The Efficiency of Pension Funds in Nigeria from 2015 to 2022: Using the DEA Approach

Abstract

The rising interest in the efficiency of pension funds stems from dwindling returns and the transfer of financial risk from employer to employee under the Contributory Pension Scheme. Opportunities created by the transfer window that allows Pension contributors to move their funds from one pension fund to another in Nigeria have placed the responsibility of getting better returns from Retirement Savings Accounts in the hands of employees, thus making this research timely and useful. Data Envelopment Analysis (DEA) was used to ascertain the relative efficiency of 18 pension funds from 2015 to 2022. Drawn from a population of 19 based on data availability, Beginning Fund Balance, Total Expenses, and Number of RSAs were used as inputs, while Year end Fund Balance and Returns on Investment (ROI) measured by the annual percentage increase in the unit price of each fund as managed by individual pension funds represented outputs. Findings indicate that only three Pension Funds obtained efficiency scores of 1, and the remaining 15 pension funds had efficiency scores ranging from 0.99 to 0.89. This is an indication that they operated at various levels of inefficiency. It was recommended that these pension funds outside the efficiency frontier emulate the efficient fund managers, especially in improving their ratio of contribution to the number of active RSAs. Consequently, the ongoing wave of mergers and acquisitions in the Pension industry could offer an opportunity for discerning PFAs to improve efficiency via cost reduction gains associated with consolidation.