An Evaluation Of The Nigerian Pension Reform

Pension Reform evokes certain primary questions: what is a Pension System? What is its essence? Why do governments interfere in this area throughout the industrial world and increasingly in developing countries? (Modigliani and Murahlidhar, 2004).

2.1.1 The Concept of Pension

Pensions are a form of Social Security for the retired. It is meant to serve as a supplementary source of income to retired workers when their current earning power ceases (Modigliani and Murahlidhar, 2004). It has been defined as "a sum of money paid regularly to a person who no longer works because of age, disablement etc., or to his widow or dependent children, by the state, by his former employers or from funds to which he and his employers have both contributed" (Onifade, 2001). According to the third edition of Longman Dictionary of Contemporary English (2000), the word Pension is an amount of money paid regularly by a government or a company to someone who is officially considered to be too old or ill to earn money by working. Alternatively, pension can also be defined as periodic payment to one who retired from work as a result of old age or disability (Chinwuba 2004).

2.1.2 The Concept of Pension Scheme

A Pension Scheme or System however, is the totality of plans, procedures and legal processes of securing and setting aside funds to meet the social obligation of care which employers owe their employees on retirement or in case of death and disability (NICON, Abuja). It serves as a structured method of providing economic security to an individual when he can no longer support himself. As a pre-arranged and well thought out plan, it gives the beneficiaries the confidence that the benefits promised are being properly arranged and will be paid at the appropriate time (Onifade, 2001). It can also be viewed as a financial plan by which a worker's benefit is provided whenever it falls due according to the rules of the plan (Chinwuba 2004).

2.1.3 The Essence and Features of Pension Schemes

The primary purpose of a Pension System is to help households achieve an allocation of life resources by smoothing consumption over life, as postulated in the Life-Cycle Hypothesis (LCH). This is achieved by transferring resources from ones working life to post-retirement when income dries up (Modigliani and Muralidhar, 2004).

There are basically three reasons for the existence of Pension Plans. These are: Social Insurance, Re-distribution, and Savings (Modigliani and Muralidhar, 2004).

First, Social Insurance is particularly valid for public systems. It is equivalent to undertaking a social obligation to ensure that all citizens, especially the old, have the requisite resources to meet their basic needs thus insuring them against the many risks they are vulnerable to, mainly the disability, longevity, insolvency, inflation and investment risks (Modigliani and Muralidhar, 2004).

Second, Pension Schemes can be a re-distribution mechanism for transferring resources from the well-to-do to the poorer segments of society that cannot afford to accumulate adequate reserves. Although redistribution features are not a pre-requisite for a Pension Scheme, they differentiate a Pension Scheme from a "Social Security" scheme. Generally schemes with re-distribution tend to provide, or should provide, a basic (rather than a generous) minimum pension payment (Modigliani and Muralidhar, 2004).

Third, as economic theory demonstrates, countries need savings for capital formation, and individuals need savings to support themselves in the non-earning phase of their lives. Using a variety of incentives (such as tax credits and deferrals) and mandated contribution rules, government encourage citizens to increase their rate of saving. The greater the need for such savings, the higher the contribution rate and, potentially, the benefit (Modigliani and Muralidhar, 2004).

Further, at macro level, a Pension Scheme allows individuals to adopt a Life-Cycle model of consumption, thus protecting myopic and unsophisticated individuals. This involves saving during working life to provide for post-retirement. At the corporate level, pensions are deferred wage payable only