Pension preserves the dignity of retirees and supports economic growth
The Pension Reform Act 2014 addresses the various concerns of informal sector professionals.
In a major reform effort in 2004, the Federal Government of Nigeria overhauled the legal framework for pension in the country. As encapsulated in the Pension Reform Act 2004, now repealed by the PRA 2014, the reform saw the creation of National Pension Commission (PenCom) as the regulator of the new Contributory Pension Scheme (CPS), and specified the operational guidelines and market structure for the emergent pension industry. A very purposeful implementation of the reform has resulted in major successes, which stakeholders in the pension industry have continued to celebrate.
PenCom's Director General, Chinelo Anohu-Amazu, especially takes joy in the reality that Nigeria has a well-regulated pension industry. She says: “The achievements recorded since 2004 have been a reflection of the Commission's unwavering efforts to build an industry with the intrinsic values of integrity and transparency while promoting the wellbeing of both contributors and retirees.”
Outstanding Accomplishments
One of the headline successes of the CPS is that it has grown the Nigerian pension assets to N5.73 trillion as at 30th June, 2016. This is all the more remarkable, considering that under the Defined Benefit Scheme (DBS), which the PRA 2004 abolished, over N2 trillion unfunded pension liabilities had accumulated. Considering how quickly the country's pension system has been transformed, the imaginations of pension industry stakeholders are animated and they are excited about the prospects of so much more that could be achieved in the years and decades ahead. Nevertheless, there is the sense of caution from both the regulator and operators that the industry must not run ahead of itself.
Pension in Nigeria has an obnoxious past. It lacked structure. Because of a faulty design, it was not inclusive. As already pointed out, obligations under the old DBS were largely unfunded. And most damaging of all, pensioners had to go through the indignity of staying on long queues that could last for days – if not weeks – to collect their pension. For a number of retirees, it
was a tragic death experience. But it is the very opposites of these deplorable situations that now hold sway.
The operation of pension in Nigeria today is underpinned by a cogent legal and operational framework. The licenced Pension Fund Administrators (PFAs) are the operators responsible for investing the pension savings, with strict compliance to the investment guidelines issued by PenCom. To prevent exuberance and potential sharp practices in investing the pension savings, there is an institutional firewall that separates the funds from the PFAs. Licensed Pension Fund Custodians (PFCs) have custody of the funds. They make releases only for approved investments.
Susan Oranye, Executive Secretary, Pension Fund Operators Association of Nigeria (PenOp), celebrates the maintenance of this well-defined market structure as a key accomplishment of the CPS. In an interview with Ms. Oranye, she told me this has fostered professionalism amongst the operators, in contradistinction to the defunct system that lacked structure, governance and thus was grossly mismanaged.
The pension ecosystem, as at Q2 2016, comprises PenCom; 7.13 million contributors to the Retirement Savings Accounts (RSA); 21 PFAs – consolidated from initial 31; 24,303 membership of 7 Closed PFAs; 40,951 membership of 53 approved existing schemes; 4 PFCs; and operators' umbrella association, PenOp.
The Contributory Pension Scheme is thriving on transparency. Under the Scheme, by Q2 2016, there have been 137,196 retirees. Total amount paid as lump sum on retirement was N340 billion, while monthly average pension being paid is N4.5 billion. The optional Annuity schemes have 32,131 retirees, with N44 billion already paid to them in lump sum; while monthly average pension under the schemes has reached N1.66 billion, against N157 billion premium paid.
Felix Ejomah, Chief Operating Officer at Covenant Visions Limited, a software development firm that provides solutions to the pension industry, says PenCom made it mandatory for the PFAs to deliver service. As a result, the PFAs are able to provide realtime information to pension contributors on their Retirement Savings Accounts. The PFAs also file reports to PenCom on a timely basis, with zero-tolerance for delay in reporting.
Contributors to the RSAs are registered with their fingerprints captured. PenCom is mandating an upgrade to direct biometric data capture of the 10 fingers. The scrupulous identification system and stringent operational guidelines have ensured the safety of pension savings assets. As Wilson Ideva, Managing Director and CEO of Premium Pension Limited, noted in my interview with him, it is nearly impossible to carry out fraud under the Contributory Pension Scheme. Not only would an improbable fraud require the collusion of a PFA and PFC, it would also require the collaboration of PenCom – the industry regulator. Even at that, Mr. Ejomah says the incentive to plan an intricate web of collaborators to commit fraud is removed because access to the cash would be impossible, as the IT systems of the PFAs audit for improbable movement of funds in the Retirement Saving Accounts.
Ms. Oranye says PenCom and its stakeholders in the pension industry agree on the “trifecta values of safety, liquidity and return on investment.” This is in recognition that the pension fund is first and foremost for the contributors. Nigerians who believe in the dignity of labour and therefore work, and then contribute towards their retirement, deserve dignity in retirement by receiving their pensions as and when due.
