Article Type : Research Article
Authors : Oyedokun GE, Akingunola RO and Somoye ROC
Keywords : Financial depth; Financial institutions; Financial sector development; Pension fund; Pension investment
This study examined the effect of pension investment
on financial dept in Nigeria. The study adopted an ex-post facto research design. The population of the study is 14
years of Nigeria economy from the year 2007-2020. Time-series data were sourced
for this study which are entirely secondary data from the Pension Commission
and the Central Bank of Nigeria (CBN) statistical bulletin, and the World
development indicator (WDI) of the World Bank Database. Autoregressive Distributed
Lag (ARDL) bounds testing approach was adopted to examine the long- and
short-term relationships between the series, using Eview 12 version. The result
of the hypothesis shows that there is evidence that pension investment in
equities has positive relationship with financial deepening. This implies that
increases in pension investment in equities will lead to increase in financial
depth in Nigeria. In sharp contrast, pension investments in FGN securities,
local money market securities and mutual funds have a negative relation with
financial depth. This implies that increases in pension investments in FGN
securities, local money market securities and mutual funds will lead to
decrease in financial depth in Nigeria. The result also shows that in the short
run that pension investments in equities and mutual funds have positive but
insignificant relationship with financial depth, while FGN securities and local
money market securities have negative and insignificant relationship with
financial depth. The study then recommended that, to accelerate financial
sector depth, it is necessary for the financial sector regulators and
policymakers to strengthen the depth of banks asset, other financial
institutions and financial markets through policies and reforms to attract more
pension investment that will contribute to the development of Nigeria’s
financial stance.
The reforms in pension administration all over
the world have been of tremendous importance to mobilise ‘invisible’ funds.
Pension funds do accumulate and are subsequently invested which over time has
helped the capital market as well as the government in meeting their immediate
fund needs. The reform agenda has a
clear and well-articulated set of goals, which include weakening the growth of
pension liabilities, ensuring timely payment of benefits, instilling thrift in
Nigerians as they approach retirement, and developing a simple, transparent,
and sustainable pension system [1]. It can also decipher from the modification
agenda; an indirect aim of the scheme is the advancement of the financial
sector of the nation’s economy. Pension systems have become a cause of
macroeconomic unsteadiness, a limitation to economic growth, and an ineffective
or multiple providers of retirement income [2]. In the same vein, pension fund
accumulation has been linked to the poor state of financial development which
is evident in countries that have adopted an accumulated pension fund system
[2]. For instance, financial depth is not a function but is a representation of
the overall expansion of the services provided by the financial system.
Similarly, the measures available for access do not directly measure how well
the financial system identifies good investments, regardless of the
individual's guarantees; but provide an approximation of the use of various
financial institutions and instruments [3]. The financial development can be
measured by a variety of factors, including the depth, size, accessibility, and
robustness of the financial system. This can be measured by examining the
performance and activity of financial markets, banks, fixed income markets, and
financial institutions. It has been observed that the greater a country's level
of financial development, the more financial services are available. The
developed financial system provides higher returns while posing lower risk. The
foregoing interest the researchers to study the effect of pension investment on
financial depts in Nigeria
Pension
investment in Nigeria
Pension, according is a
periodic income paid after retirement to an employee who has served for certain
years and retires because of age, earnings, and length of service and payments
are mostly on monthly basis [5]. It is one of the three means of providing for
the post-service life of employees. The other two are personal savings and
state sponsor social security. Opined that incorporation of pension into
employment conditions can help to improve productivity. Meeting employees' reasonable
needs, including pension, in their current employment determines their length
of stay, which has a significant impact on the organisation's well-being and
productivity. The motive of a pension scheme is to provide the personnel of an
organization with a method of securing retirement, a standard of living
moderately consistent with that they enjoyed even as in service. According to,
it is the totality of plans, procedures, and legal processes of securing and
placing apart finances to meet the social obligations of care which employers
owe their personnel on retirement or in case of loss of life. Pension Fund
Managers (PFAs) invest money in stocks and other securities and investment
assets on behalf of RSA holders to ensure value gains. They also save for
retirees, protect assets, fund pension schemes, and cover retirees' costs [8].
