By Martin Ekpeke
A report by Allianz Global shows that the Nigerian pension system ranked bottom globally in the Global Pension Report 2023. In the ranking, the Nigerian pension system scores 4.3 total scores, indicating a strong need for further reforms.
The breakdown of the scores indicates that in terms of basic condition, Nigeria scores 3.7, sustainability 4.3 and adequacy 4.4.
The report recommends that with an overall score of 4.3, the Nigerian pension system is at the bottom of the global rankings. It is only a small consolation that most other African countries have very similar scores.
It noted that the reason for concern is still the low coverage of the pension system. In addition, access to financial services and financial literacy needs to be further improved to foster private pension provision, especially against the background that private households’ net financial assets are also still rather low in international comparison.
Nigeria, however, has two big advantages: it (still) has financial leeway as public spending for the elderly is very low and it will remain a very “young” country: the old-age dependency ratio is expected to rise only moderately to 6.8% by 2050 – Nigeria is set to be one of the countries with the youngest population worldwide. Nonetheless, the sooner reforms are enacted the better.
Key points in the report
- No respite: The aging of societies continues at an unabated pace – despite Covid 19
- Busy standstill: Pension systems worldwide resemble a large construction site with no prospect of completion – although only a few countries are prepared for the coming demographic changes
- Rethink: Society’s reassessment of work is the key adjustment for the pension system of the future
- The Nigerian pension system scores 4.3 – indicating a strong need for further reforms
The Allianz Global Pension Report analyzes 75 pension systems around the globe using its proprietary Allianz Pension Index (API). The index consists of three pillars: Analysis of basic demographic and fiscal conditions as well as determination of the sustainability (e.g. funding and contribution periods) and adequacy (e.g. degree of diffusion and pension level) of the pension system. A total of 40 parameters are considered, with values ranging from 1 (very good) to 7 (very poor). In the weighted sum of all parameters, the evaluation of the respective system crystallizes into one overall score.
No respite
The Corona pandemic has led to a decline in life expectancy in many countries; in a few, a (small) baby boom could even be registered. However, this is only a short-term interruption of the unabated and accelerating trend of societal aging, readable in the global old-age dependency ratio[1]: by 2050, it is expected to climb from 15.1% today to 26.3%; in 2019, an increase to “only” 25.3% had been forecast. “The latest data from China, Korea or Italy, for example, point to speedup of demographic change,” said Michaela Grimm, co-author of the report. “In particular, birth rates are developing even worse than assumed, despite all family policy efforts. But it doesn’t help to lament; we have to face the facts: The intergenerational contract has become fragile. The younger generations Y and Z in particular are being called upon to make (even) greater provisions for old age themselves. The inconvenient truth is: they have to work longer as well as to save more and in a more focused way.”
Busy standstill
The unweighted overall score for all pension systems studied is 3.6: barely satisfactory. Compared to our last report in 2020, this represents only a small improvement. On the one hand, this is hardly surprising: After Covid 19, war and the energy crisis, the fiscal space of most countries has narrowed even further. On the other hand, however, it is very disappointing: the need for pension reforms is not in dispute, but the rhetoric is rarely followed by powerful action: work on the pension construction site is not progressing. In fact, only a few countries – such as France or China – have managed to significantly improve their scoring through reforms. France almost exemplifies the political dilemma of such reforms, as they turn the usual political economy on its head: Instead of handing out benefits today in exchange for impositions later, they require impositions today to avoid cuts later. The few pension systems that are doing well today – notably Denmark, the Netherlands and Sweden, with an overall score well below 3 (see table) – therefore also have one thing in common: they set the course for sustainability very early on, at a time when the demographic bomb was still ticking quietly. They can therefore serve as a model for many developing countries, which also still have a window of opportunity to stabilize their pension systems. In many other countries, however, it will hardly be possible without painful reforms.
Rethink
In addition to the technical details, such as contribution levels and periods, there is a key adjustment for sustainable and adequate pension systems: the social value of work. “Automation, digitalization and artificial intelligence are enabling universal access to education and thus new concepts of work. The dissolution of the rigid dichotomy between employment and retirement currently exists only for a privileged few. The pension system of the future starts by rethinking the world of education and work for all,” said Ludovic Subran, chief economist at Allianz.