respondent strongly agreed, 19 respondent agreed, 9 respondent disagreed while 4 respondent strongly disagreed. In table 13, respondent were asked if the contributory pension scheme is actually an improvement on the old scheme, 31 respondent strongly agreed, 50 respondent agreed, 12 respondent disagreed while 7 respondent strongly disagreed. In table 14, respondent were asked if they prefer to save outside any pension scheme, 36 respondents strongly agreed, 30 respondents agreed while 34 respondents disagreed. In table 15, respondent were asked if their savings have reduced since the introduction of the contributory pension scheme, 24 respondent strongly agreed, 37 respondent agreed, 29 respondent disagreed while 10 respondent strongly disagreed. Table 16 What percentage of your personal savings do you think should be saved for retirement? Frequency Cumulative less than 5% % -10% greater than 23 10% i don t know

9 Table 17 What is your level of savings after pension deduction? Frequency Cumulative you are saving enough you are saving too little you don t know if you are 16 saving enough you are not saving at all Total Missing System Table 18 What is your barrier to saving enough? Frequency Cumulative high rate of pension 37 contribution you have other financial 33 priorities you do not earn enough Total Missing System In table 16, respondent were asked of the percentage of their income that they think they should be saving for retirement, 27 respondent said less than 5%, 43% said 5 10%, 23% said greater than 10% while 7% said they don t know. In table 17, respondent were asked of the level of their personal savings after pension reduction, 10.2% said they are saving enough, 48% said they are saving too little, 16.3% said they don t know if they are saving enough while 25.5% said they are not saving at all. In table 18, respondent were asked of their barrier to saving enough, 37.8% said the pension contribution rate is high, 33.7% said they have other financial priorities while 28.6% said they are not earning enough. Tests of hypothesis Model summary Model R R Square Adjusted R Square a a. Predictors: (Constant), Are you on any pension? ANOVA a Std. Error of the Estimate Model Sum of Df Mean F Sig. Squares Square Regressi on b 1 Residual Total a. Dependent Variable: What is your barrier to saving enough? b. Predictors: (Constant), Are you on any pension?

10 Coefficients Model Unstandardized Coefficients Standardi zed Coefficien ts Beta t Sig. B Std. Error (Constant) Are you on any pension? a. Dependent Variable: What is your barrier to saving enough?

11 The researcher made use of linear regression to test the hypothesis. The researcher made use of SPSS to run the data, and the table shows the linear regression to be which shows a negatively weak relationship. This means that the contributory pension scheme has an inversely weak effect on savings, which points to the fact, that small knowledge of contributory pension scheme had resulted in the reduction of workers savings. It can therefore be concluded that the null hypothesis which states that contributory pension scheme has no effect on savings is rejected, and the alternative hypothesis which states that contributory pension scheme has effect on savings is clearly established. Conclusion The research study has attempted to give a comprehensive finding on the impact of Contributory Pension Scheme on Workers savings in Nigeria. This has enable the researcher to have a good understanding of the effect the Contributory Pension Scheme have on workers savings in Nigeria. This research has evaluated the impact of the Contributory Pension Scheme on workers savings in Nigeria using the Nigerian Railway Corporation Plc., Zaria as the case study. The research reveals that the Contributory Pension Scheme has an effect on the workers saving with the main barrier of workers saving being that the pension contribution rate is high which reduces the level of their personal savings. Recommendation The researcher makes the following recommendations: 1) The federal government and the pension fund administrators should educate workers and the general public on the Contributory pension Scheme as most workers are participating in the scheme without much awareness about the scheme. 2) The Pension Fund Administrators should ensure that they feed the workers on their statement of account, as this would allay the fear of fund mismanagement on the part of the employees Babatunde, M. A.(2012). The Impact of Contributory Pension Scheme on Worker s savings in Nigeria.Medwell Journals. Ikeji, C. C. Ikeji et al. (2011). Contributory Pension Scheme, Workers Commitment, Retention and Attitude towards Retirement in the Nigeria Civil Service.Global journal of Management and Business Research vol.2. Ike-Okoh, C. (2014). Historical Development of Pension Scheme in Nigeria. Business day Media ltd. Joseph, I. E. (2011). Pension Reform, Public \workers productivity and Welfare in Nigeria: Lessons for some other African Countries.Indian Journal of Economics and Business vol.10. McCarthy, J. &Phan, H. N. (1995). The Impact of Individual Retirement Accounts on Savings. Current Issues in Economics and Finance vol.1 no.6. National Pension commission (PENCOM) Nwagwu, E. J. (2011). The New Contributory Pension Scheme and Prompt and Regular Payment of Pension benefits to Pensioners in Nigeria. _and_regular_payment.html. Omoni, E. G. (2013). An overview of the New Pension Scheme and Teachers Level of Awareness in delta State of Nigeria: Counseling Implication. African Journal of Social Sciences vol.3 no.3. Popoola, N. (2012). Pension: Differentiating Between Old and New Schemes. Punch Nigeria ltd. Raj Chetty et al. (2011). How do Tax Deferred Saving account Affect Savings Behavior? Evidence from Denmark. Harvard university and NBER. Ruiz-Tagle, J. V. (1997). The Chilean Pension System. Organisation for Economic Co-operation and Development. Wang, Z.H. (2014). An Ananlysis of Impact of Pension Insurance on Savings and Consumption Behaviors.International Business and Management. References Adejoh, E. (2013). An Assessment of the Impact of Contributory Pension Scheme to Nigerian Economic Development.Global Journal of Management and Business Research.