ABSTRACT
Over the years there has been rapid reform and amendments from 15% to 18% contribution of pension fund scheme from the defined benefit to contributory pension fund scheme. The delay in the reform had resulted to decline in the volume of funds available in the capital market which in turn affects capital market performance. Hence the broad objective of this study focused on the impact of pension fund investments on capital marketperformance in Nigeria, from January, 2013 to April, 2021 being the period under review. To achieve this, the study adopted a monthly data of pension fund investment in domestic ordinary shares, pension fund investment in Federal government bonds, pension fund investment in foreign ordinary shares and pension fund investment on corporate bonds and capital market performance proxied by All share index. Monthly time series data from January, 2013 to April, 2021 were sourced from National Pension Commission monthly report and Nigerian Stock Exchange fact book. The study employed Vector Error Correction Model to test the hypotheses. The findings established that, pension fund investment in domestic ordinary shares had a statistically positive and significant impact on All shares index in the short–run and a statistically significant impact in the long - run, pension fund investment in Federal government bonds had no significant impact on All shares index in the short- run but had a positive and significant impact on All shares index in the long- run, pension fund investment in foreign ordinary shares had no significant impact on All shares index in the short –run but statistically significant in the long- run and pension fund investment in corporate bonds had no significant impact on All shares index in the short –run but had a significant impact in the long-run on All shares index. In line with the above findings, the study concluded that, investments of pension fund contributions in ordinary shares, Federal government bonds, foreign ordinary shares and corporate bonds in the long-run immensely contributed to capital market performance in Nigeria. On the basis of the findings, the study therefore, recommended that, management of pension fund contribution should select invest outlets that stand out to yield higher dividends and returns on investment as these lead to increase in fund available in the capital market and create more wealth for the contributors of pension fund..It is also necessary that government establish policies that will result to more contribution of pension fund by way of increasing the rate of contribution paid by the employers of labour. This will bring about increase in volume of fund available for investment in the capital market for investor to borrow to carry out developmental projects. National Pension Commission, bearing in mind the core essence of establishing pension fund scheme-to make pension fund contribution available to the pensioner as at when due. Therefore, it is important that National Pension Commission to regularly monitor the legality and viability of institutions jostling to borrow pension fund contribution or have pension fund contribution invested in equity(shares) market as to avoid loss of contributors funds. It is needful for the National Pension Commission to introduce more investment outlets in the capital market as this will result to investors making better choice of investment outlets and spread of risk and to reduce loss of pension contributions when restricted to few investment outlets. Also necessary to supervise the financial accounts or reports of PPFAs,CPFAs and PFCs on monthly basis as to avoid pension fund contribution meant for investment been misappropriated to poor performance of capital market due to inadequate fund.
TABLE OF
CONTENTS
Title Page i
Certification ii
Dedication iii
Declaration iv
Acknowledgements v
Table of Contents vi
Abstract x
CHAPTER 1: INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 11
1.3 Objectives
of the Study 12
1.4 Research
Questions 12
1.5 Statement
of the Hypotheses 13
1.6 Significance
of the Study 13
1.7 Scope of
the Study 15
1.8 Limitations
of the Study 15
1.9 Operational
Definition of Terms 16
CHAPTER 2: REVIEW OF RELATED
LITERATURE
2.1 Conceptual Framework 20
2.1.1 Concept of capital market activities 24
2.1.2 Emergence and development of pension fund scheme in Nigeria 24
2.1.3 The challenges of the old pension scheme 27
2.1.3.1 Poorly funded 28
2.1.3.2 Weak administration of the old pension scheme 28
2.1.3.3 Poor framework 29
2.1.4 The beginning of new pension scheme in Nigeria 30
2.1.5 The national pension commission 31
2.1.5.1 Pension fund administrators 32
2.1.5.2 Pension fund custodians 32
