The Contributory Pension Scheme (CPS) remains the best initiative the pension industry has ever had, as it is able to tackle corruption and also ensure better life for workers at retirement, a characteristic that was lacking in the old pension scheme.
In this interview with Chuks Udo Okonta, the President, Pension Fund Operators Association of Nigeria (PenOp), Eguarekhide Longe, spoke on how the scheme can be used to stem corruption and provide funds for execution of social projects that will spur economic growth and development.
How prepared are the operators for micro-pensions and other envisaged opportunities?
The operators are anxious, I do not know about preparations. If you look at the informal sector, you will observe that, players in that sector cannot be approached like the formal sector. A lot of background works have to be done and that is one of the concepts that were extensively discussed during the last pension industry retreat. Micro-pension remains one of the key focal points for development over the next 10 years. That is where the figure of 20 million subscribers was set as target for the industry. For me, micro-pension and the informal sector are not the same, and I will explain. Micro-pension really looks at small investors – small savers. Informal sector is not necessarily limit to small investors. A micro-pension is a sub-sector of the informal sector, because most small investors are in the informal sector. You may be looking at an artiste like Davido as an informal sector participant, Mikel Obi as a participant in the informal sector to a certain degree. The informal sector for me is categorisation, incentive and structure. The structure as to how you are going to harness those funds. How are you going to collect contributions from that growth in compliance, from 5 million to 20 million? You have to put technology in place to be able to harness that growth. Those are the things we had focused on. We had actually advanced to certain degree and we had discussions on what need to be done. There is also the structure which is the type of guidelines we can use to approach this market. We probably have to create a separate fund for informal sector subscriptions because most of the people in the informal sector, mostly micro-pension people always have a liquidity need. So, we do not want to include them in the same pot as the informal sector workers. There is also the fact that they want a different way of accessing their benefits. They probably want what we might call a guarantee return on their contributions. These are all the issues that need to be dealt with and I think that we are rapidly dealing with them. I recall, we have an eighteen month implementation plan to sort these things out, but another critical area is the area of the awareness. The kind of material you use to create awareness for the informal sector is extremely different from those in the formal sector.
All these are in process and there are champions that have been appointed to take these forward, both on the operators’ side and on the side of the regulator. We are going to see increased activities in that area and we hope for better compliance in the next 12 to 18 months.
How did the pension industry fared last year?
The industry grew last year, but there are some challenges with the remittance, particularly from states. It is obvious to know why that happened. The public finances are strained and the state remittances as well as the federal government were not up to date as at the end of the year. But nevertheless, the pension fund grew up to around N5.2 trillion or so. Even though I am not certain about the 2014 figure, last year was about 15 to 18 per cent improvement to the figure posted the previous year.
Yes, the growth was at a reduced rate, but there was growth nevertheless and the investment performance was pretty positive. The interest rate market was at an average of 14 to 15 per cent for 10 months in 2015 and the fixed income portfolios did very positively.
However, the variable income portfolios, particularly the equities, record abysmal performance; so, there were realised losses in equity portfolios. The Pension Fund Administrators (PFAs) that had high commitments to the equities market, found some revises from the gains they had made on their portfolios from the fixed income side. There were a bit of those challenges, but the market is a long term market and since our liabilities are 20, 25 years liabilities, you do not make a decision for 20 years in one year or few months; hence, those equities will bounce back.
The regulatory environment was very positive, we had good relationship with the regulators, and the dialogue is getting better, even though we are confronted with the issues of the pension industry as a unit and as a team to see how to make an impact on our environment and the wider public.
What is the level of compliance to the Pension Reform Act (PRA) 2014?
I will put the level of compliance at 60 per cent from the private sector side. On the government side, the former Minister of Finance, Dr Ngozi Okonji-Iweala, said the federal government could not comply with the new 18 per cent minimum, but when compliance starts, it will offset the entire backlog. I think that situation still remains.
The government has not complied with the 18 per cent yet, it is still paying 15 per cent. Most states’ governments are yet to start paying the 18 per cent.
A lot of private entities are finding it difficult to pay pensions, so the 18 per cent is a challenge for some, but as I said earlier, about 60 per cent had begun to pay the 18 per cent. The 60 per cent is from the contribution rate.
As far as compliance to the new law is concerned, especially the integration of employers with three employees and below into the scheme, I will not say there has been a significant growth in accordance with that part of the regulation. But there is a lot of work directed at generating compliance from that sector which is largely on the informal sector.
Are you in support of the deployment of pension funds for infrastructural projects?
