The Pension Reform Act, 2004 ushered in a uniformed Contributory Pension Scheme for workers in both the private and public sectors in Nigeria. The law, whose implementation started June, 2004 reformed the crisis-ridden unfunded and under-funded defined benefit pension schemes in the country.
Before then, the huge and increasing pension liabilities in the public sector needed to be addressed while most workers in the private sector were not covered by any form of retirement benefit scheme. The inefficient administration of pension schemes and demographic shifts made defined benefit scheme unsustainable.
A decade of contributory pension:
Under the new Contributory Pension Scheme, both employers and employees were mandated to contribute certain percentage of an employee’s total emoluments into a Retirement Savings Account (RSA) opened by the worker with a Pension Fund Administrator (PFA). The scheme, which is complemented by group life insurance to the tune of 300 per cent of the individual worker’s emolument, also allows withdrawals under strict conditions. The accumulated pension assets in custody of Pension Fund Custodians (PFCs) are being privately managed by PFAs while the National Pension Commission (PenCom) regulates and supervises pension operators.
Putting the challenges, gains, implementation drive and sustainability of the Contributory Pension Scheme into perspective; it is evident that breakthroughs have been recorded in the last ten years. The number of contributors has increased, more workers in the private and informal sectors are covered and the scheme has continued to impact positively on the Nigerian economy.
The Contributory Pension Scheme had generated a pool of long term investible funds that is attractive to fund managers, investment advisers and capital market operators who want to access part of the fund for different purposes.
From the lessons learnt and the identified loopholes and areas for improvement, the stage was set for the amendment of the enabling law. The amendments were to take care of shortfalls in coverage, address supervisory and enforcement challenges, correct anomalies in the taxation of pension assets and to enable deployment of the pension fund to develop infrastructure.
There was need to criminalise fraudulent diversion and conversion of retirement savings of workers and retirees and bring the pension reform law in tune with current developments. The above necessitated a change in the strategy with a view to exploring new investment windows for pension funds among other things.
The new developments and points of divergence between the repealed Pension Reform Act, 2004 and Pension Reform Act, 2014 with regard to capital and investment windows for pension assets was the focus of the sensitization conference on the Pension Reform Act, 2014 held in Lagos recently.
Pension Reform Act, 2014:
Reviewing the Pension Reform Act, 2014, Gbolahan Elias, who commended PenCom for being a “well-run regulator,” noted that the exemption of pension transactions from stamp duty and income tax is good for the system. He said the confidentiality obligation on the part of the Commission and its staff as well as the power to replace the management of ailing PFAs and the transfer of pension assets being managed by ailing PFAs to the strong ones were some of the commendable provisions in the new law.
He however queried the rationale for an aggrieved person to have recourse first to the Commission before going for arbitration and to the court, saying the right to litigation ought to have been the first option.
Setting an agenda for Contributory Pension Scheme, former Commissioner in charge of Inspectorate at PenCom, Musa Ibrahim was of the opinion that pension should not have been a constitutional issue since it is purely a contract between an employer and his employee, he stressed.
He also dwelt on the enforcement limitations, compliance issues and abuse of court processes in addition to supervisory and regulatory challenges. He advocated self-regulation and improvement in service delivery and recommended a shift in supervisory and regulatory activities to promote better internal governance and enhance consumer protection.
Deployment of Pension Asset to Infrastructure:
While commenting on the responsibility of finance industry regulators and the impact of pension reform on the capital market in Nigeria, the Director-General of Securities and Exchange Commission (SEC), Arunma Oteh, said the focus should be on how to leverage on the lessons learnt to fix infrastructure in the country. She advocated the use of pension funds for infrastructural development and asset financing, stressing the need to minimise risks in this regard to ensure workers do not lose their pensions. The capital market provides a safe and secure market for pension funds, she assured.
Stakeholders also welcomed the use of RSA balances as collateral for mortgages and underscored the need to channel pension funds to grow infrastructure and clear the housing deficit in the country.
Stakeholders’ Take
According to Timi Austen-Peters, the provision on the safety of pension assets, growth in pension funds, increase in coverage and applicability of the scheme were commendable. He said difficulties in getting private sector employers to comply with relevant provisions in the pension law, very low accumulated pension savings for low income earners and other enforcement issues were some of the challenges facing the scheme.
Oluwatoyin Sanni noted that the 58 per cent annual growth of the Contributory Pension Scheme is a huge improvement, adding that there is room for improvement especially when one considers the Gross Domestic Product (GDP) of Nigeria and the rate of growth in other countries.
She commended the National Assembly for making pension savings and returns on investment of the fund tax free, protecting investors the more and introducing stiffer penalties for breach of provisions in the law. She also recommended the investment of pension fund on quoted equities to check interest-pushed inflation and advised PenCom to liberalise its policy on investment while ensuring compliance by operators.
Worried about Nigeria’s demography, the Managing Director of Financial Derivatives Limited, Bismarck Rewane, said many young people cannot save in an economy where the number of middle aged people is very high. The more sophisticated a country’s financial system is, the lower its savings rate; if government saves less, the people will save more, he said.
Rewane also noted that with the pension contributions at 8 per cent and 10 per cent of individual workers’ income by an employee and his employer respectively, Nigeria should channel this large pool of fund to meet its infrastructural demands like other emerging markets. Nigeria could build new capital from its pool of pension fund and ensure that this fund is profitably deployed in the economy as is the case in Brazil, Columbia and Morocco, he advised.
They also noted that 6 million RSA holders out of over 70 million of working population and the 6 per cent return on pension funds were not good enough saying pension operators need to take more risks to maximise return on pension assets.
Conclusion
The new Contributory Pension Scheme has turned the thoughts of retirement into a sweet dream for workers since they now look forward to good life after work.
Meanwhile, as PenCom considers the views of relevant stakeholders on how to make Contributory Pension Scheme more beneficial to the Nigerian economy, the increased awareness on the part of both employers and employees will guarantee sustainability for the Scheme.
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