2.1.5.3 The closed pension fund administrators 32
2.1.6 Features of compulsory or contributory pension scheme 33
2.1.7 Amendment of pension reform act 2004 in 2011, 2012, and 2014 33
2.1.8 Upward review of the punishment, penalties or sanctions 34
2.1.9 Increase in rate of pension contribution of participants 35
2.1.10 Accessibility of benefits in event of loss of job 35
2.1.11 Opening of retirement savings account 36
2.1.12 Challenges of the new pension scheme 36
2.1.13 Pension and operation of pension fund contribution
37
2.1.14 Financial markets 43
2.1.15 The money market 44
2.1.16 The place of the stock market
45
2.1.17 The Nigerian stock exchange or market 45
2.1.18 The bond market 47
2.1.19 Equity market 48
2.1.20The pension fund investment guidelines 49
2.1.21. Equities pension fund 50
2.1.22 Private equity funds 50
2.1.23 Bonds pension fund 50
2.2 Theoretical Framework 51
2.2.1 Permanent income hypothesis theory 51
2.2.2 The theory of pooling 52
2.2.3 The life-cycle theory 53
2.3 Empirical Review of Literature 56
2.4 Summary of Reviewed Empirical Literature 71
2.5 Research Gap 82
CHAPTER 3: METHODOLOGY
3.1 Research Design 84
3.2Area of Study 84
3.3 Sources of Data 85
3.4 Description of Model Variables 85
3.4.1 Dependent variable 85
3.4.2 Independent variables 86
3.5 Model Specification 88
3.5.1 Apriori expectation
90
3.6 Method of Data Analysis 90
CHAPTER 4: RESULTS AND DISCUSSION
4.1 Presentation of Data 95
4.2 Data Analysis 95
4.2.1 Descriptive statistic 95
4.2.2 Unit root test 96
4.2.3 Lag order selection criteria (ASII)
97
4.2.4Optimal length selection criteria(DOSS) 98
4.2.5Optimal length selection criteria(FGBS) 98
4.2.8 Optimal length selection criteria(FORS) 99
4.2.7 Optimal Length selection criteria(CRBS) 100
4.2.8Cointegration test 100
4.2.8. Johansen cointegration test result 101
4.2.9 VECM
102
4.3 Test of Hypotheses 106
4.4 Discussion of Findings 109
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary 111
5.2 Conclusion 112
5.3 Recommendations
112
5.4 Contribution to Knowledge
113
5.5 Suggested Area for Further Research
114
References 115
Appendices 125
LIST OF TABLES
4.2 Descriptive Statistic 95
4.2.3 Unit Root Test 96
4.2.4.Optimal length selection criteria(DOSS) 97
4.2.5 Optimal length selection criteria(FGBS) 98
4.2.6Optimal length selection criteria(FORS) 98
4.2.7OptimallLength selection criteria(CRBS) 99
4.2.8 Johansncointegration test result 101
4.2.9 VECM Results 102
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The recent arguments
regarding the aims, sources and uses of pension funds has been a subject of
continued discussion by policymakers, investors and contributors of these funds
at local, state, national and global levels (Atedo,2006). The concerns of most stakeholders
are for the funds operators to utilize them to achieve sustained return on
investments, contribute to economic growth of the nation and most importantly,
make the funds available to pay pensioners when they are due. These among
others are the primary objectives for setting up the pension scheme across the
globe. Pension funds are likely among the most vital source of private and
public savings. Pension funds are made available for firms, institutions and
governments to borrow, help capital market and nations’ economy to grow
(Pencom, 2014). The roles played by pension fund managers have gained ground as
nations have decided to move away from the Pay As-You-Go (Defined Benefit)
scheme-where the benefit of the scheme is fixed and known, where pension
contribution was not made mandatory, where only the employer was saddled with
the responsibility to pay the contribution for the good of the employee.
The defined benefit scheme
is a scheme where at the termination of the worker’s duties to his or her
employer a lump sum of money known as gratuity or pay-off is paid to the
beneficiary. The benefit to be derived by the employee depends on his or her
last emolument before retirement as well as number of years the employee has
committed to the service of his employer. This is because the longer the year
of service the more contribution would the employee make (PenCom, 2014). Among
the basic motivations for nations to reform their pension fund system have been
the expectations that pension funds would play a crucial role in relieving
economic hardship to the aging population, support the growth of capital
market, fostering private savings and minimize the expenses borrowing funds for
corporations if left alone in the hands of banks. More so, since pension funds
are of long term savings, these funds are able to serve as long-term source of
financing to local investors and governments engaged in developmental projects.
