Mr. Muhammad K. Ahmad
The pioneer director-general of the National Pension Commission , Mr. Muhammad K. Ahmad, who retires this week, tells Kunle Aderinokun that the Contributory Pension Scheme, which was established by the Pension Reform Act 2004, gives Nigerian workers rays of hope after retirement, while also pointing out that the burgeoning pension assets are waiting to be used to bridge the country’s infrastructure financing gap
In the eight years of pension reform in Nigeria, what were the challenges PenCom had faced? Also, what are the prospects of retirees?
Basically, we started an industry that never existed. As I always say, there are basically three things that we need to focus on: firstly, we had a pension reform that was intended to establish a scheme that is fully funded and to be privately managed in a more efficient manner. A scheme that was also to replace other old schemes, particularly, at the federal government level so that we can have a more transparent scheme. The reform also provided that it should be managed by regulated agencies. But beyond that, it should be regulated by a government agency called PenCom. What have we done to date? Today, we have PenCom and hopefully by middle of December we shall exit and other people would take over from us. So, we have a regulatory and supervisory institution that is charged with the responsibility of regulating and supervising pension matters, whether at the federal level, at the state level or in the private sector. Today, pension assets have accumulated to over the period.
So, we do have an industry and quite a few states have also complied with that. We have also been able to license and regulate operators – asset managers and custodians. So, in a nutshell, these are the things that we have been able to do. Of course there are challenges, and the challenges include funds, public education and enlightenment. Public education and enlightenment is something that must continue to ensure that at least people understand. As an industry, we decided to focus on educating and enlightening Nigerians to have their buy-in, because we believe with buy-in, we will have voluntary compliance. But beyond that is the fact that we needed to go to the next level, there are people that do not want to comply, and that takes me to the next level – compliance. Private sector employers, in complying with the new reform, do they get their employees registered and if they do get their employees registered, are they contributing? For the formal sector of the Nigerian economy, we would say that majority of the employers are complying.
Either they have gotten their staff registered and are paying regularly, or the staffs have been registered and the payment have not been that regular. But as you are aware, the bulk of our employers are actually in the informal sector. Now, how do you capture that group? Historically, in an economy like the Nigerian economy, managing the informal sector is the most challenging thing, whether you are looking at tax issues or compliance issues. The reason is that you don’t have a structure of what an informal sector is all about. Businesses are not properly regulated and registered. To date, you cannot go to any agency or institution where you can pick the list of active registered businesses or employers of labour. Recently, SMEDAN and NBS did a survey on SMEs that employ three workers and above and came out with a figure of 14 million. So, the challenge is how to get the data and how to structure the issue of getting the benefits paid.
So we needed to have a separate structure of how payment of contributions can be done and how PFAs and PFCs can get money to do that. It is in that regard that we are developing a regulatory framework for the informal sector where we believe the bulk of our employees are. We also want to link it up with an important aspect of the pension reform that has not been implemented and that is the minimum pension guarantee. The intention of the minimum pension guarantee is to provide that if a contributor has saved for X number of years, then that person is guaranteed a minimum pension.
The whole essence is to encourage national savings. We are still working on that structure and we hope with that, there would be incentive for people to save. If I started saving N100 every month, at the end of 20 years my pension is not up to N18,000, then the government will have to pay the difference so that I can at least, have something to fall back on. It is a form of social security. But of course, in the formal sector we still have some few employers that are also not complying. What we did was to engage recovery agents in different parts of this country.
They have been going round, compiling details and we have quite a few numbers that is already in court. The National Industrial Court is the appropriate court that tries cases related to employment and we hope that we can secure convictions. A number of them that have been taken to court have come forward to start paying and we hope to build on that. So in other words, we are becoming more aggressive to ensure compliance. The third issues, has to do with the States. The States are expected to establish their own pension scheme. We have been able to work with them to commence the contributory pension scheme.
The flagship in the country, is Lagos, they have a very effective contributory pension scheme. We have 21 States that are in different stages of compliance, but unfortunately, the compliance has been a bit slow and haphazard. The reason was that it is not mandatory for them, so what they did was that they enacted their own laws. Some of them that started the scheme have either stopped or a paying the contribution haphazardly. So, we shall continue to engage them. But in the long run, this is a scheme that provides for income after retirement. Generally, we have made a lot of progress employees have realised the importance of the contributory pension scheme. We are receiving complaints from employees, they are asking question because they are not getting the service they need from their PFAs. The concern is to make the employees the vanguard.
