What future for Nigeria’s pension industry?

The legislative arm of government and the 8th National Assembly will tomorrow Thursday, September 28, 2017 commence a public hearing on proposed Bills that seeks to amend the nation’s Pension Reform Act 2014, barely three years after it was amended.

One of the Bills sponsored by Oluwole Oke, member House of Representative on the 16th May 2017 which has passed a second reading seeks to amend the Pension Reform Act 2014, to exclude members of The Nigeria Police, The Nigerian Security and Civil Defence Corps, Nigeria Customs Service, Nigeria Prison Service, Nigeria Immigration Service and The Economic and Financial Crimes Commission from the Contributory Pension Scheme.

While a second Bill being sponsored by Aliyu Wamaka, Sokoto Constituency at the senate on 10th May 2017 also seeks to amend the 2004 Pension Reform Act to allow retirees to withdraw a definite rate of 75 percent value of their RSA upon retirement, leaving only 25 percent to be spread over their expected years of retirement as periodic pension payments.

The outcome of this public hearing tomorrow will go a long way to determine the future and sustainability of Contributory Pension Scheme (CPS).

This is a scheme that has proved to be the best pension administrative system, having resulted in huge pension savings of over N6.5 trillion in assetssince it came on board 12 years ago, without any non record of embezzlement, and also attracting the attention and interest of many countries in Africa who have come to understudy the system.

While it’s important that those who push these Bills for amendment consider national interest as paramount, it is equally important that they also look at the future implication of managing these funds outside a secured system like the CPS, given where we are coming from and the experience wehad with Defined Benefit Scheme.

Outside amendment of these Bills, perceived lapses are addressable through guidelines by the National Pension Commission (PenCom) as the case may be, as provided in the Pension Reform Act 2014.

Analysts fear that if the Bills are allowed, the country may fall back to its old days of huge pension liability, pressure on government budget, shrink opportunity for investible long term funds, impoverish more retirees and open another channel for corruption and embezzlement.

According to industry players under the umbrella body of the Pension Fund Operators Association of Nigeria (PenOp), the Bill seeking to exempt paramilitary officers from the CPS means additional financial burden on the Federal Government by way of unsustainable pension obligations.

“The Federal Government is already overburdened with the payment of pensions as illustrated by the 2016 Appropriation Act, which made a provision under the Service Wide Vote for the sum of N200.170 billion as total Pension and Gratuities Allocation. This allocation is still insufficient to fund the pension liabilities of the Federal Government”.

EguarekhideLonge, president, PenOp said exemption of the personnel of the Police and other Paramilitary Agencies indicates by implication, the dismantling of the institutions, systems and processes that Government had put in place in the last few years towards the implementation of the pension reform program, including the culture of national savings as well as the efforts to eradicate the structures that encouraged corruption during the pre-pension reform era.

According to him, other immediate negative impacts includes to unsettle the Government’s fiscal policy and financial system stability; 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 as well as result in loss of confidence in the pension reform and other reform initiatives of Government.

On the withdrawal of 75 percent of RSA balance by retirees, Longe said the proposed amendment will undermine the objective of pension reform seeking to ensure workers save to cater for their old age.

“Retirees will become targets for unscrupulous business opportunities due to their lack of experience in handling or investing such bulk sums, will spend the money quickly and return to dependency and insecurity.”

“Indeed, retirees will be forced to return to active life rather than retirement, thereby reducing their life expectancy.”

He further stated that the proposed amendment will also negatively impact the economy by drawing large amounts out of the pool of pension assets.

Farouk Aminu, head, Research and Corporate Strategy Department, PenCom, said after amendment of the Pension Reform Law in 2014, a new amendment two years after was very unnecessary, urging the National Assembly to ensure that those who sponsor Bills do proper research and analysis of the issues.

Besides, they should also consult with relevant government agencies overseeing activities of such industries for clarifications and understanding before such Bills are deliberated at the house.

On the Bill seeking 75 percent withdrawal, Aminu said a Bill seeking to amend 2004 Reform Act after it has gone through amendment in 2014 is off the way.

“The proposal is based on a misunderstanding of the concept of pension payment under the CPS. The lump sum should not be fixed, rather, what should be implemented is a minimum replacement ratio as monthly pensions.”

Accordingly, the retiree should keep an amount that can procure an amount of monthly pensions as replacement of salary over an expected life span. Whatever remains over that amount may be taken as lump sum. The current replacement ratio under the CPS is 50 percent of last pay by virtue of the PRA 2014 and regulations issued by the Commission is adequate”