Retirement Savings Account
(RSA) have the feature of steady flow of savings as the worker continues in the
service of his or her employer through the regular monthly remittance of his or
her contribution to the approved pension fund collector. According to Pencom
(2014), pension fund investment guidelines, require that large proportion of
pension fund contribution be invested locally in various investment outlets as
approved by National Pension Fund Commission (PenCom). The guidelines contain
the maximum percentage of total pension funds to be invested in each investment
outlet in line with National pension commission directives. However, pension
fund investment in Federal government bonds has the highest percentage of
investment of pension fund contribution.
This is because government bonds are usually described as risk-free
investment asset unlike other investments. Equally to understand is that,
investment outlets assumed to have much risk are allotted or invested less
amount of pension fund contribution for instance, corporate bonds, this is
because any economic policy that is not favourable to the performance will
affect the firms and may not have the funds to redeem its debt obligation and
this will result to loss of pension funds, especially where there is no
collateral backing the borrowed fund.
More so, investment outlets
that are associated with less risk are allotted with highest pension funds such
as Federal Government bonds. Since contribution of pension fund is a regular
one, therefore, it can be said that pension fund investors contribute the most
funds to the growth of local markets. In view of the numerous good roles played
by pension funds, many nations have reformed their pension fund systems. Based
on these good roles by pension fund contributions, Nigerian government in 2004
decided to reform its pension fund system which resulted to Pension Reform Act
2004 and the establishment of National Pension Commission also in 2004 which
replaced the Defined Benefit System managed by National Social Insurance Trust
Fund took over operation from the National Provident Fund in 1993. The need to
pursue policies aimed at promoting investment and capital market performance
has been an issue of continued debate at all levels of government- National and
international government's responsibility for continued welfare of the aging
population poses much worry to the government so that the welfare of members of
the pension scheme will continue by way of regular pension payment. Governments
have to make policies that will help government and non-government institutions
borrow funds either locally or externally aimed to fill the gaps that arise due
to their needs and expenditure. These funds can be obtained from the capital
markets in which pension funds serve as a source. Pension fund investments
arise due to government policy for institutions as well as government agencies
that have surplus funds to invest pending when the contributor or his or her
beneficiaries will have need for such funds. Pension fund managers use the
regular monthly contribution from members of the scheme to invest in the
various investment outlets in the financial markets, which capital market is a
component. These investments using pension fund contributions will in turn
increase productivity in the capital market and the economy in general.
Government considered it important to invest these funds to avoid them lying as
idle funds rather utilized in manner and ways that will help both the
contributors, the borrowers of these funds including the government. Government
responsibility for providing for the aging population and improve on the growth
of the economy, all aimed to uplift the wellbeing of its citizenry has given
rise to making policies to enhance continuity of the pension fund scheme Umar
and Emmanuel (2012).
Umar and Emmanuel (2012),
posit that the establishment of new pension
scheme in Nigeria is to encourage savings mobilization which helps to
increase capital market activities. Thereby fostering financial market
performance in Nigeria. Gale and Orszag (2004), Weale (2009), Rose (2013),
further posit that a nation's financial market in one way or the other affect
the national economy. That is, there is enough funds to borrow and to invest
and there will be increase in productivity and the cost of living in such a
country will be moderate.
By investing pension funds
in the capital market, the borrowers of such funds have to agree on the terms
of repayments aimed towards protecting the contributors’ funds so as to make
these funds available when they are needed. However, it is not bad, investing
and borrowing funds, provided such funds are invested appropriately in creating
wealth and improving the quality of lives of the contributors. Various works
have established that there exist relationships between pension fund
investments and capital market performance (Catalan, 2004, Catalan, Impavido,
and Musalem, 2000, Davis and Hu, 2005, Hu, 2005, Kim,2010, Meng and Pfau,2010,
Raisa,2012, Rezk, Irace, and Ricca, 2009, Walker and Lefort, 2002, Zandberg and
Spierdijk, 2010).
Thus, developing countries
in Africa, developed countries in Europe, America and Asian and nations
transitioning from military to democracy have one common goal of establishing a
pension scheme, which is to ensure financial security for their aging
population (Barr and Diamond, 2010). Pension funds are critical catalysts of
capital market performance (Chan -Lau, 2004). The works of Levine and Zervos,
(1998), Caporale, (2003), Beck and Levine, (2004), have shown that capital
market performance has statistically positive significant correlation with
pension funds. Levine (2004) argues that capital market of nations with better
developed banking and other non- banking financial institutions grow faster
than those with weak banking and non- banking financial institutions. Pension
funds help to increase the volume of funds in the financial system through
investments in the capital market and as measures for savings mobilization.