To meet the different needs of retirees or to ensure fund performance that is
within the existing regulatory provisions, PFAs take investment decisions
considering the internal and external environment, objective setting, risk
assessment, risk response, control activities, risk appetite, information and
communication, and regulatory review. Pension Fund Custodians are responsible
for housing the pension fund's assets. It is expected that PFAs will never hold
the assets of the pension fund. The employer sends the contribution directly to
the trustee/custodian, the trustee notifies the PFA of receipt of the
contribution, and the PFA deposits the contribution into the employee's retirement
savings account. Custodians carry out transactions and activities related to
the management of pension investments under PFA instructions. The employer must
deduct the contribution from the trustee and repay it within 7 days from the
date the employee receives the salary. The Trustee, on the other hand, will
notify the PFA within 24 hours of receiving the contribution. To track their
activities, authorized operators must submit regular reports of their
activities to PenCom. PFA and PFC must disclose their rate of return and
publish their audited accounts. Also, a seeming defect in Section 87 of the
Pension Reform Act 2004 has been corrected in Section 101 of PRA 2014. Section
87 of PRA 2004 requires that every Pension Fund Custodian or Administrator
shall render to the Commission monthly reports of any fraud, forgery, or theft
occurring in its organization failing which it commits an offence and shall be
liable on conviction to a fine of not less than N10,000,000 and each of its
director or officer shall be liable to a fine, not less than N5,000,000 or
imprisonment for a term not exceeding 3 years or both. The implication of this
(not exceeding 3 years) is that the term of imprisonment could be one day! In
Section 101 of the PRA 2014, the term of imprisonment has been amended to ‘’not
less than 5 years’’. Prosecution of offences is vested in the Federal and State
High Courts, including the High Court of the Federal Capital Territory, as well
as the National Industrial Court to ensure speedy dispute resolution and
dispensation of justice as it relates to the offences stated in the Act. The
2014 PRA Act provides that where there is a conflict between the provisions of
the 2014 PRA and any other promulgation, the 2014 PRA shall prevail. Therefore,
provisions of other legislation that seek to subject income attributable to
pension funds to tax will no longer apply. As a result, pension funds invested
in bonds and short-term government securities will continue to benefit from
exemptions even after the ten-year tax-free timeframe accorded by the Companies
Income Tax (Exemption of Bonds and Short-Term Government Securities) Order 2011
expires.
Financial
depth
According to, financial deepening is defined as
an increase in the supply of financial assets in the economy, and thus the sum
of all financial asset measures gives us an estimate of the size of financial
deepening. As a result, it is suggested that the financial sector is the
channel through which financial deepening manifests itself in their models of financial
deepening used the degree of trust in the economy and the ease of conversion of
illiquid paper (after an initial acquisition) into a liquid paper as measures
of financial depth [9-11]. They referred to the latter as "securitisation
or financial intermediation," and they claimed that if the trustworthiness
is high and the costs of transforming to liquid paper are low, then an
indicator of financial deepening has been achieved. The Department for
International Development outlined the ways in which the financial sector can
be adjudged to be developed or to have deepened and these include improvement
in the efficiency and competitiveness of the sector, the variety of financial
services offered may expand, as may the diversification of institutions that
function in the financial sector, as may the amount of money that is mediated
through the financial sector, as may the magnitude to which capital is
distributed by private-sector financial institutions to private enterprises
responding to market signals (rather than government-directed lending by
state-owned banks), as may the amount of money that is collateralized through
the financial sector may increase, the regulation and stability of the
financial sector may improve and more of the population may gain access to
financial services [12]. In Nigeria, as part of the Structural Adjustment
Programme (SAP), both the financial and the foreign sectors of the economy were
deregulated. One of the goals of liberalising the financial sector was to raise
the real rate of interest enough to allow domestic savings to be mobilised. In
addition, an increase in the interest rate may stimulate portfolio capital
inflows. It is therefore conceivable that the defined contributory pension
scheme which was introduced later could then serve as a shot in the arm towards
the realisation of the goals of savings mobilisation, domestic financial
instruments acquisition and portfolio investment inflow (financial deepening).
