Why states should implement the Contributory Pension Scheme
One of the objectives of the Pension Reform Act (PRA) is the establishment of a uniform set of rules, regulations, and standards for the administration and payment of retirement benefits for both the public and private sectors at the national and sub-national levels.
Specifically, Section 2(1) of the PRA 2014 provides that the Contributory Pension Scheme (CPS) applies to any employment in the Public Service of the Federation, the Federal Capital Territory, the States, and Local Government, as well as the Private Sector. However, by the provisions of the 1999 Constitution of the Federal Republic of Nigeria (as amended), State Governments can legislate on pension matters; consequently, State Governments have to domesticate the CPS within their various jurisdictions by enacting a State pension law to that effect.
The National Council of States, in its meeting of August 2006, adopted the CPS for all states and local governments. Following the scheme’s adoption, a Model State Pension Law was developed for the state governments to adopt and modify based on their peculiarities. The National Pension Commission (PenCom) reviews draft state Pension Laws and supports states in implementation. At the end of December 2022, 25 states, including the Federal Capital Territory (FCT), had enacted laws on the CPS, while seven states were at the bill stage. The enacted laws, which are substantially in tandem with the provisions of the PRA 2014, is the first significant step towards the domestication of the CPS at the sub-national level. Five states have laws on the Contributory Defined Benefits Scheme (CDBS). Commendably, 15 states have established Pension Bureau/Board, and 10 are remitting employer and employee pension contributions in line with the CPS. Seven states have started paying pensions to retirees under the CPS.
The transition from the Defined Benefits Scheme (DBS) to the CPS or even the CDBS at the state and local government levels is significant in several ways and inevitable eventually, even for the states yet to do away with the DBS. The CPS is structured to ensure that all retired employees receive retirement benefits as and when due. The benefits of the CPS are enormous. The CPS is the best solution for pension liabilities, which many states are grappling with. States that fail to offset pension arrears now are creating a financial burden on future generations as these pension benefits will continue to grow. States can avoid this trap by adopting the CPS. The CPS will stem further growth of pension liabilities and provide fiscal discipline in the budgetary process because pension obligations would be accurately determined and settled systematically. Importantly, assets are available at the exit of a retiree for payment of pension benefits promptly. Thus, no accumulation of pension arrears.
The CPS provides safeguards to enable states to combat corruption in the pension sector. The pension contributions are received and held by custodians in the name of the Retirement Savings Account (RSA) holder. The RSA holder can only access the funds at retirement or under specific conditions. Licensed Pension Fund Administrators (PFAs) invest the funds with the objective of safety and earning fair returns for the contributors. Pension assets cannot be used to meet the claim of creditors of pension operators, seized or subject to execution of judgment debt or sold, granted as a loan or used as collateral.
Due to the contributory nature of the CPS, employers no longer need to solely bear the burden of making provisions for retirement benefits for their employees. Unlike the DB scheme, employees under the CPS are also responsible for contributing towards their retirement benefits, thus, reducing the financial burden on the employer. In addition, the scheme has provisions for employers to pay monthly pension contributions. This provision alleviates the burden on employers to make bulk payments to settle pension liabilities.
The CPS is a more efficient avenue for financing state governments’ long-term borrowing needs via investible instruments such as infrastructural bonds. States that implement the CPS derive the benefits of generating longterm savings, which can promote the growth of their real sector as PFAs invest in bonds issued by such states. PFAs are not allowed to invest in the bonds of states yet to comply with the scheme.
Meanwhile, PenCom’s regulatory oversight of state and local governments’ pension schemes is guided by the provisions of the enabling laws in the states. Section 23(i) of the PRA 2014 clearly emphasised that PenCom’s role in applying the CPS at the sub-national levels shall be to promote and offer technical assistance to states in line with the objectives of the scheme. Despite the huge benefits of the CPS, it would be contrary to constitutional provisions for PenCom to enforce the provisions of the PRA 2014 on the states without recourse to the states’ extant laws and prevailing economic limitations at every material point in time. PenCom has continued to adopt the persuasive approach in its efforts to drive full implementation of the CPS at the states and local governments.
In conclusion, PenCom, as the apex regulator of the pension industry in Nigeria, has intensified the drive to implement the CPS by states and local governments. The effective regulation and supervision of the pension industry in Nigeria remains PenCom’s priority.