Pension fund scheme is universally expected to benefit the contributors when
out of active service by way of regular and prompt payment of pension
throughout the remaining years of their life. In Nigeria, pensioners are
passing through horrible situations of non- payment of pension and incessant
request of documents which have no relevance to pension payment (Adesina,
2006). These situations have brought fear in the present day workers resulting
to the employees imbibing the act of corruption in attempting to fend for their
future (Ogunbameru and Bamiwuye, 2004). Adesina (2006), stated that the two
main aims of introducing pension fund scheme are to support the aging
population through payment of regular pension and the growth of the economy
through investment in the capital markets. Adesina (2006), reported that these
two main purposes look defeated in Nigeria in line with delay and non- payment
of the pension to the contributors, situations which are not favourable to the
welfare of the pensioners and growth of the capital markets. Before the
establishment of the National Pension Commission (PenCom), National Provident
Fund (NPF) was responsible for all pension issues in Nigeria.
Barrow (2008) and Odia and
Okoye (2012), opined that foremost pension regulation in Nigeria was known as
the Pension Ordinance of 1951.The 1951 Pension Ordinance provide for full
pension benefits for the colonial administrators and partial benefits given at
the mercy of the Governor-General for Nigerian employees in government
institutions, parastatals and agencies found to be in good book of the
government or the Governor-General at that time. Barrow (2008) and Odia and Okoye
(2012), that only public sector workers
were covered by the old pension scheme through statutory compulsion but there
was no law or regulation making it compulsory for employees in private sector
to enroll in the scheme. Private sector employers at the retirement of their
employee provided the employee with a lump sum payment known as pay-off which
was not mandatory for the employer to do so but at his or her discretion
(Nnanta, Okoh and Ugwu, 2011). Due to these inadequacies, the Government of
Nigeria considered it important to reform the pension fund industry which
resulted to the establishment of the National Pension Commission in 2004 to
improve on the welfare of the aging population having attained the statutory
age of retirement and to use the pooled fund to invest in the capital market to
help grow the economy in general.
The Pension Reform Act 2004
brought about changes in the operations of pension funds scheme in Nigeria, for
instance, the enrolment of the private sector and employers and employees into
the scheme, where the participants (employer and employee) have to contribute
given percentage of the monthly salary of the employee into a retirement
savings account opened for the benefit of the employee. This form of pension
fund scheme where the contributors to
scheme, the employee and the employer are mandated to contribute to the scheme
is known as Compulsory or contributory Pension Scheme (CPS) (Atedo, 2006). In
addition to the inadequacies of National Provident Fund and National Social Insurance
Trust Fund , such as, inadequate budgetary provision as well as late approval
of the budget by the government remit the employee's contribution to the pool,
making it difficult for the management of the pension funds to operate smoothly
Olanrewaju (2011) and, Dostal (2010), The Pension Reform Act 2004 became
necessary when the government discovered the success story of Chilean pension
industry reform which took place in 1981, contributing significantly to the
growth of the Chilean capital market and national economy at large.
The Chilean pension fund
industry was reformed in 1981 and had since been providing long- term
investment funds for deficit economic units (Orifowomo, 2006). The essence of
emulating the Chilean Pension reform scheme was to allow Nigeria pension
industry provide long- term capital to develop the financial markets and
significantly contribute to economic growth of Nigeria, to drastically reduce
the rising consequences of pension arrears and to support the credibility of
the government’s economic reforms efforts (IMF, 2005). Besides, Gunu and Tsado (2012), asserted the
goal of savings mobilization was the idea for initiating the contributory
pension scheme aimed to cater for the welfare of the contributors at old age
and to help increase the volume of funds in the capital market, thereby
increasing the volume of funds and reducing the cost of borrowing in the
market. All these are aimed to foster capital market growth in Nigeria. Ten
years after the introduction of Pension Reform Act 2004, various amendments
have taken place since the inception of the Pension Reform Act 2004. Among
these amendments include, the Pension Reform Amendment Act 2011, which exempts
the personnel of the military and Security Agencies from the contributory pension
scheme as well as the universities (Miscellaneous) Provisions Act 2012, which
reviewed upward the retirement age and benefit of university professors to
seventy years and the judges to seventy-five years. Another amendment to the
2004 pension Reform Act is the 2014 pension reform Act. The Pension Reform Act
as amended vested jurisdiction of pension matters in the hand of National
Industrial Court (FGN, 2014). However, the issue at hand is, whether the new
pension reform Act has been able to address and bring to an end difficulties
which the previous schemes? Specifically, these problems as already stated
above include, corruption within the scheme, poor administration of pension
funds, poor monitoring and evaluation of investments, poor record keeping,
delay in payment of pension to the retired contributors, among others. These
factors and more, pose great challenge to the financial security of the
contributors of these funds when they retire (PenCom, 2014).
