Appraising Eight Years of Contributory Pension Scheme

12 Dec 2012

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Mr. Muhammad Kabir Ahmad

The two terms of four years of the pioneer management in the National Pension Commission (PenCom) would come to an end on Dec 15. The success of the contributory pension scheme in the country remain the testimonials of the outgoing Director-General of the commission, Mr. Muhammad Kabir Ahmad. Nnamdi Duru and Obinna Chima report

The contributory pension scheme was introduced by the Chief Olusegun Obasanjo administration in Nigeria. By this time eight years ago, what obtained in the public sector was a defined benefit non-contributory pension scheme whereby retirees pension were paid from budgetary allocations. In the private sector, we had different types of pension schemes depending on individual employers and their agreement with in-house unions where such existed.

However, with the enactment of the Pension Reform Act, 2004 (PRA), the Federal Government arm of the public sector was the first to embrace contributory pension by January 1, 2005 with the private sector joining six months after.
The pension reform law made provision for the creation of a solid structure for the new pension scheme. In the last eight years, below are some of the major achievements and challenges recorded by the scheme.

Building Structures
The pension reform law made provision for the creation of a pension regulator in the country, National Pension Commission (PenCom). The commission, which was created eight years ago had its pioneer Director-General, Mr. Muhammad Kabir Ahmad who has been in the saddle since then; he has supervised the successes of the commission.

The commission, which was statutorily empowered to regulate the new sub-sector in the finance industry, started from the scratch by creating the much needed structures for the scheme to operate.

The commission licensed various operators in line with the PRA including Pension Fund Administrators (PFAs), Closed Pension Fund Administrators (CPFAs) and Pension Fund Custodians (PFCs).
According to Ahmad, PenCom under his watch started an industry that never existed.

Speaking on the journey so far, he said, “when we started, we didn’t have PenCom, we didn’t have licensed operators and we didn’t have a pension industry. Today we have at least those three things. PenCom has over 200 staff, we are opening zonal offices in the six geopolitical zones and hopefully we will complete this project this year.”

“We try to provide the best training to our staff because we believe that for us to succeed we must be able to attract and retain the best we can and given that we operate in the same industry with the CBN, Nigerian Stock Exchange (NSE) and the Securities and Exchange Commission (SEC), the challenge for a very young institution like PenCom becomes obvious. We are trying our best and we are proud of our staff in terms of professionalism, competence and qualifications.
However, over 180,000 employers of labour that joined the contributory pension scheme under Ahmad’s supervision with 5.3 million employees registered under the scheme.

“What we tried to do was to build 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,” Ahmad said.

Licensing Operators
When the industry started eight years ago, there was nothing like pension operators but today the story is different as according to Ahmad “in terms of operators, we have 18 PFAs, 4 Pension Fund Custodians (PFCs) and 7 Closed Pension Fund Administrators (CPFAs).”
Initially, about 27 PFAs were licensed but along the line, some had to give up their operational licenses, reducing the number to 23. Also in the course of the just concluded recapitalisation programme, five other operators threw in the towel.
Currently, there are 18 PFAs, 7 CPFAs and 4 PFCs.

Pension Assets
The outgoing director-general also confirmed that 5.28 million Nigerians registered for the Contributory Pension Scheme (CPS) as at September 2012, and these collectively pooled as much as N2.94 trillion in pension assets as at the same date.

Renaissance Capital in its report titled, “Thoughts from a Renaissance Man: Nigeria’s Pension Funds – An Unsung Story”, noted that accumulated pension assets has grown “from N265 billion and 1.4 per cent of country’s Gross Domestic Product (GDP) in 2006 to N2.74 billion or almost 1 per cent of GDP” by mid-2012, a N700 billion increase in the last 18 months.”
The import of this according to the firm is that such schemes allow countries to become safe havens during global turbulence due to the size of the pension funds invested in local assets, in addition to enabling countries to be rated high by credit rating agencies because private pension funds are sufficient in size to fund a country’s debt.