Another issue is that as part of the process, the private sector which initially was reluctant joining the new scheme because they felt it was basically a government scheme, are now the greatest contributors to the fund and more private sector workers are joining the new scheme. That is how we can build because the future of this economy is not about government business, but about the private sector. Employment can only be generated by the private sector and we hope and pray that we should be able to build on that.
Some people are still asking that how can you ensure that what happened to the old scheme will not also affect the Contributory Pension Scheme?
At the federal level, prior to 2004, we had what is called the defined benefit Pay-As-You-Go. In other words, the federal government does not set aside money for the payment of pension. On an annual basis, it has an estimate of those that will retire and pays them pension. So funds are not made available. The second issue is that it is a defined benefit based on final salary. That is how it was structured but it is not funded. Beyond that of course is that pension departments were established where the government sends money to them to pay pensioners, so they place the money in banks.
What happened, and what is still happening was that the federal government disburses money to the pension departments, they open account with banks and keep the money in banks, of course fixed deposit accounts and possibly take brokerage because there is an incentive. As of this, we had people that had retired but not on the payroll. Those that have been on the payroll, their names are on and off. So, the administration was not transparent and was cumbersome. It appeared clearly that those in charge of the pension departments took advantage of the internal weaknesses of the process and created that problem. At the end of the day, you had the government making payment while the pensioner is not getting the benefit.
On the other hand, the contributory pension scheme stipulates that it must be fully funded, in other words, funds must be set aside on a monthly basis, so you don’t need to wait for budgetary allocation. Secondly, an employee must open an RSA while his contribution is paid into that account. So it becomes an account owned by an individual, unlike a situation whereby you have a pool account and somebody decided to keep the money in the bank and refuse to pay pensioners. And then, it is privately managed and licensed by and institutions with specific rules and regulations and they are monitored and supervised and therefore you can challenge them. Beyond that is the fact that you have two institutions – the administrator and custodian. The administrator that manages the fund doesn’t have access to the fund and each of them reports on the fund. So clearly there is a segregation of duties. These are clearly defined and so it is impossible for what happened under the pension departments to happen under the contributory scheme.
That is why today, we have not had any incidence that funds were diverted. These funds are even invested in diversified portfolio such as treasury bills, bonds, equities and so many other instruments, so it is not as if there is huge cash kept in the vault of PenCom. But what has the government done to address the problems of these pension departments? The Pension Reform Act provided for the pension department and what it states that these departments are supposed to exist. So, ideally, it is a various simple process that shouldn’t have attracted such problems. But because of the fact the fact that those funds are being moved and placed around by the various persons involved, that was why the problems came up.
What we are now saying is that lets implement the provisions of the law that says we need a single department called the Pension Transition Administration Department. The government has given an approval and there is already an inter-ministerial committee which the DG PenCom chairs to ensure that it is implemented. How do we want to proceed? Very simple! Once the verification exercise has been done by the previous group, it will be taken over and validated.
The government accounting system is being computerised and therefore payment of pension will be done by the Accountant-General. So, as a pension department you don’t receive money to pay. I think if we cut down that umbilical cord, you have cut down the level of fraud completely. This is a process that is being undertaken. Other members of the committee include the Accountant General of the Federation, Auditor-General of the Federation, the Director General of the Budget Office and the Permanent Secretary Establishment. If we do that, we believe that the frauds that were committed under the old scheme would be a thing of the past.
Eight years into the contributory pension scheme, how much has the scheme taken care of in the spectra of social security?
The people retiring under the new scheme started retiring in July 2007, so we are basically looking at five years. As at September, 54,000 contributors have retired under the new scheme and close to about N150 billion has been paid out as lump sum to this group of retirees both to the public and private sector and they are being paid as at when due. However, there is also another challenge. For those that have retired under the federal government, we had a period that arrears were built up from last year to middle of this year. Section 29 of the Pension Reform Act provides that the federal government should be setting aside five per cent of its wage bill into a pension fund account to be managed by the Central Bank of Nigeria (CBN) for the purpose of redeeming past liabilities of those who are retiring under the new scheme. However, the five per cent was not being paid, the reason was that appropriate appropriation is made by the budget office, at the National Assembly, the amount was not being appropriated as required. It took us a long time to convince the National Assembly that it is a statutory requirement and that indeed; even the five per cent is minimal. So, up to 2000 and middle of 2011, when federal government retirees retired, they get their benefits regularly. Pencom encourages employees to come and register so that we can estimate their liabilities and advice the government one year in advance. So those who are retiring in 2013, we have also captured them and advised the government on how much is required.