The Pension Reform Act 2004
made it compulsory for any establishment that has from five workers to enroll
its employees in the pension fund scheme. The 2004 pension Reform Act specified
that each employee is to make a total contribution of 15% each month The Act
2004 requires the employee to contribute 7.5% and the remaining 7.5% to be
contributed by the employer based on the monthly salary of the employee into
Retirement Savings Account (RSA) opened in favour of the employee. In the same
vein, the military personnel are to contribute 2.5% of the 15% while his or her
employer is to contribute the remaining 12.5% (Nyong and Duze, 2011). The 2014
Pension Fund Amendment, made it mandatory for any establishment with up to 3
workers to enroll those workers into the pension fund scheme. That after three
months a new employee has not opened a retirement savings account that employer
is mandated to set aside from the monthly salary of such employee the pension
fund contribution and to remit same as soon as a retirement savings account is
opened for the employee. In addition, the Pension Reform Act 2004 empowers the
National Pension Commission (PenCom) to register, give license and repudiate
the license of any operator that does not comply with or abide by the rules
guiding the operation of the pension fund scheme, such operators include,
Pension Fund Administrators, Pension Fund Custodians and Closed Pension Fund
Administrators (Eme and Sam,2011). In Nigeria, there are 31 pension fund
administrators and 5 pension fund custodians licensed by National pension commission
(Pencom, 2018). Pension funds play a veritable role in every organized economy
aimed to foster its growth and relieved the aging population of economic
hardship when they retire from active economic service. Pension funds if not
used until when the contributor will retire and start receiving pension could
be described as financial mismanagement.
Therefore, these funds in
government decided to channel them into one form of investment or the other as
the law guiding its usage stipulates. Such pension funds could be invested in
ordinary shares, Federal government of Nigeria securities, corporate
securities, Real estate property, State and Local Government securities, Time
deposit among others. All these transactions are made possible through the
financial markets, which capital market is a component. Indeed, pension funds
add value to the world economy through direct supply of funds in the financial
markets. It also results to accumulation of savings or savings mobilization,
reducing old age hardship and poverty in the land (Njugana, 2010). As at 2014,
Pencom (2014), Nigeria's pension assets stood at N4.6 trillion. Similarly,
Barungi (2014), maintained that pension fund collected reached USD 16.3 billion
deficit in 2004 to a USD 19.3 billion surplus in 2012, with a further increase
to the tune of USD 23.2 billion in 2013. At another period, August 2016, Pencom
made an assets value of 5.9 trillion Naira, this amount dropped to about 5.85
trillion naira in October, the same year as a result of access or withdrawal of
lump sum by sacked workers, and whose contributions were no longer been
remitted by their respective employers (Agabi, 2017;Odewole, 2017).
In another development, in
2017 membership of the pension fund scheme from both public and private sectors
increased from 7,348,028 in 2016 to 7,823,911 in 2017. This figure showed an
increase of 475,883 of RSAs registered within the period. In 2017, a total of
2,273,627m RSAs were males and 1,205,240m were females from the public sector,
while 3,271, 463m and 1,073,581m were males and females respectively from the
private sector. These figures showed that in 2017, a total of 5,545,090m and
2,278,821m RSAs were males and females respectively (Pencom, 2018). In 2020
annual report of National Pension Commission, indicated that pension fund
administrators invested N7,117,162.81b in domestic ordinary shares,
N80,740,362.82b in Federal government bonds, N1,165,829.80b in Foreign ordinary
shares and N8,658,926.83b in Corporate bonds while All Share Index in the same period
recorded the sum of N331,830.28b. From January, 2021- April, 2021, pension fund
managers invested N3, 448,970.82b in domestic ordinary shares, N29, 799,762.35b
in Federal government bonds, N382, 263.04b in Foreign ordinary shares and N3,
012,564.26b in Corporate bonds, while All Share Index recorded the sum of N161,
097.96m Pension fund contributions are savings made by employees from
government and non-government sectors of the economy which take long time for
the contributors to start receiving pension. For the fact that these funds are
long term savings in nature, government in its wisdom by laws mandated that
these pension fund contributions be invested in various investment outlets in
the capital market in accordance with the laws guiding operations of pension
fund investments.