Retirees and Pension
Under contributory pension, the number of retirees drawing monthly pension has risen to 54,558 retirees from both public and private sectors under the scheme as at September 2012. These have collectively received over N151.52 billion of their accumulated pension savings as lump sum and were receiving about N1.77 billion monthly as pension as at the same date.

PenCom under Ahmad’s leadership concluded the first phase of the recapitalisation exercise in the industry, an exercise which saw the reduction in PFAs from 23 to 18.

Commenting on the exercise, the President of the Association of Pension Fund Operators (PenOp), Mr. Dave Uduanu said: “We have 18 PFAs and we do not expect that number to reduce… The recapitalisation was seamless, there is nothing to worry about, some PFAs were bought over by others and there were two PFAs that were adjudged not to have met the minimum capital and were not bought over by anybody… Consolidation happens in phases, while some people were expecting 10 PFAs and others 15 PFAs; people should note that the pension industry is a bit different from banking. I do not think we were expecting anything significantly lower just like other people.”

Uduanu also predicted that there would be merger and acquisitions over the next one or two years; that would not be induced by regulation but by competition. People would decide that rather than being alone, they merge with one or two PFAs to make them bigger and stronger.

New Investment Options
PenCom under Ahmad’s supervision responded positively to stakeholders’ complaints that contributors were not given opportunity to maximise returns on their accumulated savings because fund managers were not free to invest using their skills and experience to maximise returns on funds under management.

The commission has concluded arrangement to introduce four types of funds, such that pension contributors could determine the instruments in which accumulated retirement savings should be invested.
“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,” Ahmad said.

Explaining how this would work, he said “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.
“Retirees 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 fourth fund we are creating is called the ethical fund including sharia-compliant funds. 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,” Ahmad explained.

Corporate Governance
The regulator in the last eight years upheld corporate governance and ensured that the operators toed the same line but where they failed to do so, the operators were sanctioned and beaten back to line.
“I tried 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. It is illegal and criminal because if I ask a PFA to invest in any bank, there must be a reason and therefore, the system will 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,” Ahmad warned.

States and Local Governments
The pioneer management of PenCom identified that the pension reform law was deficient in the area of compelling States and Local Governments to be part of the scheme; it therefore employed moral suasion to get the buy-in of the second tier of government.
In the last four years, many states are at various stages of implementing contributory pension scheme.
19 states have accepted the scheme but implementation has been very slow; 16 others were at various stages of compliance with only two yet to make any effort at all, the commission reported.

Amendment of Pension Act
The outgoing administration in the commission initiated moves to amend PRA, 2004 to reflect modern day development in the pension industry.

“We had a workshop jointly with the National Assembly two or three years ago and we also consulted. We are about to finalise the initial draft that would eventually be submitted to the National Assembly but there are some areas which we believe the review may at least look at.

Ahmad pointed out that some of the areas in the law that need fine tuning including the need for employers to open temporary retirement savings accounts and lodge deductions from employers’ salaries where they are yet to open a Retirement Savings Account (RSA) three months after starting work.

Another area according to him is the need to make pension savings tax free and making it mandatory for every employer to register its workers.
“There is also the issue of contribution by the Federal Government. I think it should be made more mandatory, at least the accrued pension right so that in the event of default, the Accountant-General can take appropriate actions to handle that,” Ahmad said.

Reviewing his eight years supervision of the industry, the outgoing PenCom boss identified shortage of funds, public education and enlightenment as some of the major challenges the institution is facing. Managing the informal sector and bringing them under contributory pension is another serious challenge.

At the federal level, there is the challenge of funding accrued pension that we pointed out and there is also another challenge in terms of those retiring under the new scheme and that is one of the greatest challenge that we have.

Also, section 173 of the Nigerian constitution provides that any time the Federal Government increases salaries pension should be increases otherwise once in every five years and because it is constitutional provision.
“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,” Ahmad stressed.

Going Forward
Pointing the way forward, Ahmad harped on the need for publicity and creation of awareness. “Public education and enlightenment are something that we 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,” he said.

Summing up the activities of the pioneer management of the commission, the outgoing director-general said,
“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 along,” Ahmad said.

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