POSITION PAPER ON THE BILL FOR AN ACT TO AMEND THE PENSION REFORM ACT, 2014 TO EXCLUDE SOME GOVERNMENT AGENCIES FROM THE APPLICATION OF THE CONTRIBUTORY PENSION SCHEME
1. The attention of the National Pension Commission (“the Commission” or “PenCom”) has been drawn to a Bill seeking to amend the Pension Reform Act 2014 to exclude members of the Nigeria Police, the Nigeria Security and Civil Defence Corp, the Nigeria Customs Service, the Nigeria Prison Service, Nigeria Immigration Service and the Economic and Financial Crimes Commission from the application of the Contributory Pensions Scheme. We hope that these submissions and recommendations would be useful in reaching a decision on the matter.
2. The pension reform was necessitated by the many problems bedeviling the public and private sectors’ pension schemes in Nigeria. In the public sector, the Defined Benefits Scheme was faced with the problem of huge pension liabilities arising from lack of adequate and timely budgetary provisions as well as increases in salaries and pensions. Pension administration was largely weak, inefficient, less transparent, cumbersome and marred with corrupt practices. Many private sector organizations did not have any pension arrangement for their employees and where it existed, it was characterized by very low compliance ratio due to lack of effective regulation and supervision of the system.
3. After a thorough consideration and detailed evaluation of these issues, the Federal Government decided to take measures aimed at developing a system that is sustainable and has the capacity to achieve the ultimate goal of providing a stable, predictable and adequate source of retirement income for employees in both the public and private sectors in Nigeria. This culminated in the enactment of the Pension Reform Act 2004 (PRA 2004), which introduced a mandatory Contributory Pension Scheme (CPS) for employees of the Federal Government, the Federal Capital Territory and the private sector organizations with five or more employees. The Act also established for the first time in Nigeria, a regulator and supervisor of pension matters, the National Pension Commission or PenCom.
4. The PRA 2004 was subsequently amended by the National Assembly in 2011 to exempt the personnel of the Armed Forces and the Intelligence and Security Agencies from the CPS. The 2004 Act was further repealed and replaced in 2014 by the Pension Reform Act 2014 (PRA 2014), which, among other things, enhanced the benefits accruable to the contributor upon retirement, enhanced the protection of pension fund assets, unlocked the opportunities for the deployment of pension assets for national development, reviewed the sanctions regime to reflect current realities, provided for the participation of the Informal Sector and also expanded the coverage of the Contributory Pension Scheme to include employees of States and Local Governments.
5. The Scheme introduced by the 2004 pension reform is contributory in nature, fully funded, managed and kept in custody by private operators and is based on individual portable accounts. The key objectives of the Scheme are:
a) to ensure that every person who has worked in either the public or private sector receives his/her retirement benefits as and when due;
b) to assist improvident individuals by ensuring that they save to cater for their livelihood during old age;
c) to establish a uniform set of rules and regulations for the administration and payment of retirement benefits in both the public and private sectors;
d) to stem the growth of outstanding pension liabilities; and
e) to reduce fiscal cost to Government, stimulate domestic savings, generate pool of long term funds for developmental projects and increase private investments.
6. These objectives have been significantly achieved within the twelve years of the reform as may be summarised below:
a) The PenCom had made significant progress in building institutions (21 Pension Fund Administrators, 4 Pension Fund Custodians and 7 Closed Pension Fund Administrators); as well as systems and processes in the implementation of the Contributory Pension Scheme in Nigeria that can stand the test of time. We are indeed happy to inform Mr. Speaker that these institutions, systems and processes have become models in Africa with countries like Malawi, Tanzania, Ghana and Uganda coming to PenCom to understudy them with a view to adopting same in their countries.
b) The number of registered contributors grew to 7.4 million as at March, 2017. This represents about 7.45 % of total labour force in Nigeria and 3.95% of total population.