Since the inception of the funded contributory pension scheme, one wonders if
the depth of Nigeria's financial system has appreciably improved. In their
study of the impact of financial deepening on economic growth used three
measures of financial development, namely: liquid liabilities less narrow money
(M3 less M1), the ratios to GDP of liquid liabilities (M3), and credit
allocated to the private sector [13,14]. Lastly, in their study of financial
deepening in CFA Franc Zone captured financial depth as credit to the private
sector in terms of GDP. The funded scheme has the inherent potential to
increase savings due to its contributory feature. According to the OECD (2005),
institutional investors, particularly pension funds, mutual funds, and
insurance, have increased their role as savers over the last few decades. It
went on to say that this trend is likely to continue as retirement savings
increase, and that increased pension saving will increase the size of capital
markets. The large pool of savings that constitutes pension funds must be
channelled into portfolios for reasonable returns to ensure retirees' (former
affiliates') old-age liquidity and thus their old-age consumption (welfare).
This necessitates a significant amount of financial intermediation in the
financial sector. A convergence of the shortfall and surplus spending units is
probable to result in further deterioration of the financial system [15].
The Contributory Pension Scheme and the Premium
Base of the Nigerian Insurance Industry [16]. The study examined the level at
which the defined contribution pension system has contributed to the growth of
the insurance industry's premium base. The study adopted an ex-post-facto
(after-the-fact) research design. The study shows that the contributory pension
scheme had a positive but insignificant impact on the growth of the insurance
industry's premium base in Nigeria. The study, therefore, recommended that
Nigerian pension regulators enforce strict compliance with the relevant
provisions of the law for the insurance industry to experience the quantum
growth expected. Pension funds and financial repression. According to the
study, pension funds are used as a captive audience in some economies to
channel capital to the government at below-market rates. This policy is only
one tool in the toolbox of financial repression, but it is gaining traction as
governments around the world struggle to increase fiscal space and reduce their
sovereign debt burdens as they rebuild their economies following the pandemic.
First, from a historical standpoint, this paper examined financial repression
using pension funds. It then assesses the policy's welfare and distributional
implications, drawing on lessons learned from a variety of advanced and
emerging economies. A general set of policy recommendations is elusive due to
the wide range of possible interventions and idiosyncratic country conditions,
but the paper proposes four high-level principles that can help policymakers
assess the costs and benefits of implementing policies that use pension funds
as a captive audience for financial repression. The determinant of the 2014
Pension Reform Act in Nigeria: A study of Abuja workers and adopted a survey
research design [17]. 246 questionnaires were processed. The study aims to
identify the impact of taxpayers 'decisions on the 2014 Pension Reform Act in
Abuja, Nigeria, and to examine the impact of pensioners' living standards on
the 2014 Abuja Pension Reform Act. Nigeria study shows that taxpayer
decision-making has a positive and significant impact on the 2014 Pension
Reform Act in Abuja FCT, while the standard of living of retirees has a
negative and significant impact on the 2014 Pension Fund Reform Act in Abuja
FCT. It recommended that the new 2014 Pension Reform Act continue to apply to
workers and workers as workers make a good decision to use the plan to prevent
future financial crises after retirement. The new Pension Reform Act of 2014
should be implemented with more emphasis on the standard of living of retirees,
even if there have not been many plans for the standard of living of retirees.
Pension investment funds analysis: A variance-comparison tests of
non-contributory (pre) and contributory (post) schemes in Nigeria [18]. The
research compared both non-contributory (pre) and contributory (post) pension
schemes in Nigeria. Secondary data sources were used. The findings revealed
that the contributory (post) system is healthy, dependable, and ready to assist
retirees in surviving after they leave the service. As a result of the reform
in Nigeria, the defined contribution system (post) has significantly improved,
particularly in the area of pension funds. As a result, the study recommended
that there be an endless retirement savings plan and that employers make no
pension contributions to PENCOM; additionally, the return on investment and
service delivery by pension fund managers should be improved in order to boost
pension investment and voluntary contributions. Examined the theory test of the
Nigerian pension fund [19]. The specific objective of the study examined the
historical expansion of pension funds in Nigeria, a certain aspect of the
Pension Reform Act of 2004 and the current Act of 2014, possible regulatory
options for investors when investing the pension fund, the pension fund, and
economic growth as well as the net asset value of the Pension fund. By
including the informal sector in the system and formulating responsive
regulation to facilitate the rate of conversion into the system, the prospects
for a boost in the capital fund, that is, capital formation, are good. This
suggests that there will be more long-term capital available for the execution
of capital-intensive projects. A study to analyse the factors that influence
pension fund investing. The study relied on primary data gathered using a
questionnaire [20]. A simple random sampling approach was used to choose
