ABSTRACT
This study seeks to evaluate
whether or not the Contributory Pension Scheme has an impact on employee
retirement benefits of quoted firms in Nigeria and; to determine the
relationship that exists between the Impact of the Contributory Pension Scheme
on employee retirement benefits and standard of living in Nigeria. The study
also assessed the relationship between pension costs and independent variables:
total assets and profitability of quoted firms in Nigeria. In line with the
objectives, three hypotheses were formulated. The population of the study is
the one hundred and eighty-two (182) firms quoted on the first- tier market of
the Nigerian Stock Exchange and ten (10) quoted firms selected as sample size
based on judgmental sampling. The study utilized data from secondary source.
Data were obtained from the annual accounts and reports of the (10) quoted
firms that made up the sample of the study and the World Bank data profile on
gross national income per capita in Nigeria. The time frame for the study is ten
years, covering the period of 1998 to 2007. The techniques of analysis used in
the study were the Student’s T-test, qualitative grading, the Pearson
Correlation Coefficient and Multiple Regression Analysis. We concluded that
even though the Contributory Pension Scheme has positive impact on employee
retirement benefits of quoted firms in Nigeria, variation in application still
exists among them. The study also established that the ability of quoted firms
to fund their pension assets has direct relationship with their assets sizes
and respective profitability. The study recommended an effective
monitoring/supervision and enforcement of the provisions of the Pension Reform
Act, 2004, in addition to effective implementation of the penalties provided by
the Act on non-compliers regardless of their status or origin. The study calls
on the appropriate authorities such as the government, professional accountancy
bodies on academics to commission research and activities geared towards
developing not only accounting policies that would ensure swift compliance with
Statement of Accounting Standards (SAS 8), but strategies that would ensure
optimum investments that enhance net worth and profitability of firms.
CHAPTER ONE: INTRODUCTION
1.0 BACKGROUND OF THE STUDY
Pension as a scheme is designed to
cater for the welfare of the pensionable retired workers both in the public and
private sectors. The working lives of employees move continuously towards a
certain direction that is, from employment, to grow, to retirement, some are
fortunate to save enough money to take them through the retirement period;
while a majority leaves the service with little or no savings at all. Ideally,
there, governments and organizations need to identify a way of accommodating
and adequately rewarding employees’ past efforts through organized pension
plans, so that it can achieve the goals of their existence (Rabelo, 2002).
Essentially, this is often thought different retirement policies which include
the Defined Benefit (pay-as-you-go) Scheme, the National Provident Fund Scheme
and in particular the new Contributory Pension Scheme that is expected to be
fully funded.
However, some of the existing
Pension Schemes seem inadequate and/or ineffective. In Nigeria, for instance,
Statement of Accounting Standards number 8 (SAS 8) was issued in 1991 to direct
and guide businesses on the determination and reporting of pension and
retirement benefits. Its growing tribute, however, emerges from divergent
schools of thought namely, the contributory, the noncontributory and the hybrid
schools of thought (Kantudu, 2005). The first school of thought, emphasizing on
contribution, is advocated by most accounting standards setting bodies as well
as by writers (Campbell and Feldstein, 2001). These scholars argued that should
the employees contribute a certain percentage to the plan the employee will be
able to receive the entire or part of the benefits at retirement, or in case of
termination of appointment or dismissal. The hallmark of the contributory
theory is operational efficiency in computation and funding.
The second school of thought (the
non contributory) also advocated by some accounting setting bodies (McGill,
1984; and Byrne, 2003). According to the school, employers alone should fund the
pension asset. The belief of this school was that the singular funding made by
the sponsor encourages and attracts more qualified and dedicated employees into the organization.
Under this arrangement, the benefit is defined by a formula, and pension at
retirement is paid either as a lump sum amount or as a life annuity (SAS 8,
1991). In between the two extremes lies another school – the hybrid, with the
view that on an aggregate basis, the active working employees of the firm
should always provide the funds for the firms’ pensioners (Feldstein, 1996). In
other words, companies should pay pensioners out of the company’s cash flow
(Hendriksen and Van Breda, 1992). This is because the cash flows generated are
as a result of the employees’ efforts and contributions, and hence they
deserved a share of it especially now that they are unproductive. But an
apparent limitation of this argument is that it can only hold if current
employees are not out numbered by pensioners (Klumpes and McCrae, 1999).
Pension Accounting has also been
subjected to further controversies and criticisms particularly in the area of
actuarial valuation methods to be used in computing pension costs. The result
has been the emergence of two schools of thought. Hagerman and Zmijewski
(1979); Bowen (1981); Daley and Vigeland (1983); and Ghicas (1990) contended
that the prescription of one best method which posters comparability among
annual accounts of firms and one that eliminated chances of earnings management
by firms at the detriment of the pensioners, should be the goal of pension
standards. This school argued that the laxity which must pension standards
allow in the selection and application of actuarial valuation methods must
often than not gives firms an advantage to reduce pension liability, and hence
pension contribution, which by extension increases their earnings per share and
executive compensation. For instance, a study by Gopalakrishnan and Sugrue (1995)
revealed that a 1% increase in discount rate will lower the pension liability
by about 20%.
