ECONOMIC INSIGHT Contributory pension scheme under threat
On 16th May 2017, Rep Oluwole Oke again sponsored a Bill seeking to “Amend the Pension Reform Act 2014 To Exclude Members of The Nigeria Police, The Nigerian Security and Civil Defence Corps, Nigeria Customs Service, Nigeria Prison Service, Nigeria Immigration Service and The Economic and Financial Crimes Commission from the Application of the Contributory Pension Scheme and Other Related Matters”.
The bill passed its second reading and was referred to the relevant Committee of the House of Representatives for further action. A public hearing is billed for this week.
The new bill seeks to take the above agencies back into the Defined Benefits Scheme (DBS) era of pensions in Nigeria. The DBS was faced with the problem of huge pension liabilities arising from lack of adequate and timely budgetary provisions. Pension administration was largely weak, inefficient, less transparent, cumbersome and marred with corrupt practices. Also, many private sector organisations did not have any pension arrangement for their employees and where it existed, it was characterised by very low compliance ratio due to lack of effective regulation and supervision.
In fact at the time the Contributory Pension Scheme was introduced in 2004, the Federal Government had in excess N1.6trn in pension liabilities under the DBS. The ‘new’ CPS has grown to N6.42trn in assets as at the end of March 2017, data from National Pension Commission (PenCom) showed. This has happened in a 12-year period that has witnessed zero incidence of fraud and retirees get regular pay.
This proposed bill if passed into law, experts say, will destroy the very soul of the Contributory Pension Scheme (CPS) that has proved the game changer in pension administration in Nigeria.
Recall that in not too distant past, retired workers from the above governed agencies waited for years without pensions. Some died waiting.
David Akwu, a financial expert at the University of Nigeria, Nsukka said “We witnessed the ignoble sights were senior citizens were sleeping on the cold streets, begged to feed and some even took ill and died waiting to access their pensions. While these happened, some government officials helped themselves from the pensions of these senior citizens. The CPS stopped this maltreatment of senior citizens who served their fatherland meritoriously; they all got their due after retirement. This proposed bill if made law, will plunge retirees of the affected agencies into a life of despair after retirement.”
Some other experts suggest sinister motives behind the proposed law.
Akwu further said, the N6.42trn of which over 70 percent have been invested into several instruments will be compromise and the financial economy of Nigeria severely hurt if a huge chunk of those investments are divested prematurely.
A position paper on the proposed bill from PenCom presented to the National Assembly and obtained by our correspondent indicated that the bill is in bad faith and shouldn’t even be contemplated.
PenCom noted that the number of registered contributors grew to 7.4 million as at March, 2017. This represents about 7.45 percent of the total labour force in Nigeria and 3.95 percent of the total population.
Also, the total pension fund assets had grown to N6.42 trillion as at March, 2017 with an average monthly contributions of about N30 billion. The total pension assets were equivalent to about 6% of the Nigerian rebased GDP. The pool of pension fund generated by the Contributory Pension Scheme has aided the deepening of Nigeria’s financial sector and provided a platform for attaining strategic programmes of government in the areas of infrastructure, housing and the development of the real sector of the economy.
Data from PenCom showed that over 184,979 had retired under the scheme as at March 2017 and are currently receiving pensions as and when due with an average monthly pension payment of N6.7 billion as at the same period.
No doubt the pension reform has gained public confidence and acceptability within the short period of its implementation. The private sector, which hitherto was apprehensive of the CPS as a ploy by the public sector to raise funds to address its huge pension liabilities, has come to accept it and is religiously implementing the reform. To date, about 200,000 private sector employers of labour are implementing the CPS and have contributed about 60 percent of the total pension fund assets.
Attracted by the enormous benefits of the scheme, 26 states of the federation had, as at date, adopted the pension scheme and are at different stages of implementation while the remaining 10 states are at bill stage.
Promoters of the bill as stated in the Legislative Digest (Pension Reform Amendment Bill 2016) include that: the identity, data, addresses and family ties of security personnel are best handled internally by the relevant service and not kept in civilian custody which may be easily compromised; that the nature of the service provided by the paramilitary is unique and hazardous and the burden of paying their pensions should therefore be borne by the government; low monthly pensions being paid to the retired personnel and preference for the DB system where workers who had worked up to 35 years were entitled to 70 percent of their last monthly salary and directors received 100 percent.
However, the Pension Funds Administrators of Nigeria (PenOp) said those reasons are just escapist and don’t address the core concerns.
It said the exemption of the personnel of the police and other paramilitary agencies means additional financial burden on the Federal Government by way of unsustainable pension obligations. For instance, in the last 10 years, the number of FGN employees that retired under the CPS from the six agencies sought to be exempted are 50,730.
The total Accrued Benefits of these personnel amounted to N208.22 billion, which had been redeemed by the Federal Government, paid into their respective Retirement Savings Accounts (RSAs) and consolidated with their monthly pension contributions to fund their retirement benefits. These retirees are currently receiving their retirement benefits promptly as and when due. Exempting them from the CPS would imply that government would shoulder the entire huge financial obligation of payment of their pensions as well as that of future retirees through budgetary provisions, with no guarantee of availability of funding and/ or timeliness of payment.
Also in the 2016 Appropriation Act, the Federal Government made a provision under the Service Wide Vote for the sum of N200,170,000,000 as total Pension and Gratuities Allocation. This allocation is still insufficient to fund the pension liabilities of the government. For instance, the 2016 Pension Transitional Arrangement Directorate (PTAD)’s budget proposal indicated a total Annual Pension Liability of the sum of N388,320,580,231.64. Out of that amount, the sum of N255,896,954,017.38 constituted unfunded liability, which was inherited by PTAD mostly due to outstanding payments for 33 percent pension arrears to pensioners under the Defined Benefits Scheme.
Indeed, the Federal Government’s pension liability burden under the Defined Benefits Scheme is much higher than the PTAD proposals in view of the provisioning of about N74.53 billion for the Military Pension Board, N7.64 billion for the State Security Service and N3.71 billion for the National Intelligence Agency. Consequently, it would be fiscally imprudent to increase the number of this category of retirees under that scheme. It would also render the retirees financially vulnerable and insecure.
An immediate negative impact of the exemption of the police and other paramilitary agencies is to unsettle the government’s fiscal policy and financial system stability. Data show that as at date, about 70 percent of the N6.4 trillion pension assets are invested in Federal Government securities. Exempting some government agencies would lead to divestment from FGN securities before maturity, which would have ripple negative effects on not only the finances of government, but on the entire financial system.
Another negative effect is erosion of the pool of long term investible funds accumulated under the CPS, which is suitable for economic development of any nation as illustrated in other jurisdictions including developed economies.
This would thereby undermine the process of the attainment of development initiatives in the infrastructure, housing and real sectors of the economy, which are largely hinged on the utilization of a portion of the pool of pension fund assets, PenOp submitted.
Following these and dwindling government resources, experts say the bill has negative consequences on the pension industry, and is not fit to become law.