respondents from a sample of five AFPs in Nigeria. A total of 125
questionnaires using Likert scales were processed. The collected data were
analysed. The author opined that the pension fund is a set of resources that
are provided by employees to have sufficient resources to meet their needs
after retirement. Investments were made to meet the contributor goal. According
to main components, economic factors, risk, and property security were
identified as the most important determinants of pension investment, it was
concluded that the variable was like interest rate the internal control system
is not critical in determining the investment of pension funds in Nigeria. The
study also recommended that pension fund managers develop good systems to
mitigate the enormous risks they face as investment managers. The first results
of the Nigerian pension reform of 2004. In early 2010, the new system of
privately financed and managed retirement accounts covered approximately 4
million Nigerians in a country of over 50 million people [21]. The research
focuses on the new system's flaws. More importantly, the reform did not provide
basic social security in old age for the majority of Nigerians employed in the
informal sector. In addition, the minority of covered workers are also likely
to have problems. The study demonstrates in a computational model that funded
accounts have so far produced negative real returns for savers. It is suggested
that change inside the present paradigm is unlikely to fix the current system's
flaws and that alternative solutions, such as universal non-contributory social
pensions, should be considered to extend basic social security. In the Nigerian
context the impact of a funded contributory pension scheme on financial
deepening and economic growth in Nigeria. Following a review of relevant
literature, secondary data on relevant macroeconomic indices in the Nigerian
economy were gathered. The information was analysed in a descriptive manner.
TDS (total domestic savings) increased during the post-pension reform period,
and the increase was not caused by GDP growth. Some financial deepening
indicators, such as DCP/GDP (domestic credit to the private sector as a share of
GDP), TBD/GDP (total bank deposits divided by GDP), and CIM (contract intensive
money), did not improve significantly during this period, pointing to poor
intermediation in Nigeria's banking sector. However, the DCP/GDP + SMC/GDP
measure (domestic credit to the private sector as a share of GDP plus stock
market capitalisation as a share of GDP) improved significantly during this
period, owing largely to the performance of the SMC/GDP measure. This implies
that the Nigerian capital market experienced some depth during the post-pension
reform period. As a result, despite the increased TDS that may have been
derived from contributory pension funds, efforts must be intensified to
increase the scheme's participation rate by including state employees and
informal sector workers in the scheme. The poor performance of the DCP/GDP,
TBD/GDP, and CIM measures must be reversed through strict enforcement of
banking regulations, and the Nigerian judiciary must be truly reformed to
enforce contract laws and protect private property rights. PenCom must be
persuaded to relax the stringent portfolio diversification guidelines that PFAs
are required to follow to further deepen the Nigerian capital market. This must
be followed quickly by the internationalisation of the Nigerian capital market.
This research is based on
the theory of financial intermediation, which was first developed in the 1960s
by Gurley and Shaw [22]. A financial intermediary is a third party who acts as
a go-between in a financial transaction. It is critical to investigate the role
of pension funds as intermediaries, as well as how they improve capital
markets. According to proponents of the current theory of intermediation, while
pension funds do not provide liquid liabilities, they play an important role in
influencing the structure of securities markets and, as a result, improve the
efficiency of financial systems.
The study adopted an
ex-post facto research design. The population of the study is 14 years of
Nigeria economy from the year 2007-2020. Time-series data were sourced for this
study which are entirely secondary data from the Pension Commission and the
Central Bank of Nigeria (CBN) statistical bulletin, and the World development
indicator (WDI) of the Worldbank Database. Autoregressive Distributed Lag
(ARDL) bounds testing approach was adopted to examine the long- and short-term
relationships between the series, using Eview 12 version.
The Long-run model is
given as:
To
distinguish the short-run impact from long-run impact the error correction
model framework is written as:
To determine the speed of
adjustment in a co-integrating ARDL model, equation (3.11) can be re-specified
to include an error correction term as follows:
Where:
LFDIDE = Financial
development index to depth, LPENINVEQ = Pension Investment in Equities,
LPENINVFS = Pension Investment in FGN Securities, LPENINVLMMS = Pension
Investment in Local Money Market Securities, and LPENINVMF = Pension Investment
in Mutual Funds. ? is the intercepts
from equations 3.10-3.11,
To conduct the bounds test for co-integration approach within the ARDL framework, the optimal lag order must be determined. According to, too many lags incorporated into the testing equation may reduce the degree of freedom and the power of the test statistics, while too few lags may cause a misspecification problem. Table 1 revealed that the maximum lag for the model is two (2), however, before the maximum lag of two can be used there must be absence of autocorrelation, and these is reported in Panel B of Table 1. The result did not reject the null hypothesis of no autocorrelation, thus for the ARDL model estimation of pension investment and financial depth the maximum lag used is two (Table 1,2) (Figure 1).