The other school of thought argued
that firms should be allowed to switch actuarial valuation methods, because
whatever they do will be in the best interest of the firms and other
stakeholders. What is important, according to this school of thought, is that
voluntary application of the requirements of the standards would be affected by
political visibility of making the disclosure and the proprietary costs associated
with application (Ghicas, 1990; Klumpes and McCrea, 1999; Klumpes and Manson,
2000). Consequently, Pension has in recent times increasingly attracted the
attention of policy makers in many countries as a means of
facilitating privately funded retirement income savings by an ageing workforce
(World Bank, 1994).
Pension has been defined in
various ways viz: Uzoma (1987) is of the view that Pension is a series of
regular payment provided by a former employer to a retired employee. Also, pension
is basically a human affair that employees are expected to enjoy a retirement
benefit that corresponds with the amount of commitment they have investe in the
achievement of the profit maximization or service oriented goals of the
organization or government (Bunmi and Obaro, 2007). Furthermore, paragraph 9,
Statement of Accounting Standards (SAS. 8) states that pension involves an
agreement between employers and employees upon attainment of a specified
retirement age.
In
the same vain, Ako (2006) views a pension system as essentially an income
security program which provides benefits to beneficiaries who may be retirees,
pensioners or the destitute. However, the establishment of different Pension
Schemes in Nigeria did not achieve their aim, these were characterized by many
problems that really constituted a set back for the scheme. These include
non-availability of records, uncoordinated administration, inadequate funding,
out right fraud, irregularities and conflicting laws, diversion of remitted or
allocated fund, presence of ineligible pensioners on the pension’s payroll, and
incapacity to effectively implement its budget and make adequate provisions.
This has given rise to untold hardship faced by retired workers, for example
frustration, lack of sustenance, health problems and in some cases death.
Therefore, the gross in adequacies
and mismanagement of the most of our adopted pension policies with their
attendant frustrating effects on the sustenance of both the retired workers and
the economy at large has often call for their constant review in Nigeria as
obtains in other part of the world. Pension Schemes exist to provide
post-retirement benefits to employees. Pension Scheme was introduced into
Nigeria during the colonial era to provide old age income and security to
British citizens working in the country upon retirement. All along, and until
very recently, Nigeria embraced and adopted the traditional Defined-Benefits
(D-B) plan that has failed to yield the desired benefits for most workers and several
economies where it has been adopted. The
Defined-Benefits (D-B) plan, which
usually specifies the entitlements of workers after a minimum qualifying year
of service, has lost favour with most countries, including the most developed countries
of Europe and North America. In fact, Ambachtsheer (2007) noted that many
corporate employers are abandoning their traditional Defined-benefit plans,
while many of the Defined Benefits plans that remain are financially important
to offset the huge indebtedness.
Thus, it is imperative that the
privilege of receiving gratuity and pension appears the greatest manifestation
of the victory of labour in his fight with the employer over his exploitation
after several years of productive services. Hence, pension reform became
necessary as a result of the malady which ravaged Pension Schemes through the
activities of the old Pension Board. With the bad administration of Pension
Schemes in Nigeria, the hope of the pensioner became bleak, as many verification
exercises were embarked by old Pension Board to mock the pathetic pensioners.
This eventually escalated their agony as their labour became in vain. Many of
these pensioners lost their lives as a result of these exercises which do not
yield any good dividend. Indeed, today people have resorted to self-help to
secure their life in retirement. Thus fueling corruption and other vices
(Fanimo et al, 2007).
Pension Scheme which was meant to
provide for old age when one has retired from service has turned out to become
a burden on the people and the government. These Nigerian workers who have
worked tirelessly for the growth and development of the country will end up
passing through many hurdles to get their retirement benefits. It should be
noted that the Federal Government still owes pension obligation areas in excess
of N2 trillion national pension deficits as at 12004 and 216,000 retirees from
the Federal public service being owed a whopping N56 billion retirement benefit
(Moddibo 2007).
From the foregoing, in order to
reposition and refocus the Nigeria Pension Scheme to be alive to its
responsibility and to address some of the problems associated with Pension
Schemes in Nigeria. The Federal Government signed into law the Pension Reform
Act 2004 which introduced the New Contributory Pension Scheme and it covers
employees in the public sector, the Federal Capital Territory and the private
sector.
The Pension Act repeals all
previous legislations regulating the administration of pension benefits in
Nigeria. The Pension Reform Act, 2004 appears to be a neoliberal piece of
legislation which ideas are relevant in explaining the evolution and
development of pension system in Nigeria (Aborisade, 2008). With the virtual
collapse of the African Welfare System, the new Pension Act attempts to have as
its primary objective, the encouragement of savings among employees so that in
retirement they are not impoverished and the establishment of a uniform set of
rules regulations and standards in the public and private sectors of the
Nigerian economy on matters of pensions. Fundamentally, the Pension Reform was
designed at ensuring that all employees receive their entitlements as and when
due, assist improvident individuals by ensuring that they save in order to cater
for their livelihood during old age. The question remains, what is the impact
of the application of the Contributory Pension scheme on employee retirement
benefits and standard of living. In the same vein, the new Contributory Pension
Scheme will save the economy much of its heavy debt burdens inherited from
previous schemes, facilitate adequate funding of employers pension pans, create
enhanced opportunity for the citizens in all works of life, add more value to
the final entitlements of workers, promote the development of capital markets,
foster investment opportunities; promote national savings and, macroeconomic
development (Pension Reform Act, 2004).....
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