We have always been allowed to invest in infrastructure. We are allowed to invest five per cent in infrastructure funds or five per cent in infrastructure bond. I think that figure had been reviewed to 20 per cent in the guidelines that is soon to be issued. That is 10 per cent each. It is not a question of the industry shutting its door to infrastructure investing. Infrastructure development or the deficit in infrastructure in this country, as had been pointed out by a few people, is not a funding problem; it is a concept problem. So, if I bring $5 billion to invest in infrastructure in this country now, I have a capital that requires a return which the pension money is. You will not find what they call bankable projects, and that was what the core of the discussion was with the Minister of Works, Power and Housing, Barrister Raji Fashola. He was saying the operators keep talking of bankable projects, and yet are not doing enough work to go and look for those projects. He equally said pension funds outside Nigeria, notably South Africa, are making incursion into Nigeria and that they are finding those bankable projects. That may be true to a certain degree, but you need to take a step back and look at what projects are these people investing in. It is ill-advisable for us to go and do infrastructure projects. For instance, we asked the minister about the Lagos mono-rail project, and he told us that the project was conceived without having enough funding, and that they just wanted to start and you can see the stage they are now. I believe they are more than three years delivery overrun and I suspect also that they are more than three time cost overrun. If the pension funds are put in that project, where would we be today? Because what the project is supposed to do is to deliver social services, but it is also supposed to generate revenue and that revenue is supposed to pay back the investors.
Currently, you cannot invest in infrastructure from the pension industry, if you do not have the channel to get the money back. We must invest in revenue generating infrastructure which is another name for bankable project. So, we cannot put money in Lagos-Ibadan Expressway when there is litigation on it, no matter how attractive the project may be. These are the things we need to consider, these are the concept problems, contractual problems that need to be dealt with. We are at the forefront of working with key government officers to find a way to deliver infrastructure projects that are win – win for all parties around the table. We cannot use blocks to pay retirees at the time when their retirement benefits become due. It is money that we are going to use to pay them. So, we must invest in projects that mature at the right time with good returns to be able to pay them.
However, the contributors want to drive on good roads, want to benefit from rail ways, housing projects, but there should be a mutual benefits position in this. But even with the mutual benefits, this has to be delivered with clear thinking that is where we are. So, we are working to fashion that out, even though we are very anxious to move in that direction.
How are the PFAs tackling the challenge of inadequate knowledge and skill requirements for the conduct of due diligence on developmental projects?
Managers of funds in the pension industry comprises of people who have had different careers in different places. I had worked in investment management for over 25 years. I believe that even though I may not be the one who originates a project, I can access a project for what value it delivers, and I think that the industry has individuals who can access projects or developmental initiatives in the same way. Yes, there might be a problem with the board of operators’ entities and I think that is where the Director-General of the National Pension Commission, Mrs. Chinelo Anohu-Amazu made her remarks at the private seminar that held about a week ago. Even if I can access a project and make a proposal and my board members cannot see the value of what I made, it will stall ability to move forward.
Fortunately, we don’t have such limitations in the company (AIICO Pension) where I work, for we are committed to private equity investments. Though, it’s a slight challenge, but it’s surmountable.
With what PenCom is doing, in the area of enlightenment and operators’ desire to see things moving forward, it’s a good development for the industry. I think there is a gulf between the operators and the investment banking community. They have expressed frustrations that the pension operators do not make it easy for them to deliver projects, but in many cases, they do not also see the projects from the pension operators’ point of view.
Most times they are motivated by what fee they can earn, rather than look to see that we deliver a balanced venture that is beneficial to all parties. Whatever we want to do as operators must be beneficial to our contributors. If all these are taken into consideration, then I think we would see rapid growth in the industry and the country.
One of such areas that require funding is housing and we are working very actively with all the stakeholders to see how we can contribute to the housing strategy that is being propelled by the Ministry of Works in conjunction with the Nigerian Mortgage Financing Corporation to deepen the mortgage industry. I think a lot of work is being done and there is sufficient knowledge to move in the direction of alternative assets from the pension industry.
Don’t you think there is the need to create more investment channels in the industry?
The investment guidelines are broad enough for anyone to explore. That there are no assets yet, perhaps is the critical question. Those assets will emerge. The industry is just about 12 years old; it takes time for those things to come up. There was no long term financing available before, and suddenly it becomes available. You might find that people are not coming up as fast as they should, but do not forget that because of the fact that there has not been long term financing, most of the originators of these investments opportunities have often delivered shorter term products. Therefore, it is taking them some time to adjust to the possibility of delivering longer term projects. For instance, I have never seen anybody who comes up with a product on how to deliver better transportation services, railways, roads, bus services, even concessions on aviation. All of these things would be slow in coming, but they will come and when they come, we would be ready to access and invest. The pension funds in a more developed world are often invested in real estates, roads, bridges, water system and more. All these will happen. It will happen as a matter of cost and I think that we are on the way and going in that direction.
