Inflation Risk Factors and Contributory Pension Wealth: Reflections on Nigeria’s Old-age Poverty

Abstract

Purpose of the article: Nigeria’s shift to the Defined Contributory Scheme (DCS) is more or less questionable in terms of providing economic security for the senior citizens and preventing old age poverty. The 2004 and 2014 pension reforms sought to conform to pension theory; yet, there could be greater critical risks such as inflation risk factors. This study therefore examined how inflation risk factors impact pension wealth in Nigeria. Methods: The Structured Autoregressive Distribution Lag (ARDL) to the co-integration approach is employed to determine the relationships between inflation risk factors and investment returns of selected Nigerian pension fund administrators for the period 2009–2014. Scientific aim: This study sought the evidence to support the impact of inflation risk factors on pension wealth in Nigeria following the switch to the DCS based on the theoretical link between the investment returns and inflation rate. Findings: Inflation and world oil prices adversely affected the asset returns of pension funds management bourgeoning vulnerabilities to old age poverty. Conclusions: Pension wealth of Nigerians at the cumulating phase is at high risk to inflation risk factors, and is reasonably justified with the negative relationship with the exchange rate factors and world oil prices. The study suggests that inflation, exchange rate risk, and world oil price risk must be strategically tackled with farsighted multi-faceted fiscal and monetary measures to reduce social insecurity and vulnerability to old age poverty. The government should consider promoting the flotation of inflation-indexed bonds and urgently consider imposing a guaranteed returned pension plan (GRPP) to reduce the inflation risk in the accumulating phase of the DCS, while workers should consider increasing their contributions to mitigate inflation risk factors. Insurance life annuities can also provide inflation insurance linked to inflation-indexed bonds.