Among such investment
outlets include, domestic ordinary shares, Federal government bonds, State and
Local Governments bonds, Foreign ordinary shares, Real estates property, time
deposits and Corporate bonds These transactions are regarded as debt financial
instruments transaction while investment in domestic ordinary and foreign
ordinary shares indicate ownership right of the holder of such share documents
in the given firm or firms. Pension funds are steady flow of savings and help
to reduce the cost of borrowing if allowed the banks to be the only providers
or source of funds for the investors to meet up with their growing financial
needs.
Since pension funds are
steady flow of funds, it makes it possible to be available in the capital
market for firms, institutions and governments that have need for fund to
source for it. As more pension funds are available in the capital market the
more the performance of the capital market all things been equal. Investors of
pension fund need assurance that their investments will lead to increase in
their wealth. To achieve this and others, it is very important develop capital
market in which pension funds are invested and policies made in favour of
providers of pension funds. It is also very necessary that the regulators of
the market to regularly monitor and make sure that the activities in the market
been done in accordance with the law guiding the operations in the market.
These will go a long way to increase the confidence of pension fund
contributors that their funds are safe and this will make them willing to
contribute more to the scheme. Again, it is also good that government make
economic policies to increase the rate of return on pension fund investments.
Equally important is for the government to create more investment outlets where
by investors will from much varieties of investment outlets make their choice
in form of risk diversification or spread.
1.2 STATEMENT
OF THE PROBLEM
There seems to be a general concern on the roles
pension funds pay in terms of financial security for the aging
population as well as on the performance of capital markets in both developing
and developed economies. Reports have it that pension fund serve as a critical
catalyst of capital market performance and has significant correlation with
capital market performance (Barr and Diamond, 2010; Beck and Levine; 2004; Chan
-Lau, 2004; Caporale, 2003 and Levine and Zervos, 1998). On the other hand,
some researchers argued that pension funds have insignificant impact on capital
market performance (Melok and Ikhide; 2014; Zandberg and Spierdijk;2010;
Olvares,2005, Yermo,2005 and IMF and World Bank, 2004).
This disagreement among researchers created
a problem which findings of an empirical study of this nature can
provide an answer for or against any of the two different group of researchers
on the impact of pension fund investment on capital market performance which
will in turn serve a knowledge gap that need to be filled. To the best of my
knowledge none of the previous researchers decomposed pension fund investment
to determine the impact of individual proponent of pension fund investment on
capital market performance as well as using the most current data. In view of
these differences in line with the subject matter: pension fund investment on
capital market performance, that the present study identified as problems that
required attention, they also formed gaps to be filled and contribution to
existing knowledge, against which backdrop this study is conceived.
1.3 OBJECTIVES
OF THE STUDY
The broad objective of this
study is to empirically analyze the impact of pension fund investments on
capital market performance in Nigeria. To achieve this broad objective, the
specific objectives were stated based on the decomposed proxies of pension fund
investments(the independent variable; pension fund investment in domestic
ordinary shares, Federal government bonds, foreign ordinary shares and
corporate bonds) and capital market performance (dependent variable; proxy by
All share index). Hence, the specific objective of this study were to :
i. determined the impact of
pension fund investment in domestic ordinary shares on All share index in
Nigeria.
ii. assessed the impact of pension fund
investment in Federal government bonds on All share index in Nigeria.
iii. investigated the extent
to which pension fund investment
invested in foreign ordinary shares have affected All share index in Nigeria; and
iv. ascertained the impact of pension fund
investment in corporate bonds on All share index in Nigeria.
1.4 RESEARCH QUESTIONS
On the basis of the above
stated broad and specific objectives of this study, the following research
questions were considered specifically to determine;
i.How has pension fund
investment in domestic ordinary shares impacted on All share index in Nigeria?
ii. To what extent has pension fund investment
in Federal government bonds impacted on All share index in Nigeria?
iii. What is the impact of
pension fund contributions invested in foreign ordinary shares on All shares
index in Nigeria?
iv. How does pension fund
investment in corporate bonds impact on All share index in Nigeria?