What is the update on the transfer window?
The transfer window is being dealt with. However, for this window to commence, there are certain steps that must be taken. There should be software that can capture the biometric information of each contributor. The software should be robust system that captures the registrations and can continue to update the records as time progresses.
What PenCom saw was that the contributory registration system was not robust enough to deal with the biometric information that has to be captured and so, they decided to migrate to a more robust system which is the pension administration software.
The regulator is at the request for proposal stage now and I think the usual requirements had been determined and request for proposal is being sought from providers and thereafter, the system would be acquired, installed. Thereafter, we will now go out and register the biometric information of our subscribers. I know that there was a meeting at the end of last year that assigned responsibilities to operators, regulator and the prospective vendors that will get the system to work. I had gone into that amount of detail just to show that there is work in progress. That has to happen because there were a lot of issues with the current information that is on the national data bank in PenCom. We had to start this industry very quickly, so certain things were over looked at the time. There are a lot of multiple registrations which need to be cleaned out. In some cases where you have biometric information, it is repeated, so you find out that it is not tenable for that system. We do not want people transferring an account that does not belong to them. We need to be sure of who is transferring what and that is the clean up exercise that need to be done.
However, with the new system we are acquiring and the assigning of responsibilities, I cannot say for certain when all of these will end, but you can see that there is active work in progress and these are necessities, so that we don’t race into implementation when we can take our time and do it well, once and for all.
How has the Electronic Pension Contribution Collection System (EPCCOS) fared?
This is the channel for electronic contributions and collections, it is already been implemented. Uptake is a bid slow and this is understandable since electronic transfer penetration in not that high. You know that we are collecting contributions from all over the country, some people do not have internet access; some employers are not ready for this technology, but the uptake will grow as time progresses. But for those using the platform, they testified that it solved a lot of schedule reconciliation problems. We think that, over the years, we will continue to enforce. Also, one of the industry initiatives is to facilitate shared services like EPCCOS present in other areas such as benefit payment and registration. The platform would be enhanced as time goes on. For many industry operators, they had increased enlightenment programmes with their customers to ensure that the uptake of this electronic system is a lot better.
How has PenOp fared in regulating the affairs of members?
PenOp is self regulating organisation. One of the items on the agenda of the association for the foreseeable future – 2015 to 2017, is to instill the code of ethics. We want to wipe out unhealthy competition, improve service delivery and improve the functional skills of our operators. As a self regulatory organisation, you find out incidence of fraud is almost non-existence in this industry. So, I think it is more of the rules of engagement as far as competitions amongst the operators are concerned, that is where the real work is as far as self regulating activities are.
What is PenOp doing to stem the alleged demarketing by some insurers?
The competition is unfair. It is like a boxing match where you tie one man’s hand behind and the other man has two hands. That is exactly the analogy of Annuity and Programmed Withdrawal (PA). One hand of the pension fund administrators is tied behind their back and the insurance providers have two hands. You see that there is a big challenge as far as dealing with the benefit side of the business is concerned. Let me just explain how this works, the pension fund operators are supposed to offer two options to their subscribers for retirement benefits access, that is the Programmed Withdrawal and the Annuity. PA is a product of the pension industry. The annuity is a product of the insurance industry. There is a tendency for some operators to lean more on the programmed withdrawal side than the insurance side. I do not think operators should do that, I think they should be neutral and that is what AIICO Pension stands for. We are not really bothered which window a retiree decides to access his benefits, either programmed withdrawal or annuity.
