Replacement Ratio of the Provisions of the Nigerian Pension Reform Act 2004

Abstract

As a defined contribution (DC) pension scheme, it is important to be able to compare its benefit at retirement with those of other pension schemes in other countries. Replacement ratio is measured by the percentage of a person’s annual income at retirement divided by his/her annual income just before retirement. The global minimum level is about 67%. The Federal government of Nigeria has eight different salary groups for different categories of workers. Salaries of three groups- the Federal Public Service, Academic Staff of Universities and Tertiary Institutions which includes Non Academic Staff – were used to get three different ratios. These were tested using the Chi Square test and found not being significantly different at both 95% and 99% levels of significance. The average of the three showed 59.4% replacement ratio. With this figure, additional 2.5% increase in the contribution rate will be required to achieve the global minimum ratio of 67%.

Keywords: Replacement ratio, Significance level, Chi square.