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RETIREMENT DETERMINANTS AND MONEY WORTH RATIO OF DEFINED CONTRIBUTION PENSION IN NIGERIA

RETIREMENT DETERMINANTS AND MONEY WORTH RATIO OF DEFINED CONTRIBUTION PENSION IN NIGERIA

 

Abstract: Retirement decision is an important stage of the employment cycle under Defined Contribution (DC). In 2004, many employees believed that by switching from Defined Benefit (DB) plans to DC was a good deal for retirement income security in Nigeria. However, DC plans have begun to manifest some of its weaknesses that are of major concern to employees’ retirement decision. This study examined the impact of retirement determinants on pension contributions and what the pension money worth ratio implies for retirement decision and old age security. Data on employees’ contribution rates towards their retirement savings accounts (RSAs) and other relevant information were sourced from the respondents of the universities visited in South-West Nigeria. The contributions were averaged for all categories of employees and used to accumulate both past and future contributions based on the assumption that employees will remain in the present employment till retirement. The accumulated funds were used in proxy for annuity premiums by determining their money worth ratio. The result show that the present contribution rates are far below what can give a retiree a secure financial income at retirement due to escalating cost of living allowances (COLA). The study concludes that lack of access to contributed funds and low money worth, that subject retirees to abject poverty, are some of the dangers ahead of the present pension scheme. Consequently, the study recommends that government should adjust contribution rates based on the economic reality and provide inflation index for the employees’ contributions.

JEL Classification: G23, J26, H55

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