Figure 1: Stability test - plots of cumulative sum of residual.
Bound
test
The first condition to
ascertain the possibility of long-run relationship for pension investment and
financial depth is the bound test, the results shows that the bound test
statistics of 22.413 is statistically significant at 1 per cent level. This is
because the statistics of 22.413 is greater that the critical values of 4.26,
3.5 and 3.13 at 1 percent. This implies that there is possibility of a long run
cointegrating relationship for pension investment and financial depth in
Nigeria. Based on the possibility of a long-run relationship for pension
investment and financial depth in Nigeria, the study then estimates the
long-run and the short-run elasticity. The empirical results for the model for
the effects of for pension investment and financial depth in Nigeria, in the
short and long run are reported in Table 2.
The
long-run dynamics
The estimated long-run coefficients (elasticities) for the UECM model are given in Panel A of Tables 2. In the long run, there is evidence that pension investment in equities has positive relationship with financial deepening. This implies that increases in pension investment in equities will lead to increase in financial depth in Nigeria. Furthermore, there is evidence of a long-run significant relationship that pension investment in equities and financial depth in Nigeria (LPENINVEQ = 0.211, t-test= 2.115, ? = 0.041).
Table 1: Diagnostic Test for Pension Investment and Financial Depth in Nigeria.
Panel A:
Lag Order Selection |
||||||
Lag |
LogL |
LR |
FPE |
AIC |
SC |
HQ |
0 |
-6.6035 |
NA |
1.08e-06 |
0.446289 |
0.633909 |
0.518218 |
1 |
253.1289 |
459.5265 |
1.30e-10 |
-8.58188 |
-7.456162* |
-8.15031 |
2 |
287.5268 |
54.24295* |
9.28e-11* |
-8.943340* |
-6.87952 |
-8.152121* |
3 |
306.6788 |
26.51818 |
1.25e-10 |
-8.71842 |
-5.7165 |
-7.56755 |
4 |
318.2672 |
13.81683 |
2.41e-10 |
-8.20258 |
-4.26257 |
-6.69208 |
Panel B:
Serial Correlation LM Test |
||||||
Lag |
LRE* stat |
df |
Prob. |
Rao F-stat |
Df |
Prob. |
1 |
26.72522 |
25 |
0.3697 |
1.081153 |
(25, 127.8) |
0.3734 |
2 |
21.12032 |
25 |
0.6859 |
0.836912 |
(25, 127.8) |
0.6887 |
3 |
14.68586 |
25 |
0.9484 |
0.568374 |
(25, 127.8) |
0.9491 |
4 |
69.26360 |
25 |
0.0000 |
3.292890 |
(25, 127.8) |
0.0000 |
5 |
26.94024 |
25 |
0.3589 |
1.090720 |
(25, 127.8) |
0.3625 |
6 |
33.14785 |
25 |
0.1274 |
1.373381 |
(25, 127.8) |
0.1298 |
7 |
22.79230 |
25 |
0.5897 |
0.908745 |
(25, 127.8) |
0.5930 |
8 |
57.63548 |
25 |
0.0002 |
2.619783 |
(25, 127.8) |
0.0002 |
9 |
24.18627 |
25 |
0.5086 |
0.969297 |
(25, 127.8) |
0.5122 |
10 |
11.77409 |
25 |
0.9883 |
0.450870 |
(25, 127.8) |
0.9885 |
* indicates lag order selected by the criterion. LR: sequential
modified LR test statistic (each test at 5% level), FPE: Final prediction
error, AIC Akaike information criterion, SC: Schwarz information criterion
and HQ: Hannan-Quinn information criterion |
Dependent Variable: LFDIDE Panel A: Long -Run Estimates |
||||
Variable |
Coefficient |
S.E |
t-stat |
Prob |
C |
1.633 |
0.138 |
11.791 |
0.000 |
LPENINVEQ |
0.211 |
0.100 |
2.115 |
0.041 |
LPENINVFS |
-0.023 |
0.032 |
-0.715 |
0.479 |
LPENINVLMMS |
-0.003 |
0.059 |
-0.053 |
0.958 |
LPENINVMF |
-0.017 |
0.042 |
-0.409 |
0.684 |
Panel B: Short -Run Estimates |
||||
Variable |
Coefficient |
S.E |
t-stat |
Prob |
D(LPENINVEQ) |
-0.061 |
0.481 |
-0.128 |
0.899 |
D(LPENINVEQ(-1)) |
0.466 |
0.495 |
0.941 |
0.353 |
D(LPENINVFS) |
-0.043 |
0.086 |
-0.497 |
0.622 |
D(LPENINVFS(-1)) |
-0.067 |
0.085 |
-0.791 |
0.434 |
D(LPENINVLMMS) |
0.452 |
0.298 |
1.518 |
0.137 |
D(LPENINVLMMS(-1)) |
0.002 |
0.299 |
0.005 |
0.996 |
D(LPENINVMF) |
0.017 |
0.047 |
0.369 |
0.714 |
D(LPENINVMF(-1)) |
-0.002 |
0.049 |
-0.036 |
0.972 |
ECM(-1) |
-0.792 |
0.146 |
-5.437 |
0.000 |