But having said that, insurance agents have only one motivation and that motivation is commission. So they can draw blood to earn that commission. In the process, they spread a lot of false information just to be able to attract the retirees’ benefits to the insurance industry. They are only offering annuity and not programmed withdrawal, so, there is bound to be conflict. The conflict is not going to vanish with a gentle breeze, it will always be there. They want to seize, at a cost, what is in the pension industry, whereas the pension industry is supposed to offer both options to retirees to choose. What I think should be done is, that, the proprietors of insurance businesses should try and clean up the agency system. There should be ethical marketing. That should be the key focus. Yes, you can access the retirement funds, but the rules of engagements should reflect that somebody has offered something that is true and what you can defend. By the way, while the insurance agents are moving around aggressively marketing annuity products, the underwriters are finding it a bit challenging to meet their commitments because the liability situation has changed drastically. They are having issues with some contracts. In some cases, some insurance companies have to make capital addition. Those are the things that are playing out in the market. The long and short of it is that I do not think there is any reason to fight. Both are trying to serve the same customers and we should enlighten the customers the benefit of each option and allow them to decide. The pension industry is where the funds are incubated, so, there is a tendency for them to protect the funds. The insurance agents are motivated by commission and they go to any length to access that fund. I think there are ways as gentlemen and women, we can offer products to clients in a more decent way.
What impact do you think the financial crisis is having on the pension business?
Since benefits are paid in Naira, we do not have ostensive foreign exchange exposure. But it is also true that we have the opportunity to invest in international currency denominated assets. We could invest in foreign securities, so, with the way the Naira is going, if you invest in dollar-linked assets, you have edged your position, and you would not lose value. But with the adverse rate situation, everybody, in a way, has been affected. If you look at the aggregate fund under management in dollar terms today, it is about $22 billion whereas in 2014, it was already over $20 billion. The Naira value has grown over a billion. But if you quantify it in dollar terms, that value has been eroded. But fortunately for us, we do not have dollar exposures as such.
However, looking at the larger economy, it is affecting the retirees. Since the economy is import-driven, it has led to imported inflation and Nigerians now spend more to buy their needs. There, you find out that your retirement benefits cannot buy you as much as it used to be.
If you are buying medicine at a certain rate before and the medicine is imported, it is going to increase by that rate. So, the capacity to afford the medicine is diminished. That is a problem. I do not want to go into the issues of whether we should devalue the Naira or not, as that is not the question you asked. I think that the government has no choice, but to focus on creating alternative revenue sources away from oil as the main income driver for the country. I am fairly encouraged by what I hear from government circles. I am happy about what I heard from the tax authorities, although, it is going to impact all of us, we should be ready for more aggressive taxing.
I heard the Minister of Finance said she want to be the last Minister of Finance that would worry about price of oil that is a very positive comment. The challenge is the implementation. We should encourage and pray for them to succeed, because if this government did not succeed, it is going to be a challenge for all of us. We do not want to put our properties on our heads and start crossing oceans looking for people who would take us as migrants. We should support the government and I think the government is going in the right direction.
What is PFAs doing about non-remittance and half remittance by some employers?
For non-remittance, we sent reports to the regulatory authorities and they also follow them up with recovery agents to a certain degree. On half remittance, we sent that report as well and employees are also encouraged to use the whistle blowing channels of PenCom which is its website, to report cases where they believe their employers have collected their money and refused to remit. When we are briefed by the employees, we intimate the regulatory authorities. It is difficult for operators to enforce; we do not have such powers. We cannot enforce compliance; we can only alert the regulators to that information. You also know that it is a challenging environment; moral suasion is more effective these days than enforcement because pension is an additional benefit for the workers. Many employers, if they have their way, would pay less. So, how many of them can we chase and what length should we chase them to comply? I guess we need the combination of carrot and stick to get people to do the right thing. As people see the impact of pension fund, the compliance level will improve.
How involved are operators in corporate social responsibilities?
There was a joint industry initiative that was drawn by PenCom which is in place. People are doing different things; we have done a few things. AIICO Pension has donated uniforms to Abuja Environmental Protection Board. We have donated to some orphanages too.
What is your expectation from the public?
The public should detach their minds from how pension used to be in the past and understand how it is today. At every opportunity I had, I have said the contributory pension scheme is an absolute revolution that was initiated by the Obasanjo’s government for which we should give extreme commendation. We should give the scheme time to take root. It can be a clear alternative strategy to economic growth for this country. As people comply, we get long term funding which we can use for development in some cases and more importantly, we have money to provide for people’s retirement where it was not so available before. It improves the wealth environment of the country; we should give it time to sink in. People should ask their state governors what the pension strategy is so that they would not have liabilities that they cannot meet. They should advise them to establish the contributory pension scheme. For me, it is the best strategy to take care of pensions in the country.
What is the place of pension in the anti-corruption war?
Pension would help eradicate the menace of ghost workers, for a ghost cannot register biometrics. That is the reason some people do not want to establish the contributory pension scheme. Once you register people for pension, and you have their biometric information, you eliminate ghost workers almost with a wave of a hand. The other indirect way is if you get adequate provision for your retirement, the incentive to steal would reduce.