1.5 STATEMENT OF HYPOTHESES
In order to guide the study
to achieve the specific objectives and provide answer to the research
questions, the following hypotheses were formulated in the null form (H0)
for testing:
HO1:Pension fund
investment in domestic ordinary shares has
no capacity to contribute to the performance of All share index in Nigeria.
HO2:Pension fund
investment in Federal government bonds has no potency to enhance
performance of All share index in
Nigeria.
HO3: Pension fund
investment in foreign ordinary shares does not significantly impact on All
share index in Nigeria.
HO4: Pension fund
investment in corporate bonds has no significant impact on All share index in
Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The core aim of this research work is to usher
in empirical findings or evidence on the impact of pension fund investments in
(domestic ordinary shares, Federal government bonds, foreign ordinary shares
and corporate bonds) on capital market performance in Nigeria.
The Pension Reform Act 2004,
Pension Reform Amendment Act 2011 and 2014 are to many a long awaited government
intervention measure to adequately address and find solution to the various
crises engulfing the Nigerian Pension industry. The identification of the
causes of none or delay in payment of pension and undeveloped state of Nigeria
capital market become necessary as they are instrumental to economic growth of
a country such as Nigeria. The study findings will contribute to the body of
literature and knowledge in pension funds contribution and investment in the
capital market. Similarly, the study will be of benefit to the following;
i. Policy makers: The
content, model and recommendations of this study would help the various tiers
of government, put in place measures and legislations to help beneficiaries of
pension funds reduce delay in payment of pension, unfair treatment of
pensioners and put in place enabling environment needed in the capital market
operations aimed to stimulate economic growth in Nigeria, which is among the
core purpose of establishing the capital market.
ii. Investors: The knowledge of study would enlighten investors to understand viability or
usefulness of pension fund contributions, the sources, their investment outlets
and investors fear pertaining loss of their funds, will have a better
understanding of how their funds are used in the capital market environment and
risk diversification or spread, aimed to maximizing asset returns. Thus, will
assist the investors in making informed decisions that their funds are safe and
to be made available when need for such come. Also, would serve as a roadmap
towards reducing the increasing high cost of borrowing in the capital market if
left alone in the hand of commercial banks as it boost constant supply of
funds.
iii. Students and researchers: The research work will serve as a
reference point to students and researchers who may be interested in carrying
out further research in similar topic in future and as well contribute to
existing literature on pension fund investment and capital market performance
in Nigeria, as well extending the study to areas not covered in this current
study.
1.7 SCOPE OF THE STUDY
The scope of this study
covered an empirical analysis on pension fund investments on capital market
performance in Nigeria from January, 2013 to April, 2021 showing a total of 100
(hundred) observations. The period January, 2013 was chosen as the base year
for the work as the period when National Pension Commission started report of
monthly data for the selected variables of the work. Time series data consisting of All share
index, domestic ordinary shares, Federal government bonds, foreign ordinary
shares and Corporate bonds, from National Pension Commission monthly report and
Nigerian Stock Exchange fact book of various years were used. The month April,
2021, was selected as the end period for the work in order to accommodate the
most current realities in terms of pension fund investments in the selected
variables of this study. The highlight this study focused on how pension fund
contribution are utilized in the capital market through investment in various
outlets in the capital market (domestic ordinary shares, foreign government
bonds, foreign ordinary shares and corporate bonds) for performance of the
capital market in Nigeria. The content
scope also covered review of relevant conceptual literature and theoretical
framework and empirical review.
Geographical scope of this
research covered the entire Nigeria situated in West Africa, African continent.
1.8 LIMITATIONS OF THE STUDY
This research work
encountered some limitations as a result of measurement error, for the fact
that some of the values of the chosen variables such as domestic ordinary
shares, Federal government bonds, foreign ordinary shares and corporate bonds,
were loglinearized or approximated which in turn may affect the actual figures
or values if used as they were in their original source.