Until recently, employees didn’t want to do that. So, there is no way the government can have an estimate of who is retiring next year. It is when they retire, after one year, they come and knock at your door and say give us our money. So we had groups like that that decided to just surface that they have retired, they have gone somewhere and they are back and they want their benefits. As a result of these, we had an accumulation. It was not until August when the President approved about N34 billion to clear that. As at today, up till the end of September, all federal government retirees that retired have been paid their benefits. However, another challenge is the fact that we have a regulation on how people can retire and we have been explaining that.
What we always say is that six months before an employee retires, he should commence the process of his retirement benefits and the argument is that it is possible that the employer has defaulted, and PenCom needs to be informed so that it can follow up and get the benefit. But people don’t do that. The essence of the six months was that by the end of the six months, if you retire in June, by July you start getting your pension. But because people do not go through that process until July, they start to complain that they have retired and have not gotten their pension.
But can’t the government or regulator initiate the process since they know that the worker is going to retire soon?
Let me tell you how it works, the PFAs write to all prospective employees six months in advance to ensure that all the documentations are available, but majority do not care to respond. For instance, one is being asked to provide his letter of employment, evidence that he works in that organisation and other documents that are listed. It is only the employee that needed to file those documents. And for us, six months is sufficient enough to provide these documents and the benefits are processed in advanced. We don’t have that problem in the private sector; it is mostly in the public sector.
In the old scheme,whenever there is an increase in salary, it affects the take home of pensioners, but that is not the case with the contributory pension scheme, why is it like that?
There are two different schemes. The Defined Benefits Pay-As-You-Go scheme is a final salary scheme. So in other words, when you retire, you get 80 per cent as your pension for the rest of your life. I can tell you it is one of the most generous in the world. Except for Saudi Arabia that has 100 per cent, Netherlands about 105 per cent, most African countries have less than 40 per cent as their replacement ratio. 40 per cent is the International Labour Organisaton Convention.
The second issue is that there are two things, it is either you have your money now or you assume that somebody is going to give you money. Assuming you worked for Nigerian Airways, you will not even have the 80 per cent because that institution is dead, or National Shipping Line, NITEL and PHCN very soon.
So, this new scheme is that you have your money, the money is there, but for the old scheme, you are dependent on budgetary allocations which may not come. But beyond that is the fact that the old scheme was terminated as at June 2004, so you may be a Permanent Secretary today, but perhaps you were a Deputy Director in 2004 and therefore your pension will be low and somebody who was a director in 2004, will even earn more than you do. There is no doubt about that, most of those that will be retiring in the next 10 years, that is from 2007, there pension will be low. But those who have time to save, I can tell you that at the end of the day, they are going to make more money than even under the old scheme.
The second issue about the limited time, the mortality table we are using today in Nigeria, is the one that the British used in 1955. As a country we don’t have a mortality table. The mortality rate in Africa is still very low and AIDS seems to be the major factor. The average life span after retirement (OECD pension outlook for 2012) is 18 years, from 60-63, people are not expected to live beyond that.
However, with this new scheme, you have an option. If you don’t want programme withdrawal, you can take a life annuity and there are so many retirees that have taken life annuity. Life annuity is saying that come rain, come shine, you will get X amount of money for the rest of your life, but with the programme withdrawal, I will guarantee you 20-25 years. So it is optional. If you have a programme withdrawal, if you die after five years, the money goes to your estate and if you pick an annuity, if you die, your estate doesn’t get anything. For now we have a fixed annuity.
Pension assets are used as a source of investment in several sector of the economy, but in Nigeria, there has been a challenge in redistributing and classifying the class of assets PFAs are allowed to invest in. What is PenCom doing about that?
Investment management is the most critical aspect of the contributory pension scheme. What we do as an organisation is to ensure that the investments are managed in a more transparent manner and clearly defined rules and regulations. Therefore what we did was to issue an investment regulation. Generally, there are two options.
