By Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Chairman/CEO Achor Actuarial Services Limited
Basically, the Nigerian Pension Industry has been operating two pension regimes concurrently since 2004, namely Pay-As-You-Go (PAYG) defined benefit (DB) scheme (the old unfunded pension regime) and the Contributory Pension Scheme (CPS) under the Pension Reform Act (PRA) 2014 as amended. Currently, there are three categories of employees in the pension industry that will receive retirement benefits from either or both the two pension regimes. The first category consists of employees in the public service of the Federation, Federal Capital Territory, States and Local Governments or the Private Sector who are expected to receive retirement benefits from only CPS. At retirement, these employees may withdraw an amount of money (lump sum) not exceeding 25% of the total amount credited into their Retirement Savings Accounts (RSAs) being managed by a Pension Fund Administrator (PFA) and the balance will be used to provide a regular pension either through annuity from a life insurance company or Programmed Withdrawal from the PFA.
The second category of employees are exempted from the CPS as specified in section 5 of PRA 2014 (e.g. members of the Armed Forces, the intelligence and secret services of the federation etc.) and they will receive benefits only from the existing PAYG defined benefit scheme in accordance with a specified formula provided for in the Second Schedule to the Act or under the provisions of enabling laws. For example, an employee will be entitled to a gratuity and pension as 300% and 70% of final salary respectively at retirement, having completed 35 years of pensionable/qualifying service with the employer.
The third category consists of public service employees (RSA holders with deferred pensioner status) in the CPS. At the date of retirement, they are entitled to receive the accrued (past service) pension rights (determined by an actuarial valuation at the commencement date of the CPS) from both the existing PAYG defined benefit scheme and RSA balances from the CPS.
Nigerian pensioners have two basic expectations under the CPS, namely to have sustainable standard of living in retirement and “receive their retirement benefits as and when due”, as stated in section 1(c) of PRA 2014. This paper highlights the reasons for the increasing apathy of employees to join or remain in the CPS, particularly those in the formal and public sector, as their expectations are not likely to be met.
Reasons for Increasing Apathy to Join/Remain in CPS
The public service employees particularly the third category of membership of the CPS feel aggrieved and short-changed compared to their counterparts who are exempted from the CPS. The retirees in this category always perceive that their expectations have not been met for the following reasons:
•The employees still erroneously believe that 25% of the RSA (maximum lump sum allowed) and/or the pension payable from CPS will be closed to 300% and 70% of their final salary as prescribed for gratuity and pension in PAYG defined benefit scheme respectively having completed 35 years’ of service.
•The employees’ accrued pension rights calculated at the commencement date of the CPS may not have kept up with inflation due to lack of revaluation. In practice, a deferred member’s accrued pension benefits/rights from the date of leaving the PAYG defined benefit scheme are usually expected to be revalued up to the member’s retirement date in order to keep up with inflation.
•The pensions in payment from CPS do not allow for pension increases as compared with the pensions payable from the PAYG defined benefit scheme.
•An employee’s RSA balance at retirement being managed by a PFA could not provide a decent standard of living at retirement, mainly due to the short period over which contributions have been made and invested after commencement of CPS, and overall investment returns credited into RSA are abysmally low.
•The delayed or inability of the Federal Government and/or State Governments to remit the accrued pension rights to the individual retirees RSA on a timely basis had increased the plight of pensioners because the regulator insisted that the retirement benefits cannot be paid from RSA without the accrued pension rights being added to it.
The Nigerian Police Force, having been granted their own PFA, is still making several efforts through the House of Representatives to opt out of CPS. Many State Governments are at various stages of implementing the CPS but the senior public service employees of the State Governments who are closed to retirement age had been making frantic efforts to ensure that the process of transition to CPS is delayed unduly until they retire in the old PAYG defined benefit scheme.
The recent statistic has shown, in InspenOnline news platform dated 25th September 2021, that “of the about 46.49 million employed persons working in the formal sector of Nigeria, just 9.4 million of them had subscribed to the CPS, leaving a whopping of 37.09 million of them out of the scheme”. It is obvious that the public service employees of State Governments are likely to constitute a greater percentage of the number of employees (37.09 million) currently out of the CPS.
The private sector employees have different level of apathy to join the CPS because employers do provide additional gratuity schemes and/or voluntary contributions in CPS for their employees in order to augment any shortfall in expectations.
The Challenges of Meeting Pensioners’ Expectations in CPS
The framers of the law, PRA 2014, realized the importance of the guaranteed minimum pension (GMP) as stated in section 84(1) of the Act to reduce the risk of volatility of standard of living of Nigerian pensioners in retirement. GMP is akin to an income support from the government, which can be considered as a variant of social security policy that ensures redistribution of resources, a safety net for a pensioner. Thus, the expectations of pensioners under the CPS cannot be fully met, particularly for the third category of membership, without the implementation of the GMP. This is true because they have higher expectations close to that of the exempted pensioners (e.g. in Armed Forces of the Federation) receiving benefits from the PAYG defined benefit scheme.
In practice, the GMP is usually a form of underpin applicable in a defined contribution scheme which has a main benefit that is defined contribution in nature, with a promise that the benefit will be at least a defined benefit amount, usually a percentage of final salary at retirement date. GMP is usually to protect the members against some of the risks of low investment returns and may also be applied on a temporary basis after a conversion of a scheme from a defined benefit form to a defined contribution form, which is particularly suitable for employees in CPS with deferred pensioner status.
The implementation of the GMP has been unduly delayed since the commencement of the CPS in 2004 by the regulator, having assured stakeholders in Punch Newspaper dated 10th November 2016 that “retirees to earn minimum pension from 2017”. This may be probably due to computation complexities, as the assessment of the cost of guarantees using stochastic modelling techniques should be under the control of an actuary. Furthermore, there could be lack of sufficient funds to finance the GMP despite the Pension Protection Fund (PPF) being established as stated in section 82 of PRA 2014. Instead, the regulator implemented an Enhanced Pension for only the Programmed Withdrawal (PW) pensioners effective December 2017. This could be seen as cushioning the effect of non-implementation of the GMP to an extent for only these PW pensioners.
The personnel of the Police Force and other Paramilitary Agencies seeking for exemption from the CPS, the State Government public service employees’ apathy to join the CPS and the general disenchantment among the current pensioners have arisen from not implementing the GMP. Thus, the pension industry requires an enlightenment campaign in order to manage the expectations of employees and retirees in the CPS.