By Jerry Nnebue, Chief Investment Officer, CardinalStone Pensions
Beyond Wealth Accumulation
For individuals who already save and invest, the value of a pension may not be immediately obvious. If you can independently build a diversified portfolio of equities, fixed income securities, mutual funds and alternative investments, why should you also contribute to a pension?
It is a fair question, particularly for financially sophisticated investors who understand compounding, manage risk and make deliberate investment decisions. For such individuals, the argument for pensions cannot simply be that they provide access to investment opportunities or diversification that are otherwise unavailable. In many cases, their personal portfolios may offer both.
The more fundamental question is whether the wealth being accumulated is deliberately structured to meet the financial demands of retirement.
Building wealth and planning for retirement are related, but they are not identical. An investor may accumulate substantial assets while focusing primarily on capital appreciation, current income, or other financial goals. Yet, without a clear assessment of future retirement needs, even a sizeable portfolio may not necessarily translate into the financial independence desired in later life.
Contributing to a pension scheme helps bring this objective into focus by providing a structured framework for setting aside wealth for retirement and assessing whether accumulated assets are likely to support the desired standard of living. Its relevance, therefore, lies not in replacing independent investing activities of individuals, but in helping them make retirement an explicit part of their broader wealth strategy.
The Power of Time and Discipline
One of the strongest arguments for long-term pension saving is the opportunity to benefit from compounding. When contributions are made consistently and investment returns are reinvested, the passage of time can have a significant effect on accumulated wealth.
Take, for instance, an individual who invests ₦100,000 monthly and earns a hypothetical return of 1% per month, with all returns reinvested. Assuming contributions are made at the end of each month, with no fees or interruptions, the investment would grow to approximately ₦50 million after 15 years, from total contributions of ₦18 million. After 25 years, it would reach approximately ₦188 million, from contributions of ₦30 million.
These figures are illustrative, not a forecast or guarantee, as actual outcomes depend on investment performance, fees and other factors. Nevertheless, they demonstrate how time and consistency can influence long-term wealth creation.
Of course, disciplined investors can achieve this through voluntary investments as well. The distinction is that a pension arrangement provides a formal mechanism for maintaining a long-term commitment to retirement saving. This can be particularly valuable when competing financial priorities create pressure to redirect funds elsewhere. For individuals who already maintain the same discipline
independently, the additional benefit must be assessed alongside the pension arrangement’s costs, restrictions and other features.
Pensions Within the Broader Financial Toolkit
A sound financial plan is built around different needs, each requiring an appropriate financial tool. Emergency savings provide readily accessible funds for unexpected expenses, while insurance helps protect against specified risks. Investments such as equities, fixed income securities, mutual funds and alternative assets support wealth creation, income generation and other financial objectives. Pensions, in turn, provide a structured means of preparing for life after employment.
These functions may overlap, but they are not identical. Just as having substantial investments does not eliminate the need for insurance or emergency savings, the ability to build wealth independently does not necessarily remove the value of a dedicated retirement savings arrangement.
Consider an individual with ₦350 million in total wealth, comprising ₦50 million in pension assets and ₦300 million invested independently across equities, fixed income securities, mutual funds and other instruments. Such an individual may be an experienced investor with a diversified portfolio and the expertise to manage investments effectively. In this case, the argument for a pension, therefore, is not that the individual’s other investments are inadequate, but that retirement deserves deliberate consideration alongside other financial priorities.
A pension can help formalise this commitment by providing a dedicated framework for long-term retirement saving. For investors who already manage their wealth with clear retirement objectives, the incremental benefit may be different from that for individuals who struggle to maintain consistent long-term savings.
Ultimately, the point is not that every individual must rely exclusively on a pension to fund retirement. Rather, like other financial tools, its value lies in the role it plays within a broader financial plan.
Retirement Adequacy: Will the Wealth Be Enough?
Having a financial tool dedicated to retirement is only part of the equation. The more fundamental question is whether the resources accumulated, whether through a pension, independent investments or both, will be sufficient to sustain the desired standard of living throughout retirement.
Inflation makes this assessment particularly important. To this point, someone who requires ₦500,000 monthly to maintain a particular standard of living today would need approximately ₦3.36 million monthly in 20 years if inflation averaged 10% annually. Similarly, ₦100 million received in 20 years would have purchasing power equivalent to approximately ₦14.9 million today, under the same inflation assumption.
To maintain spending equivalent to ₦500,000 per month in today’s purchasing power throughout a 25-year retirement, an individual would need approximately ₦6 million per year in real (inflation-adjusted) terms.
Assuming the retirement portfolio generates a constant real return of 3% per annum and withdrawals are made at the end of each year, the value required at the start of retirement would be approximately ₦104.5 million in today’s naira value.
If retirement is expected to begin 20 years from now and inflation averages 10% annually over that period, the equivalent amount required at retirement would be approximately ₦703 million in nominal terms.
The lesson, however, is clear: retirement preparedness should be measured not simply by how much wealth has been accumulated, but by whether that wealth can generate sufficient resources to meet future needs. Pension balances should therefore be assessed against retirement income objectives, while independently held investments should be evaluated for the same purpose. In doing so, individuals can determine whether they are on track, need to increase their savings or should reconsider how their wealth is allocated.
In the end, the true measure of wealth is not simply how much we accumulate, but whether that wealth can sustain us throughout our lives, preserve our financial independence and provide a stronger foundation for the generations that follow.
