Actuarial Considerations in Designing Occupational Pension Schemes for the Informal Sector in Nigeria

This study examines the actuarial design considerations for occupational pension schemes targeting Nigeria's large informal sector workforce. The formal contributory pension scheme covers only a fraction of Nigeria's workforce, with the vast majority of informal sector workers, including artisans, traders, transport operators, and domestic workers, having no pension coverage. Designing actuarially sound pension products for irregular-income earners requires adapting conventional defined contribution frameworks to accommodate variable contribution frequencies, interrupted contribution histories, and different mortality and morbidity profiles. This study uses a design science research methodology, developing a prototype informal sector pension scheme architecture based on actuarial projections and primary survey data from 250 informal sector workers in Lagos, Kano, and Enugu. Replacement rate projections are computed under multiple contribution pattern scenarios using stochastic investment return models. Benefit design options including minimum pension guarantee, flexible annuity, and lumpsum options are evaluated for actuarial viability. Findings reveal that a flexible micro-pension product combining variable contributions, investment linkage, and an optional minimum pension guarantee funded through a pooled reserve is actuarially viable at median income levels for workers aged 25 to 50. The probability of ruin for the minimum guarantee pool is below 3 percent at the calibrated contribution rate. The study concludes that actuarially designed micro-pension products can viably serve Nigeria's informal sector. It recommends PENCOM develop a regulatory framework for micro-pension products with explicit actuarial viability requirements.

Keywords: informal sector pension, micro-pension, actuarial design, replacement rate, PENCOM.