You have the option where you allow the investment manager to decide because he is a professional and a very transparent person who can take decisions on your behalf. Most developed countries have that. The other option is to have prescriptive regulation with clearly defined areas where you can invest in and there is also the limit. Every now and then, anytime we review the regulations, we expose that draft to both our operators and every person on the scheme so that people can bring suggestions on how to move forward. As at today, there are basically three main instruments where pension assets are invested-federal government bonds constitute about 60 per cent, came down from about 80 per cent to 60 per cent, interbank placements and money market instruments (14 per cent) and the equities markets (12 per cent) of the portfolio.
The reason why you have substantial part of the pension assets being invested in FGN bonds is because they are sovereign risk and are the safest funds. But beyond that, they offer the highest yields. So, PFAs are compelled to move there. As long as bonds provide higher yields, obviously, they will remain there. But we have other classes of assets. For instance, we have an allocation of 35 per cent for corporate bonds, but till date it is about only three per cent. The reason is because corporate bonds are not being issued by corporates. We also introduced infrastructure funds and infrastructure bonds. The idea of that was see how pension assets can be channelled to long-term funds for the development of the Nigerian economy. Till date, no infrastructure bonds have been issued. So that is virtually zero and there is nothing we can do.
We also have private equities funds and we provided allocation of five per cent, but we have not made any progress on that. There are alternative classes of asset that have been created but unfortunately, we don’t have institutions that issue such instruments and for that reason, the funds are concentrated in few locations. Of recent, the state governments have gone to the capital market to raise bonds, but we made some requirements.
For pension assets to be invested in state bonds, the state must be in compliant to the contributory pension scheme and that has assisted us in getting few of them to join the new scheme and we hope that will encourage others to do the same. As at today, we have about N3 trillion pension assets. The growth rate per annum is about 25-30 per cent for pension assets. So, it is a gradual process and it has been consistent so far and the private sector has been contributing significantly to that.
There was a time PenCom said PFAs are allowed to invest up to 25 per cent; I want to know if that still holds
The regulation we issued in December 2010, is being reviewed and hopefully before the end of the year, it will be issued. One of the key components of that regulation is to introduce multiple funds. Today, if you are a contributor under the RSA, you only have one account, so you don’t have an option and the PFAs invest on your behalf. But what we did was to create different buckets of funds so that for the younger contributors, they can be given the opportunity to invest in more floating instruments because in floating instruments, you earn higher returns. Investing in capital market earns higher returns than money market and therefore we created Fund 1, which is the Aggressive Fund. If you are not up to 40 years, you can ask you PFA to invest in Aggressive Fund. Now in that bucket, we said PFAs can invest up to 50 per cent of that fund in equities or rather in floating or variable instruments. Then we went to the next one which is more of a neutral one, which is where the 25 per cent comes in, then we moved to another one that is basically for somebody who is close to retirement. Then we have the full one that is just for retirees. We said for retirees, they cannot afford to have their investments in floating because of the fluctuations in returns and they will not have time to accumulate or correct any possible fall in return, so substantial part of the fund will be invested in fixed income. But the fifth fund we are creating is called the ethical fund. There are people who will not want their contributions or savings to be invested in certain instruments or businesses, so we created an ethical fund which will be based on demand. However, this will require a lot of education and therefore it is not something that will be implemented immediately. Roughly by the first quarter of next year, PenCom and the operators will engage the public in trying to educate and enlighten them.
Most contributors are not aware of how their funds are being invested and will like you to throw more light on the minimum pension guarantee
As at today, what contributors have is what is called an RSA statement on a quarterly basis. You can have a hard copy, some PFAs can give you access to their website so that you can see you balance always. That gives you an idea of how it has been contributed by you and your employer over a period. But by the time we create these funds, you now choose which funds you want your assets to be invested. So, that may to a large extent address that concern.
On the issue of the minimum pension guarantee, what it says is that there are people, particular small savers who may not contribute enough, such savings will not accumulate huge amount over the period. For that reason, what the law says is that for those of us that have saved for a minimum number of years, when they are retiring, the pension they will take will be their minimum salary, so that nobody will be taking pension below the minimum wage. So there is an incentive for people to come on board. Now, the challenge we have today in our society is who bears that cost? If I work for Lagos state government, will the federal government pay that? This is an issue that we have to engage the federal government to see if it can be part of the national social security mandate. So that if somebody is at the age of 50 or 60, he needs to be taken care of and if indeed he has contributed, then let him have a minimum wage. That provides a sort of conditional grant to support individuals that made efforts to save because in the long run, national savings promotes economic development and for every country to succeed, they must have national savings. And the best way to promote national savings is to encourage somebody to save and the benefit for government is that large funds are being made available. Therefore, instead of borrowing from banks, government can borrow and invest in infrastructure. Worldwide, pension assets constitute an average of about 100 per cent of GDP of most countries in OECD. They rely on pension and insurance assets for growth and development, definitely not on bank assets.
