Assessing the challenges of implementing CPS in Nigeria
Acting Director General, PenCom, Aisha Dahir-Umar
Before the advent of the contributory pension scheme (CPS) in 2004, it was a common sight seeing public officials shedding tears at public functions decrying the plights of pensioners. A lot of them died on the process of waiting endlessly in the sun for their pensions.
A Pension contributory scheme is designed to ensure employees derive the benefit of adequately being paid their pension as it is due upon retirement. In Nigeria, this fund is regulated by the Pension Commission.
The Pension Reform Act 2004 established the National Pension Commission (PenCom) as the body to regulate, supervise and ensure the effective administration of pension matters in Nigeria. The functions of the Commission among things include: Regulation and supervision of the Scheme established under the Act.
Nigeria being a former colony of Britain, it’s been argued, received a pension tradition into her public sector that is entirely designed after the British structure.
The Country’s pension scheme had started in 1951 when the colonial British administration established a scheme through an instrument called Pension Ordinance. It, however, had a retroactive effective from 1946 and applied only to Untied Kingdom officials posted to Nigeria.
The whole of the ordinance acts and Decree is capped up in the Decree No. 102 of 1979, which took effect from April 1, 1974. It consolidated all enactments on pensions and in corporate pension and gratuities seals devised for public officers by the Udorji Public Service Review Concision in 1974.
In the same way, Pension Act No. 103 of 1979 like its counterpart Decree No. 102, of 1979, on the other hand, dealt with pension benefits, liabilities and seals devised for the agreed forces.
Features of the past pension schemes
In the past, civil servants bore no direct responsibility, by way of payroll tax, for the provision of pension; instead pension benefits were paid through budgetary allocations to be kept in the Consolidated Revenue Fund. Thus, in most cases, the amount released usually fell short of the actual appropriation for pension payment.
Another issue was that the past pension schemes suffered because politicians, eager to capture the votes of the electorates, were in the habit of offering fabulous pension increases that they either knew they were not going to pay or which may fall on regimes other than theirs. And due to the fact that the pension account was not distanced from political control, politicians usually dip hands into pension funds to cushion up temporary fiscal shocks.
It is also claimed that pension debts in the public sector mount, in part, because of the failure of some state governments to provide their counterpart funds necessary to make up the amount provided by the federal government, in situations where the affected pensioners worked for both federal and state governments.
Both the way a record of pensioners in the public sector is kept and the procedure for payment of pension created avoidable problems. In some establishments, no accurate record of actual pensioners exists. Corruption breeds more in the absence of facts and figures. Therefore pension costs in the public sector were inflated through insertion of fictitious names on the list of pensioners.
Another weakness found in the public sector system concerns the less than dignifying manner with which the senior citizens were treated. One observes how weak and frail-looking elderly citizens are compulsorily required to travel long distances to the point of pension payment.
Worse still, they are left, under inclement weather for long hours and sometimes for days, before collecting their stipends. Some pensioners were claimed to have died while standing in a queue waiting to receive pension benefits. This shows poverty of ideas or unwillingness to deploy ideas in the way pension payment should be handled.
Introduction of pension reform in Nigeria
Before the enactment of the Pension Reform Act 2004, which establishes a contributory pension scheme for all employees in Nigeria, the country had operated a Defined Benefit (DB) pension scheme, which was largely unfunded and non-contributory.
The Scheme led to a massive accumulation of pension debt and became unsustainable largely due to a lack of adequate and timely budgetary provisions, as well as increases in salaries and pensions. The administration of the scheme was very weak, inefficient, less transparent and cumbersome, leading to bureaucracy and highly liable to corrupt practices.
Due to lack of reliable records of pensioners, huge amount of resources on what became yearly verification exercises were expended which did not result into the timely and efficient payment of pension.
In the private sector, on the other hand, many employees were not covered by the pension schemes put in place by their employers and many of these schemes were not funded. Besides, where the schemes were funded, the management of the pension funds was full of malpractices between the fund managers and the trustees of the pension funds.
Divisions of the Pension Scheme
Pension scheme is broadly divided into the defined contribution plan (now Compulsory Pension Scheme (CPS)) and the defined benefits plan.
