Exploring The Micro Pension Concept
By Ronke Adedeji, PenOp President
MD/CEO of Leadway Pensure PFA Limited
What is Micro Pension?
Micro Pension is an arrangement for the provision of Pension and Retirement Benefits to the low income, self-employed and persons operating in the informal sector.
Protection against the vagaries and unpredictability of old-age poverty. The formulation of such schemes require a delicate balance between economic viability, generation of adequate returns and customized features for the participants.
To succeed, it needs to properly address administrative, design and efficiency issues.
PRA 2014 Sec 2(3) paved the way for Micro Pension:
Employees of organizations’ with less than 3 employees as well as self employed are entitled to participate under the scheme in accordance with guidelines issued by PenCom.
This group covers the informal sector which plays an indispensable role in Nigeria and world economies.
Is Micro Pension an Imperative?
Informal Sector plays significance role in Micro Pension as it generates jobs, amplifies entrepreneurial undertaking, reduces unemployment and underemployment, alleviates poverty and promotes economic growth. Informal sector is the major driver of Micro Pensions,
Nigeria’s Demographics Profile
Nigeria has an adult population of 96.4 million (50.8% Male and 49.2% Female) with 63.9% residing in the rural areas.
56.2million adults (58.3% of the adult population) are under 35years while 21.8million adults (22.6% of the adult population) have no formal education.
18.4million adults (19.1% of the total adult population) have farming as their main source of income 18.9million adults (19.6% of the total adult population get their income from own business (non-farming).
Largely informal sector.
Source: Efina 2016 survey
Attributes of Informal Sector Workers
Some of the attributes of the Informal Workers that isolate them from formal pension arrangements and thereby creating a need for separate well thought out design are: Continuous job changes; Likely opts to self-employment; Not on Payrolls in most cases;Temporary nature of employment contracts; May be illiterate or semi-illiterate and unfamiliar with the workings of pensions; Limited experience in dealing with formal financial institutions.
Frequent need for liquidity
Micro Pensions: An Imperative with Urgency
Increasing longevity; large and relatively young population; potential to reduce poverty and raise standard of living; changing culture/diminishing family support; growing size and significance of Informal sector
Informal sector has potential to transform the economy through Traditional savings aggregators more successful than Banks.
Operating in the informal sector. It is a protection against the vagaries and unpredictability of old-age poverty.
The formulations of such schemes require a delicate balance between economic viability, generation of adequate returns and customized features for the participants.
Micro Pension Plan – Design Considerations
To encourage contributions to the Micro Pension Plan by the target audience the following are recommended:
Flexibility of contribution amounts, Access to contributions/savings, Incentives for participants, Financial/Pension education, Coverage of a high proportion of the population
Availability of infrastructure that is supportive of mass registration, contribution collection and database management flexibility
Easy and straightforward access to benefits
Complications to the Execution of Micro Plans
Culture, Lack of Knowledge or Education (Financial), Inexperience with formal financial institutions, Low incomes
The design – elements include mobilization of savings and granting of loans/liquidity
Matching sporadic deposits with flexible withdrawals in addition to the investment, inflation and longevity risks to be mitigated.
Collection of contributions and payment of benefits, Communication with clients, Complexity of administration, Premature withdrawals, Risk of low benefit payout, High transaction costs associated with frequent/small inflows and outflows, Voluntary scheme means low priority and Absence of saving culture
Strategies to Address the Challenges
Key strategies to encourage engagement in micro-pension plans are:
Creation of awareness, Provision of incentives to participants , Encouraging the contribution of small frequent amounts , Flexible contribution rates, Convenient door to door collection of contributions , Insulation of the participants against volatility in investment growth, Leveraging technology to facilitate easy contribution/payments
Allowing opt outs during periods when participants are not able to contribute, Ensure inexpensive portability, Financial education
Compulsory participation, Centralized administration to lower administrative costs, Professional management of funds Seamless and straightforward access to benefits
PenCom’s Micro Pension Draft Guidelines
Section 2(3) of the Pension Reform Act, 2014 (PRA2014) provides that employees of organizations with less than three employees as well as the self-employed persons shall be entitled to participate in the Contributory Pension Scheme in accordance with the guidelines issued by the Commission.
The highlights of the Micro-Pension guideline include the following:
Eligibility to participate under the Micro Pension Plan is conferred on Persons 18 years and above with legitimate source of income that are:
Self-employed, including those that belong to a Trade, Profession or Business Association, Employees operating in the informal sector who work with or without a formal written employment contract., Small business owners (including partnerships).
A prospective Micro Pension Contributor shall be required to open a Retirement Savings Account by completing a registration form with his/her PFA of choice.
Micro Pension Contributors can make contributions daily, weekly, monthly or as may be convenient to them.
Contributions under the Micro Pension Fund shall be split into two as follows:
25% for Contingent Withdrawal
75% for Retirement Benefits
Emphasis is on retirement
The forms of withdrawal: Contingent Withdrawal and Retirement Benefit Withdrawal
Access to retirement benefits on attainment of age 50 years or on health grounds
Retirement benefits shall be withdrawn by way of programmed withdrawal or Annuity.
The Micro Pension Contributor can withdraw the total balance of the contingent portion of his/her RSA including all accrued investment income one month after first contribution and thereafter anytime.
The timeframe for processing and payment of contingent withdrawals shall not exceed two working days and payment shall only be made to the Micro Pension Contributor’s designated bank account
The Micro Pension Active fund will have a unique fund (E.g. Fund 5) under the Multi Fund Structure.
Micro Pension Contributors shall be entitled to Guaranteed Minimum Pension on the provisions of Section 84(1) of the PRA 2014 and guideline on Minimum Pension Guarantee.
Conversion – An RSA holder who quits or is released from formal employment and has not started drawing pension can participate in the Micro Pension Plan and continue with his/her contributions subject to the Commission’s approval likewise a Micro Pension Contributor who gains formal employment.
Investment – The Funds shall be invested in line with the Regulation on Investment of Pension Fund Assets.
Conclusion
A key policy issue in developing countries and an imperative in Nigeria
Over 90% of the population in Sub Saharan Africa and South Asia are not covered by any pension arrangement (Keizi, 2006, 2007) due to general unemployment, low incomes, poor saving culture and above all pension arrangements that only favor workers in the formal sector
The World Bank on the other hand estimates the size of the informal labour market to be 4-6% in the high-income countries and over 50% in the low-income countries
A unique regulatory framework to govern micro-pension arrangements which shall address; registration, investment of funds, risk management, membership, withdrawal of benefits and taxation incentives.
The planning and execution of micro-pensions is a missing link in increasing pension coverage in Nigeria. The coming full implementation will be a major economic booster and will reduce the level of poverty associated with informal sector and old age.
A paper delivered at the 3rd National Association of Insurance and Pension Correspondents (NAIPCO) Conference on Insurance and Pension in Lagos recently.