But subsidiary to preservation of the pension assets is the fact that pension savings have been a major contributor to Nigerian investments in the economy. Pension's contribution to the GDP peaked at 6.1% in 2009. Adjusting to the rebasing of the Nigerian GDP in 2014 – which saw the national output dramatically increased from N42 trillion to N80 trillion – pension contributed 5.6% to the economy in 2015. It is projected that pension's contribution to GDP will surpass the pre-2014 rebasing high in 2016. The steady growth of pension contributions, which now significantly outpaces GDP growth rate, ensures that the pension industry will account for greater percentages of the economy in the coming years, and remain the point of gravity of Nigerian investments.
With regard to investment, Umar H. Modibbo, Managing Director and CEO, Sigma Pensions Limited, says: “The (pension) scheme has allowed channeling of pension funds into developmental projects through both the public sector and quoted private sector institutions for economic development.”
According to Riscura, a South Africabased global investment advisory and financial analytics firm, 65% of Nigeria's pension funds are allocated to fixed income, mainly government securities. This has helped government at federal and state levels to fund developmental projects. About
15% of the funds are allocated to equity investment. Currently, infrastructure investment attracts about 4% of the funds. In sum, pension funds are helping to deepen Nigerian investments. This impact is expected to significantly scale up as the funds continue to grow.
The pension industry is also attracting foreign investment. Last year, Actis, the British private equity firm, invested $62 million in Sigma Pensions Limited. A year earlier, another global investor, Helios Investment Partners LLP, invested $50 million in ARM Pension Managers Limited. These foreign investments followed earlier ones, which show that the Nigerian pension industry is internationally competitive for investment.
Industry Outlook
The Nigerian pension industry, in effect, entered a second phase of its revolutionary development with the passing of the Pension Reform Act 2014. Mr. Modibbo says: “The Pension Industry is over 10 years in operation, and we believe it is moving to its second phase, which is more or less the consolidation of all the experiences gained in the past years.” PenCom, in collaboration with its industry stakeholders, has strategized on delivering safer and broader investment portfolios, stronger real returns and visible impact on the economy. The industry is driving towards inclusivity and expanded coverage, as well as improving service delivery.
The drive towards inclusivity takes multiple approaches. PRA 2014 has lowered the requirement for mandatory participation in the CPS by organisations. Employers who have three staff can now join the scheme by enrolling their staff. Previously, only businesses that employed five or more workers were mandated to enlist in the CPS.
Although the Nigerian SME space is largely informal, many operators are professional services providers, including doctors, lawyers, investment bankers, engineers, performing artistes, media entrepreneurs and owners of the horde of budding start-ups. These are people with significant, even if irregular, earnings. They work as hard as their peers in the formal sectors, but for one reason or another they are not yet part of the CPS. However, both categories of professionals will sooner or later retire, and death, they say is a leveler. Therefore, informal sector professionals also owe it to themselves to contribute towards their financial independence during their retirement years and financially protect their dependants when death occurs.
The new PRA addresses the various concerns of informal sector professionals. There is Draft Guidelines on Accessing RSAs for payment of equity contribution for residential mortgages, which is being developed by the Commission. Under these Guidelines, it is proposed that Retirement Savings Account holders can now withdraw a maximum of 25% of their pension assets as equity contribution towards payment of a residential mortgage. A Multi-funds Investment Structure for the RSA Fund is also being finalized. When this becomes operational, the pension assets of contributors would be appropriately invested according to their age profile and risks appetite, with the objective of generating risk-adjusted and aboveinflation returns. In other words, a significant portion of the pension funds of young contributors who have longer working lives of 15–25 years, would be invested in long term alternative assets; while the pension funds of contributors that are above 50 years and close to retirement, would be invested in low risk assets, with stable streams of income.
The Commission is at the verge of launching a micro pension scheme to capture the small-savers segment. This move will potentially see tens of millions of Nigerians who are employed in Micro, Small and Medium-scale Enterprises (MSMEs) added to the pension system. According to a 2013 survey by Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and Nigerian Bureau of Statistics (NBS), there are 37 million MSMEs operating in the country, employing approximately 60 million people. Overwhelming proportions of the businesses operate informally. Micro pension will help formalize retirement savings in this socially-vulnerable and unprotected segment. It will also help enlist a significant population in formal financial services coverage for the first time, with attendant economic benefits and improvement in living standards.
The Director General of PenCom says the micro pension scheme in the offing is a “lowcost and innovative solution,” which may adopt the agency approach for the collection of contributions. In the same vein, Ms. Oranye, “This Scheme is tailored to suit the nature of the informal sector in a way that is compelling enough to attract them. Their flow of funds come in peaks and troughs and this is recognized in the scheme being put together. There is room for flexibility of contribution and withdrawal, which we hope is a major incentive to get the informal sector workers enthused.”