c) The total pension fund assets had grown to N6.42 trillion as at March, 2017 with an average monthly contributions 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.
d) The Contributory Pension Scheme has simplified the process of payment of retirement benefits through the issuance of effective regulations and guidelines for accessing such benefits. 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.
e) 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 Contributory Pension Scheme as a ploy by the public sector to raise funds to address its huge pension liabilities, has come to accept 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% of the total pension fund assets.
f) The Contributory Pension Scheme has also introduced transparency and integrity in the pension administration system in Nigeria. From inception of the reform to date, there had not been a single incidence of fraud or mismanagement of the pension funds and assets under the Scheme.
g) Attracted by the enormous benefits of the Scheme, 26 States of the Federation had, as at date, adopted the Contributory Pension Scheme and are at different stages of implementation while the remaining 10 States are at Bill stage.
h) The Pension Transitional Arrangement Directorate (PTAD) has been fully established to handle issues of FGN retirees exempted from the CPS subject to the regulation and supervision of PenCom. Indeed, payment of pensions to public sector retirees by PTAD has become more regular and efficient due to the supervisory oversight of PenCom.
i) The pension reform has also positively impacted on other sectors of the Nigerian economy. Notably, the reform facilitated the growth of Group Life Insurance and development of Life Annuity in the insurance industry. Indeed, monthly pension payment under the Life Annuity Scheme has averaged N1.7 billion as at March 2017. It also facilitated the development of the Corporate Bond Market, deepened the Nigerian Capital Market and the development of Rating Agencies.
j) It is noteworthy that the total premium paid to insurance companies for the monthly Life Annuity was N170.57 billion as at March 2017. This has significantly assisted the growth of the insurance industry in Nigeria, which is a special focus area under the Federal Government’s Economic Recovery and Growth Plan (ERGP) that was launched recently by Mr. President. Already, a lot of the retirees of these Agencies are annuitants, thus, exempting them would amount to political interference to contractual obligations as these annuities are contracts between the annuitants and the insurance companies. It will also negatively affect the flow of capital into the insurance companies thereby undermining the ERGP.
7. In spite of these achievements, however, there have been recent actions, both legislative and administrative, aimed at undermining the pension reform in Nigeria.
a) 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.
b) Another immediate negative impact of exempting these Agencies is the 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. Indeed, the pension industry had actively participated in the establishment of the Nigeria Mortgage Refinancing Company and had already invested the sum of N83.36 billion in its securities and other mortgage refinancing initiatives of the Federal Government.
c) Exemption of some agencies of Government would also result in loss of confidence in the pension reform and other reform initiatives of Government. The growing culture of national savings built within the last decade would be destroyed. It is pertinent to note that due to the successful implementation of the pension reform, the discipline with which the industry players have been discharging their responsibilities and the resultant impact on the Nigerian economy, foreign investors have invested heavily in some major Pension Fund Administrators. There are still some expressions of interest by foreign investors to obtain stakes in the pension administration business in Nigeria. Indeed, the private sector, including these foreign investors in the Nigerian financial sector and the Nigerian economy, would question the commitment of Government to the pension and other reforms due to such policy reversals.
d) It would also be contrary to public policy for the Federal Government to succumb to the clamour for exemption of its employees from the CPS, which has so far proven to be efficient, effective and beneficial as a pension administration system. Indeed, it is the benefits of the CPS that are attracting increasing number of State Governments in Nigeria as well as other African countries to adopt and implement the Scheme in favour of their respective employees.
8. As it is the case with every human endeavour, the pension reform had its own share of challenges. These challenges, however, could all be addressed within the framework of the CPS. Indeed, there had been many challenges that were over years addressed administratively by PenCom and recently through legislative action under the PRA 2014.
There is, therefore, a dire need to consolidate the gains of the CPS and avoid policy reversals, as this would undermine public confidence and negatively impact the Nigerian economy and Federal Government’s change agenda and economic recovery plans.