Panel C: Diagnostic Tests |
Statistic |
Prob. |
||
Bound Test |
22.413 |
0.000 |
||
Serial Correlation |
1.700 |
0.143 |
||
Heteroscedasticity |
1.665 |
0.459 |
||
Linearity Test |
3.032 |
0.215 |
||
Adjusted R-square |
0.751 |
|||
CUSUM |
||||
Stability Test |
Stable |
This implies that pension
investment in equities is a significant factor influencing changes in financial
depth in Nigeria. In sharp contrast, pension investments in FGN securities,
local money market securities and mutual funds have a negative relation with
financial depth. This implies that increases in pension investments in FGN
securities, local money market securities and mutual funds will lead to
decrease in financial depth in Nigeria. Furthermore, there is no evidence of a
long-run significant relationship that pension investments in FGN securities,
local money market securities and mutual funds with financial depth in Nigeria
(LPENINVFS = -0.023, t-test= -0.715, ? = 0.479; LPENINVLMMS = -0.003, t-test =
-0.053, p = 0.958, and LPENINVMF = -0.017, t-test= -0.409, ? = 0.684). This
implies that pension investments in FGN securities, local money market
securities and mutual funds are not significant factors influencing changes in
financial depth in Nigeria. Concerning the magnitude of the estimated
parameters, a 1 per cent increase in pension investment in equities will lead
to 0.211 per cent increase in financial depth, while a 1 per cent increase in
pension investments in FGN securities, local money market securities, and
mutual funds will lead to 0.023, 0.003, and 0.017 per cent decreases in
financial depth in Nigeria respectively in the long run. To test the hypothesis
for objective one, the bound test of 22.413 was used and it is statistically
significant at 1 per cent level, thus on the overall, the null hypotheses that
there is no significant effect of pension investment on financial depth in
Nigeria was rejected and accept the alternative hypothesis that there is
significant effect of pension investment on financial depth in Nigeria.
Short-Run
dynamics
The purpose of this
section is for two reasons. First, is to examine if changes and the statistical
significance experienced in the long run also exist in the short run model.
Second, is to examine the degree of adjustment back to equilibrium using the
error correction term. The short-run adjustment process is measured by the
error correction term ECMt-1 and it shows how quickly variables adjust to a
shock and return to equilibrium. For stability, the coefficient of ECMt-1
should carry the negative sign and be statistically significant. The result
shows that in the short run that pension investments in equities and mutual
funds have positive but insignificant relationship with financial depth, while
FGN securities and local money market securities have negative and
insignificant relationship with financial depth. In addition, the estimated
coefficient for the ECMt-1 reported in Panel B of 4.3 is negative and
statistically significant (ECM= -0.792, t-test = --5.437, p = 0.000). This implies
that deviations from pension investments in equities, FGN securities, local
money market securities and mutual funds equilibrium path are corrected by
nearly 79 per cent over the following quarter. In other words, the adjustment
process is relatively high in Nigeria. The statistical significance of the
ECMt-1 confirms the presence of long-run equilibrium relationship between
pension investment and financial depth in Nigeria. The Adjusted R-square is
0.75; this implies that pension investments in equities, FGN securities, local
money market securities and mutual funds explains about 75 per cent changes in
financial depth, while the remaining 25 per cent were other factors affecting
changes in financial depth but were not captured in the model.