There was no research grant
to the researchers of this work, hence a limitation. This resulted to the
researchers soliciting for assistance from family members and friends to get
this work to this extent. The period for this study may have been affected by
the 2019 pandemic (COVID-19) resulting to the presentation of this work in
2022. However, these limitations did not influence the result of the work.
1.9 OPERATIONAL DEFINITION OF TERMS
All share index
All shares index is
described as the changing average value of share prices of all firms or
companies on a stock exchange. This is
used as a measure of how a market is performing. Bonds: A bond is a debt document to the issuer (borrower), which
contains the amount borrowed, owed or invested by the recipient of the document
and the coupon rate-interest for the amount borrowed. The debt document also
contains the period during which the core or principal sum along with the
return will be repaid. This period is known as the maturity date.
Bond market: Bond market
is described as fixed income market, which allows corporations and governments
to borrow directly from investors through the issuance of debt financial
instruments in the capital market.
It is fixed income market
because the return (interest/coupon rate on investment is known at the time of
borrowing or investing). The bonds are issued in the primary or virgin market
and resold in the secondary market. In bond transaction, the principal amount
lent to the investee is repaid alongside the agreed interest/coupon rate which
is an income to the investor. Irrespective of the economic policies in a
country both the principal amount and the interest must be repaid unlike
transactions in the equity/share market.
Holder of bond document is
not a permanent fund provider for the investee which is the opposite in the
equity/share market. Risk adverse investors (investors that do not like taking
risk) like investing in bond market because both the amount invested and
interest accrued must be paid at time of maturity. These bonds as debt
documents used to raise funds from the capital market to carry out long term
projects.
Closed pension fund administrators
These are licensed private
institutions charged with the responsibility of operating pension fund scheme
on behalf of their employees. They are usually being established by
Multinational companies. They are charged to take responsibility in terms of
managing contributions made prior to 2004 Pension reform in Nigeria,
(Contributions made by employees during the period of National Provident Fund,
NPF and National Social Insurance Trust Fund, NSITF)
Financial market: Is
a broad term that explains “any marketplace or forum which may exist in
physical place or not, where buyers and sellers participate in the exchange of
assets such as equities, bonds, and currencies.
Financial markets are
associated with transparent pricing, fundamental rules, fees and costs as well
as supply and demand which serve as determinants for prices of securities.
Foreign ordinary shares: The use of pension fund contributions to invest in shares of
firms that are owned by foreigners. This is one of the independent variables
used in the model of the work. National
pension commission (PenCom):
This is Federal Government of Nigeria institution charged with the
responsibility of pension fund matters in Nigeria.
PenCom makes policies,
monitors the activities of PFAs, CPFAs and PFCs with regards to pension fund
contributions, their investments and payment of pensioners.
Pension fund administrators: These are private licensed firms by PenCom authorized to invest
pension funds on behalf of National Pension Commission and for the benefit of
the contributors/beneficiaries.
Pension fund custodians: Pension fund custodians as private licensed institutions or
firms by PenCom delegated with the responsibility to take collect the pension
contribution and remit same within 24 hours to the PFAs.
Pension fund investments/assets: These are tangible items or property (moving/immovable) under
management and custody of National Pension Commission (Pencom), Pension Fund
Administrators (PFAs), Closed Pension Fund Administrators (CPFAs), Pension Fund
Custodians (PFCs).
Pension reform act 2004/2011/2014: These represent the 2004 and 2014 pension reform Acts that
established National Pension Commission and further reform of the 2004 which
contained improved conditions on the management of the pension fund matters.
Private equity fund: As shares of private firms not listed or traded on the floor of
the Stock Exchange. The firm sales its shares directly to the public to raise
funds.
Securities
These are financial instruments used by
investees to raise funds to meet the financial needs of their firms,
institution or government. They could still be described as financial instruments
showing the extent of capital exchanged with the investor, which are to contain
terms/conditions of the transactions. These are debt documents issued by the
borrower of funds in the financial markets and collected by the provider of
such funds as evidence of the exchange or debt owed.
These documents contain
details of the transaction such as the amount, date, coupon rate, name of
borrower and lender. Securities Exchange: As legal trading facility used to
raise some funds, increase, reduce or regulate the amount or quantity of money
in circulation by the government. Security
exchange commission (SEC): This is formerly called the Capital Issues
Commission (CIC). The SEC was founded by the SEC Act of 1979, which SEC Act of
1989 strengthened the more.
Security exchange commission
is known for the regulation in the capital market and is the Apex regulatory organ of the capital
market (NSE) for all the institutions or participants operating in the capital
market. Its core objective is to promote an orderly and active capital market
that will meet the requests made by the stakeholders.
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