Time Series Decomposition of Inflation Dynamics and Its Impact on Pension Fund Returns in Nigeria

Rising inflation in Nigeria, which reached a 28-year high of 33.7 percent in April 2024, poses a fundamental threat to the real value of retirement savings managed by Pension Fund Administrators under the contributory pension system established by the Pension Reform Act. This study applies classical and STL (Seasonal and Trend decomposition using Loess) time series decomposition techniques to the monthly Consumer Price Index data from the National Bureau of Statistics spanning January 2015 to December 2023, identifying trend, seasonal, and irregular components driving inflation dynamics. The extracted inflation trend component is used in a portfolio simulation model evaluating the real return outcomes for a representative defined contribution pension portfolio allocated across equities, government bonds, and money market instruments in proportions reflecting average PFA allocations. A rolling real return analysis computes the quarterly real investment return after adjusting nominal returns from the Nigerian Stock Exchange, FGN bond yields, and treasury bill rates by the contemporaneous trend inflation rate. Results demonstrate that average real pension returns were positive at 4.2 percent annually during 2015 to 2019 but turned negative at minus 6.8 percent during 2021 to 2023 as inflation accelerated beyond portfolio nominal return capacity. The study recommends diversification into inflation-linked instruments and equity-heavy allocations for long-horizon contributors. Keywords: inflation dynamics, pension fund, time series decomposition, real returns, Nigeria.