The Impact of Investment Restrictions on Pension Participants: A Case Study of Nigeria

Abstract

What is the impact of investment restrictions on pension participants? Defined benefit public pensions are often susceptible to political pressures to direct some of their investments toward generating domestic economic growth rather than maximizing returns for participants. Defined contribution pensions, however, may also face similar pressures in the form of investment restrictions. Investment restrictions can include regulations on investing in foreign securities to encourage investment in domestic securities; and requirements for investing in domestic public debt to promote the government’s fiscal capacity. This article provides a case study of the effects of restricting pension investments in foreign securities in Nigeria following the transition to a defined contribution model in 2004. This article argues that restrictions on foreign investment in Nigeria ultimately harm pension participants by denying them access to high-performing securities. Through various analyses, this article establishes the need to allow Nigerian pension funds to diversify their investments beyond the domestic market.