Post-Estimation
test
For the validity and reliability of the
parameter estimates and to be able to draw valid conclusions based on the
results, four types of residual test were conducted. First, is the serial
correlation test which is used to test for the possibility of the error term
being uncorrelated. Second, is to check if the finite variances of the error
terms are equal. This assumption is referred to as the homoscedasticity. A
violation of this assumption is referred to as heteroscedasticity. Third, is
the linearity test, which is used to test if the model is linearly specified,
the non-significance of the Ramsey RESET test implies the model is linear
specified. Fourth, is the stability test, where the cumulative sum of residuals
(CUSUM) is used. For the stability of the estimated model, the plot of CUSUM
statistic must stay within a 5% significance level portrayed by two straight
lines. The results revealed that the successive error terms are not serially
correlated because the probability value of F-statistic of 1.700 with a
probability of 0.143 is not significant. Thus, the null hypothesis that there
is no serial correlation in the residuals up to the specified lag orders at 1,
5 or 10 percent significant level is not rejected. The study concluded that the
successive error terms were not correlated in the estimated model for pension
investment and financial depth in Nigeria. Also, the heteroscedasticity results
show that the F-statistic of 1.665 with a probability value of 0.459 is not
statistically significant at either 1, 5 or 10 per cent levels of significance
this implies that the null hypothesis of homoscedasticity could not be
rejected; thus, there is evidence that the covariance of the error terms have a
constant finite variance. In addition, the Ramsey Reset Test, F-statistics of
3.032 with a probability value of 0.215 is not significant, thus, the model is
correctly specified and that there is a linear relationship between pension
investment and financial depth in Nigeria. Also, the CUSUM reported in Panel C
and Figure 4.2 shows that that the estimated model is stable; because the plot
of CUSUM statistic stays within a 5% significance level portrayed by two
straight lines.
This study examined the effect of pension
investment on financial depth in Nigeria. The result of the hypothesis shows
that there is evidence that pension investment in equities has positive
relationship with financial deepening. This implies that increases in pension
investment in equities will lead to increase in financial depth in Nigeria. In
sharp contrast, pension investments in FGN securities, local money market
securities and mutual funds have a negative relation with financial depth. This
implies that increases in pension investments in FGN securities, local money
market securities and mutual funds will lead to decrease in financial depth in
Nigeria. The result also shows that in the short-run that pension investments
in equities and mutual funds have positive but insignificant relationship with
financial depth, while FGN securities and local money market securities have
negative and insignificant relationship with financial depth. These findings
corroborate with the results of that examined the nexus between financial
development and economic growth. The empirical results revealed that
development hurts economic growth in general, but on the growth of the tertiary
sector [23]. By contrast, it found that financial development has no
substantial effect on the primary and secondary industries. Also, examined the expansion
and innovation of financial markets, commonly known as financialization, as
they are closely related to the growth of pension funds. Although the
conventional narrative is based on the idea of financial development as a
positive change, they argue that annuity pension funds can create demand
pressures on the financial system, creating the potential for systemic risk and
instability. Therefore, the increase in pension funds is important for the
financialization process, as the demand for the assets of these institutions
continuously generates growth and innovation in the financial markets. In the
current context, pension funds are trying to reduce risk by switching their
allocation from stocks to "alternatives" such as hedge funds and private
equity. Stabilizing force in present financial markets [24-28].
The result from this
study shows that in the short run, pension investments in equities and mutual
funds have positive but insignificant relationship with financial depth, while
FGN securities and local money market securities have negative and
insignificant relationship with financial depth. From the findings of the
study, the study concludes that pension investment in equity, pension
investment in FGN securities, pension investment in local money market
securities and investment in mutual funds are significant determinants of
financial sector development in Nigeria. In particularly, pension investment in
Nigeria significantly reinforce financial sector development in the aspect of
financial development depth. The study then recommended that, to accelerate
financial sector depth, it is necessary for the financial sector regulators and
policymakers to strengthen the depth of banks asset, other financial
institutions and financial markets through policies and reforms to attract more
pension investment that will contribute to the development of Nigeria’s
financial stance.
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