What is your response to the current debate that pension asset should be provided to develop infrastructure in the country?
Honestly, that is what pension assets should do because pension assets are long-term assets and they should finance long-term assets. Those funds are available for investments. However, there must be clearly defined rules and regulations because these are other people’s money. You and I cannot get concession in a local government that we are going to build hospital and go and borrow, and at the end of the day, nobody gets anything out of it. And with concession, the rules and regulations must be completely spelt out. Today we are seeing how concessions are being handled. You are not sure that if you finance a concession today, at the end of the day, you are going to get your money back. Basically, there must be clearly well defined terms and exit strategy.
Following the recent recapitalisation in the pension industry, what is the latest about the marginal players?
The last time we interacted with the media we said there are two PFAs that had not complied- IGI and Citi. IGI has indicated their interest to comply. To the two of them we issued notice to the board. Our law says that you must give notice for revocation. You can't revoke immediately and the notice is 28 days, which means you are given the opportunity to meet up.
Most likely, for IGI when our board meets we may take a decision and ask them to return the licence, because they are prepared to do that. They have the funds and they say they are going to do that. Unfortunately with the Citi Trust, they decided to take us to court, we are in court with them. As at today, you could say we have 21 PFAs, plus IGI.
Do we expected more of them to have merged? Yes. We raised their minimum capital from N150 million to N1 billion. The argument was that is the N1 billion not too small? Of course not! They are asset managers and don't need huge capital. They don't take credit risk. But they need capital for expansion to provide effective services to the public. We have been discussing with them. We encourage mergers and acquisition. What we are saying is that the more account you have the better you are generating resources to manage your business. We say for instance if after 90 days, there is shortfall in this N1 billion capital, we can withdraw the licence. It is a huge task, especially for some of the marginal players for them to maintain that N1 billion continuously. We will continue to encourage them through moral suasion.
It is better to operate in a bigger environment and get more reliable returns than to be managing. In most countries, Chile, Mexico started with a large number but over the year ended up curtly with six or seven. Some people say no you will create an oligarchy. The bottom line is that the stronger they are, the better.
What do you want to be remembered for ?
I think that we came to implement a reform, basically, a social reform arising from a very controversial legislative process where various interest groups felt that they don’t need the scheme. But by the grace of God, without being immodest, we have been able to achieve what we did today by engaging all the stakeholders and by making sure that we carry our social partners, whether it is the Nigeria Labour Congress (NLC), the Trade Union Congress (TUC), NECA and others along. What I tried to do was to build an institution. An institution not built around an individual, but an institution that will survive each individual that participated in the building process. It is extremely difficult in the sense that in our environment today, segregating an individual from an institution is extremely difficult. Most people would want to push themselves as the institution. If we are building institutions that will survive us, maybe in the next 1,000 years, then we must divorce ourselves from that institution.
The other thing which I tried to do was to respect the wall which the law creates between regulator and operator. I will not come to you as a PFA and say place money with a particular bank. If I do that, it is illegal and criminal. For me, if I had allowed myself to be used, then it would have become like a drug or cocaine. This is because if I ask a PFA to invest in any bank, there must be a reason and therefore, the system collapse completely. So, corporate governance and transparency is an issue that we must continuously pursue because we must always remember that we are dealing with other people’s money. The worst thing you can do to a worker is that he has contributed for 30 years and you tell him that he can’t get his money back. These are the things that we will continue to remind ourselves and Nigerians that collectively, we must protect the system and that is the only way we can build institutions. If we do that, regardless of who is the DG, things will go the way they should and there won’t be any interference. I can tell you that since 2004 till date, we have never had any interference from the President, because we report to the President and no other government official has given us directive to either give licence or any other thing. We have also maintained a very consultative process with operators. I think the greatest challenge we have had is to consistently remind our policy makers on the need to be consistent, particularly on pension system relating to federal government employees.
In implementing a reform, there are challenges and rather than abandoning a reform, there is need for you to identify the challenges and address them.