PenCom says it has established a department to implement the micro pension scheme, and it is developing a multi-channel platform to effectively provide customer services to the informal sector contributors. Further to ensuring the success of the scheme, PenCom is in consultation with NACCIMA (Nigerian Association of
The Commission is at the verge of launching a micro pension scheme to capture the small-savers segment.
Chambers of Commerce, Industry, Mines and Agriculture), SMEDAN, states chambers of commerce, trade unions as well as other relevant associations, to enlighten them on how their members can participate in the micro pension scheme.
While the medium- to long-term outlook in the pension industry is expansive, GDP data by the NBS has confirmed Nigeria entered a technical recession in Q2 2016. This has been a fallout from the crash in the prices of crude oil in the international market as well as policy bottlenecks, which the government and various stakeholders are working to resolve.
Nevertheless, it is believed that the nearterm outlook of the pension industry is positive. Mr. Ideva says: “Nigeria is a high yield environment, and yields remain positive in spite of the spike in inflation the country has recently been experiencing.”
The elephants in the room are the state governments, which have not enlisted or started to make pension contributions for their workers. So far, only 10 out of the 36 state governments have fully implemented the Contributory Pension Scheme. While the remaining 26 states add up to the potentials of the scheme to continue to grow exponentially, in the meantime, the non-compliant state governments are depriving their workers a key labour benefit that their colleagues in the 10 participating states are enjoying. Moreover, the Pension Reform Act 2014, which is a law of the Federal Republic of Nigeria, makes it mandatory for state governments to sign up and remit the pensions of their workers. It is, therefore, a matter of legality and responsibility for the governors to safeguard the retirement of their workers by remitting their pensions under the CPS.
Challenges
The success of the CPS has raised expectations higher. For instance, the accumulated savings have continued to attract the attention of other policymakers and government officials, and there have been wider expectations that pension assets should invest more in infrastructure development. In response, PenCom hopes to raise the percentage of the pension funds invested in infrastructure from 4% in 2014 to 40% in 2019. But the dearth of investment instruments, like infrastructure bonds and infrastructure project finance that is well structured and bankable, have been a limiting factor. A recent analysis by Financial Nigeria contributor, Details Commercial Solicitors, says under the new investment guidelines (pending approval of PenCom's Board), infrastructure investment in the new multi-funds structure will see infrastructure investment ratchet up.
Intensive competition by the PFAs, who hope to win by providing superior services, is driving up their cost of operations. This is besides the high cost of establishing brick and mortar presence in multiple locations around the country in order to bring services closer to pension contributors. Indeed, Nigeria is a jurisdiction noted for high cost of doing business, not least because of the dismal level of the provision of public utilities, especially grid electricity.
But PenCom is now focusing as well on delivering a low-cost and efficient pension industry. PenCom and PenOp are working to centralise the operational processes of the operators in non-competition areas to enhance industry capacity and reduce costs of operations. The measures to be employed will aim to reduce operational cost per RSA by 50% of the current rate by 2024.
The CPS, in spite of its successes, is beset with a perception backlash from the virtual dysfunction and collapse of the old Defined Benefit Scheme. Delay in the release of accrued pension rights of federal government employees that worked prior to June, 2004 has resulted in the delay in payment of retirement benefits to the affected retirees. This has continued to create confusion in the minds of the people who have yet to understand the distinction between the old and the new pension systems. But it is hoped that as stakeholders continue to enlighten the public on the wellfunctioning, successor scheme to the defunct DBS, the industry will overcome the residual perception challenge. More awareness will also help increase participation in the CPS.
Conclusion
The various individual and joint initiatives of the pension stakeholders tend to support the projection by RisCura that the industry will maintain 30% year-on-year growth over the medium term. Over the longer term, more sophisticated investment instruments are expected to be available in the market. In anticipation of a larger and more sophisticated industry and investment milieu, PenCom wants to close the competency gap in the pension industry by 80%, and ensure the manpower gap is less than 25% by 2024.
To guarantee continued success, PenCom and industry stakeholders need to tweak very little. They mainly need to continue to uphold the principles and practices that have so well served and propelled the industry to the astonishing growth of the past 12 years. They need to scale up what works and expand the frontiers of coverage of the CPS.
It is also delightful that PenCom is thinking sustainability by integrating Environmental, Social and Governance (ESG) principles in the investment decisions of pension funds. Adherence to ESG principles will ensure further credibility, which will serve the need of attracting foreign investment into the pension industry as well as enabling the investment of pension assets in foreign investment instruments in accordance with the guidelines of the Commission.
PenCom, the operators and other pension industry stakeholders deserve the accolades for running a system that is evidently helping to preserve the dignity of Nigerian workers in retirement, and is contributing to the nation's economic growth and investment.