In defined contribution plan, a contribution rate is fixed. For instance, in Nigeria based on the amended Pension Reform Act (PRA 2014) an employee contributes 8% of his monthly emolument while the employer contributes 10 percent or more depending on the category of employee. The retirement benefit is variable depending on the performance of the investment selected.
In defined benefit plan, the retirement benefits is stipulated usually as a percentage of average salary, but the contribution will vary according to the percentage of the average compensation a participant receives during his or her three earning years under the plan. (Owojori, 2008).
Basically, the two pension plans create very different investment problems for the plan sponsors. While the defined benefit plan creates a liability pattern that must be anticipated and funded, the defined contribution plan creates a liability only as long as there is investment at any point in time. Investment is often left to the people who benefits from the decision or suffers from the consequences (Anthony and Bubble, 1997:575). It was based on this that prompted the PenCom to recently introduce the multi-fund structure, to enable them manage the pensioners’ investment properly in such a way that will generate returns. Full explanations of Multi-fund structure will be given later in this article.
Problems with the Old Pension Scheme
A major problem of the pension fund administration in Nigeria, According to Odia According to Odia J. A, Lecturer, Department of Accounting, University of Benin, Nigeria, in his Paper “PENSIONS REFORM IN NIGERIA: A COMPARISON BETWEEN THE OLD AND NEW SCHEME” was the non-payment or delay in the payment of pension and gratuity by the Federal and State governments.
“For instance, the pension backlog was put at about N2.56 trillion as at December, 2005. In fact, pension fund administration became a thorny issue with millions of retired Nigerian workers living in abject poverty and they were often neglected and not properly cater for after retirement (Orifowomo, 2006). Sadly, retirees went through tough times and rigorous processes before they were eventually paid their pensions, gratuity and other retirement benefits. At one time the money to pay their benefits is not available; and at another time, the Pension Fund Administrators were not there to meet the retirees’ needs.
“Basically, the old scheme has been beset with a lot of challenges and problems. Besides the aforementioned; other problems were: demographic challenges and funding of outstanding pensions and gratuities, merging of service for the purpose of computing retirement benefits. These problems coupled with the administrative bottlenecks, bureaucracies, corrupt tendencies and inefficiencies of the civil service, and the economic downturn have resulted in erratic and the non-payment of terminal benefits as at when due (Orifowomo, 2006; Ezeala, 2007, Abade, 2004). Other problems were: gross abuse of pensioners and pension fund benefits which were politically motivated in some cases, extended family and other traditional ways already broken down due to urbanization and increased labour and human mobility.”
Moreover, he said, “considering Statement of Accounting Standard (SAS) No. 8 “on accounting for employees’ retirement benefits” the problems of the old pension scheme which led to the pensions reforms of 2004 include: wrong
investment decision, wrong assessment of pension liabilities, arbitrary increases in pension without corresponding funding arrangements, non-preservation of benefits, some were mere saving schemes and not pension schemes, and serious structural problems of non- payment and non-coverage.”
He posited that there was no adequate safeguard of the funds to guarantee prompt pension and other benefits payments to retirees. The old scheme was characteristically defined benefits, unfunded mostly pay as you go, discriminatory and not portable. The employee was not entitled to pension benefits if he is dismissed from service. Also there was no adequate provision to secure the pension fund. Following the unsatisfying nature of the old scheme, the unpleasant experiences face by retirees and pensioners and the huge pension liabilities, it became apparent the need for reform and change. The fund has continued to grow exponentially.
The New Pensions Reform Act of 2004
It is worthy of note that the Pensions Reform Act (PRA) of 2004 as amended 2014 is the most recent legislation of the Federal Government of Nigeria which is aimed at reforming the pensions system in the country.
It encompasses employees in both the public and private sectors. The PRA of 2004 came into being with a view to reducing the difficulties encountered by retirees in Nigeria under the old pension scheme.
It is believed that the new scheme will guarantee the prompt payment of pensions to retirees, eliminate queues of aged pensioners standing hours and days in the sun to collect their pensions and also increase their standard of living.
