Impact of the Contributory Pension System on the Growth of the Nigerian Insurance Industry, 2005-2015

Abstract

The Federal Government of Nigeria on the 25th June, 2004 repealed and replaced the pay-as-you-go pension system with the contributory pension scheme (Pension Reform Act, 2004). Before the Act, the pension system in Nigeria was afflicted with crisis which manifested in huge pension arrears, delay in release of budgetary allocations, cumbersome pension payment system, unreliable and inaccurate pensioners’ data base and the alleged cases of fraud. The contributory pension was therefore introduced to eliminate these flaws and to accomplish more, including financial system growth. Pension system reform is held to facilitate financial system growth through the accumulation of pension funds, especially in economies with underdeveloped financial sector and weak regulatory infrastructure. It was against this background that the work examined : the impact of contributory pension scheme on the premium base of the insurance industry; the impact of the contributory pension scheme on the insurance industry’s equity investments; the impact of the contributory pension scheme on the growth of the insurance industry’s investment in the Federal Government securities; the impact of contributory pension scheme on the insurance industry’s investment in domestic money market; the impact of the contributory pension scheme on the ratio of the gross premium from the contributory pension scheme to the insurance industry’s gross premium contribution to the gross domestic product( GDP) and the impact of the contributory pension scheme on the industry’s real estate investments. The study adopted ex-post facto research design. Data were drawn from annual accounts and reports of National Insurance Commission, publications of Pension Regulatory Commission and National Bureau of Statistics and those of Central Bank of Nigeria, CBN, for several years, which spanned the period, 2005-2013. Six key hypotheses were formulated and tested. Ordinary Least Square (OLS) was the method of estimation, whereas techniques for data analysis included Multi-Regression model, t-statistic, adjusted co-efficient of determination and F-statistic. The results of the tests showed that contributory pension scheme has positive but no significant impact on the growth of premium base of the insurance industry ( p >0.05); contributory pension has positive and significant impact on the growth of : insurance industry’s equity investment; insurance industry’s investment in Federal Government securities and money market securities ( p<0.05); whereas contributory pension scheme was found to have positive but no significant impact on both the growth of Gross Premium ratio to GDP and the insurance industry’s Real Estate investments. Results overall showed that contributory pension had the capacity to stimulate the growth of insurance industry in Nigeria but that this was hamstrung mainly by the observed apathy on the part of the Ministries, Departments and Agencies(MDAs) to comply with the relevant provisions of the law. Hence, it was recommended that the National Pension Commission should take steps to compel Ministries, Agencies, Departments and private sector employers of labour to fully comply with the relevant provisions of the pension Act.