But the fear, according to Odia “is whether the programme will actualize the set objectives by the “power and people that be” when we call to remembrance the abysmal failure of the National Housing Fund which was set up by Decree No3 of 1993. Nevertheless, before the enactment of the PRA of 2004, the three regulations in Nigerian pension industry were: Securities and Exchange Commission (SEC), National Insurance Commission
(NAICOM) and the Joint Tax Broad (JTB).The new scheme is regulated and supervised by the National Pension Commission. The Commission has the power to formulate, direct and oversee the overall policy on pension matters in Nigeria. It also establishes standards, rules and regulations for the management of the pension funds .It approves, licenses, sanctions and promotes capacity building and institutional strengthening of the Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs).
Objectives of the New Pension Scheme
The objectives of the Scheme according to Section 2, Part 1 of the PRA of 2004 include to: – Ensure that every person who worked in either the public service of the federation, federal capital territory or private sector receives his retirement benefits as and where due.
– Assist improvident individuals by ensuring that they save in order to cater for their livelihood during the old age.
– Establish a uniform set of rules, regulations and standards for the administration and payment of retirement benefits for the public service of the federation, federal capital territory or private sector.
– Stem the growth of outstanding pension liabilities.
– Secure compliance and promote wider coverage.
“It is envisaged that the various reforms measures put in place, which also clearly spelt out in the objectives of the new PRA of 2004 , would be able to remedy the situation by adequately tackling the difficulties in the old scheme by being adequate, affordable, sustainable and robust (Balogun,2006). It must also prevent old-age poverty and able to smoothen life-time consumption for the vast majority of the population. It must be able to withstand major shocks including economic, demographic and political volatility.”
It is worthy of note that as part of the implementation efforts increased registration of contributions in public and private sector, membership of Contributory Pension Fund assets has grown exponentially to about N8.3 trillion.
Challenges of implementing CPS in Nigeria
“With the implementation of the Pension Reforms Act 2004 by the Federal Government more than a decade ago, the road may have not been smooth even though it is indeed a radical departure from the past defined benefit system.
While reviewing the journey so far in Abuja recently, stakeholders in the sector that included labour, employers and others who major players pointed the way forward for the continued robust of the scheme.
Tracing the factors that influenced the scheme, President of the Nigeria Labour Congress (NLC), Ayuba Wabba, revealed that series of engagements with the then President Olusegun Obasanjo led to the pension reforms that metamorphosed into the contributory pension scheme.
Wabba, who spoke through NLC Deputy President, Peters Adeyemi explained that the non-payment of pension of primary school teachers and the inability of government to pay the pension liabilities of privatized assets by the Bureau of Public Enterprises (BPE) was against the objective of the scheme.
Wabba said the introduction of contributory pension scheme is indeed a radical departure from the Pay-As-You-Go defined benefit scheme, which was hitherto in operation in the public service.
He added: “Our expectation is that the new clause in the 2014 amendment of the pension act, specifically section 4(4)(a) has taken care of the dispute with our colleagues on the employers’ side on whether or not the 2004 Pension Act abolished gratuity in the private sector. Our position has been that gratuity is a product of collective bargaining and that employers were paying it, including the mandatory NSITF contributions.”
Indeed, the section 4(4)(a) which is a new addition to the Act provides that notwithstanding any of the provisions of the Act, an employers may agree to pay gratuity.
Though Wabba admitted that labour and workers were initially skeptical about the implementation of the scheme, it has nonetheless helped to stabilize pension administration in the country in both the public and private sectors.
Despite the fact that the problems of retired teachers at the state and local government levels arguably kick-started the agitation for pension reforms in the country, Wabba observed that the scheme still ostracized workers at the state and local government levels as most governors have refused to key into the scheme.
His explanation: “The remedial action of going through the Council of State in 2006 to advise the state governments to buy into the scheme provided little success. Though the 2014 amendment to the Pension Reform Act rectified the omission in 2004 Act, the fact that only few states in the country have completed the process of legislation, and full contributory schemes are in place as at the last quarter of 2018, shows the effect of the non-inclusion of states in the earlier reforms. The current fate of states’ civil servants who are being owed several months of pension arrears, some up to 12 months and more, underscores the urgent necessity to bring this category of public servants on board the scheme.”
NLC also identified the ratio of contribution between employer and employee as another formidable challenge to the implementation of the pension scheme.
Again, it observed thus: “From a situation where employers bear 100% of the pension liabilities on their employees, the ration of 7.5% parity as benchmark for ratio of employer and employee’s minimum contribution provided for in the 2004 Act, was putting it grossly inadequate. The 2014 Act slightly increased employer’s contribution to 10% and employee’s to 8% of gross salary, making a total of 18%, a 3% marginal increase over the 2004 Act. Not only has this not fundamentally addressed the concerns of workers, majority of the employers including the Federal Government are yet to begin the implementation of this new rate of deductions.”
Additionally, the central labour organization also noted that although the 2004 Act provided for group life insurance policy, the process for payment to dependent beneficiaries was rather cumbersome due to be admitted to probate or letter of administration.
“The main challenge with the group life insurance policy is the fact that many employers are yet to implement this aspect of the law. For us in the labour movement, we will continue to work with relevant authorities and Pencom for the full implementation of this provision by all concerned employers,” Wabba stated.
Citing the establishment of Trustfund Pensions Plc., as an example of what the coming of contributory pension scheme meant to the survival of the Nigeria Social Insurance Trust Fund (NSITF), a past managing director of the Fund, Ahmed Rufai, said contributory pension scheme served a good escape route for government in its bid to escape the mounting pension arrears.
Rufai, who is the first Board chairman of Trustfund Pensions Plc., said: “The Federal Government was sold on this idea of the pension reform on the good reason that its employees and evem those in the private sector should also contribute towards their pension so that they (government) could be partially relieved of some of the financial burden of pension costs. The industry would also be managed by the private sector in order to save pensioners the unnecessary bureaucracy and inefficiency of government machinery. Above all, the new pension industry will be a defined contributory rather than a defined benefit scheme. Employees will ear precisely what they and their employers contribute plus investment income. As such, the burden of ageing population will not be a challenge to pension payments as was and still is troubling the countries who are presently operating the defined benefit pension scheme.”
The Contributory Pension Scheme being a mandatory scheme, has compelled employees and employers in the public and private sectors to collectively save a minimum of eighteen percent of an employee’s monthly emolument into the employee RSA, from where employees will be paid retirement benefits.
According to Ivor Takor, Director, Centre for Pension Advocacy, said: “Pension fund has also impacted positively on other sub sectors of the financial sector of the economy. As the fund press for improvements in the architecture of allocative mechanisms, including investment, risk management, better accounting, auditing, brokerage and information disclosure; Insurance supervision and management for Group Life Insurance and annuity, new securities and rating agencies have developed. The fund has developed Equity market, which has shown to enhance overall economic development.”
He said the monthly pension payment under the Life Annuity Scheme established under section 7(1)( c ) of the Act has averaged N1.7 billion as at March 2017. That figure is much higher now. Moreover, the total premium paid to Insurance Companies for the Group Life under section 4(5) of the Act was N170.57 billion as at March 2017. This has significantly assisted the growth of the insurance industry.
According to him: “In spite of these notable achievements and the positive impact of the fund on the economy, there have been recent activities, both legislative and administrative, which will undermine the Pension Reform in Nigeria. There are Private Members’ Bills in both Chambers of the National Assembly, which have all gone through second readings in both Chambers, and public hearing held on them. Of note is the fact that during the public hearings organised by both Chambers, critical stakeholders in the pension industry, roundly criticised, condemned and rejected the Bills.
“The unfortunate point in the Bills saga is that it points to the fact that the Bills are surreptitiously, being sponsored by Agencies of the Federal Government, with the sole objective of exempting the Police, Customs, Immigration, Prisons and the Nigeria Security and Civil Defence from the Contributory Pension Scheme. The sponsors of the Bills carry on with full knowledge that the issue of Police personnel exiting from the Contributory Pension Scheme had since been resolved by government with the licensing of a Nigerian Police PFA by PenCom and the PFA is doing well. These sponsors are also aware that a Federal Government White Paper on the Report of the Presidential Committee on Restructuring and Rationalisation of Federal Government Parastatals, Commissions and Agencies, accepted the Committee’s recommendation that the practice where certain categories of employees were opting out of the Contributory Pension Scheme should be stopped.”
