Informal sector: Micro pension in financial inclusion

The growth of the pension industry is no doubt dependent on development of the informal sector where majority of the self-employed population of the Nigerian workforce operates.

They are single individuals who are economically strong and capable of making savings but may not be saving for retirement either due to lack of knowledge or because they are not captured by legislation in the existing Contributory Pension Scheme (CPS). They also include people who are vulnerable and economically weak, but who could be assisted to save for retirement and move out of old age poverty through some level of literacy education and support.

Experts say the number of registered pension contributors could hit 15 million in the next five years while pension assets could also grow to N20 trillion if the informal sector population is captured into the contributory pension scheme.

This is the song everywhere and the question now is where do we go from here?

What products should the pension industry be coming out with to bring this group of people into the scheme? Is the product going to be same for all pension fund administrators? What will be the driving force for PFAs investing in market development to increase enrolment? What incentives will be included in the package to attract target market? Are we going to see a more flexible regulation that will allow risk taking and exploits? How soon are we going to see the guideline for take-off of micro pension scheme?

Again, developing micro pension space, is it what pension fund administrators can do alone? Or, will it be requiring partnership of other financial service providers to deliver these products to the target market, and how has this worked in other jurisdictions?

At the last World Pension Summit Africa Special held between September 27 and 28 in Abuja, experts struggled to provide answers on how to deploy pension enrolment in the informal sector through a micro pension scheme.

They agreed that taking pension products to the informal sector would require financial literacy and awareness, stating that these are the foundations for micro finance and micro pensions. And financial literacy experts say is the use of marketing and financial education campaigns to demonstrate to customers the importance of saving; how to set savings goals; and change their saving behaviour to save with formal financial services providers.

“The key word is savings, because it is only when people understand savings and are able to save that you can deploy products, Harry Smorenberge, founder world pension Summit said.

The EfInA Access to Financial Services in Nigeria 2014 survey revealed 57.1 million adults never had a deposit money bank, 16.3 percent indicated they did not operate an account because commercial banks were far away from them. The study also found out that 42.7 percent of women are financially excluded as compared to 35.8 percent of the men.

While a similar report in 2010 revealed there were 23.8 million adults who are currently saving at home, so there is demand for a range of affordable, convenient and accessible formal savings products for low value savers.

EfInAseeks for the development and launch of innovative and effective formal savings products in terms of convenience, flexibility and cost, targeted at the lower income segment that encourages people to save. The product and business model, the agency, said, should enable the collection of low-value savings from unbanked and under-banked savers, especially women and the products and services offered must have the following features, convenience, flexible, secure, usable and affordable.

Experts at the Pension summit also said that to drive micro pensions in the informal sector where about 60 percent of the population are largely women with little or no access to financial services, empowerment schemes to upgrade their income level and encourage them make savings for the future is critical.

They also argued that there must be a strategy to create financial and literacy awareness so that with increased income people could begin to appreciate the need for savings and overall financial inclusion.

According to them, despite recent financial sector growth in Africa, many individuals are still excluded from formal financial services.

They said that analysing individual groups provide opportunity to identify the demographic group that are particularly excluded from the financial system. “For example, those living in rural areas, the poor, women, less educated adults, young and older adults particularly face challenges in financial inclusion.

Discussing the sub “Financial Inclusion” Richard Dowen, director, Royal African Society; Mary Delahunty, GM, Business Development Health Employees Supernation Trust, Australia; Dupe Ladipo, director, Enhancing financial Innovation & Access, Nigeria; and Sefa Gohoho, Yali Regional Leadership Centre, Ghana, agreed that the major challenge with financial inclusion and savings for retirement are poverty and illiteracy.

“If we are able to empower them to earn some level of income and also give them education on financial services, definitely they will buy into saving for pensions, they said.

According to them, this will require a clear strategy that will involve many actors in the financial services industry including micro finance banks, NGOs, banks, telecommunication, provide among others, who will all join hands to drive awareness, distribution and allied services.

Susan Oranye, executive secretary, Pension Fund Operators Association of Nigeria (PenOp) speaking at the sideline of the summit said development of the micro pension sector is the way to go for growth and expansion of the pension industry.

“There is a huge growth potential in the informal sector and we must do everything possible to ensure that we develop that sector”. If we can do that, the current N5.6 trillion pension assets we currently have today will be a minor, Oranye said.

Chinelo Anohu-Amazu, director general, National Pension Commission (PenCom) in an interview on the sideline of the Summit said that President Buhari is very interested in inclusive participation in the contributory pension scheme (CPS), not just the working population but also the larger population of people in the informal sector.

How do we want do this? “We want to move closer to this group of people, try to study their environment and characteristic and come up with products that will meet their needs. We have to take the message to all Nigerians, because if you cannot save when you earn N10, you will not be able to save when you earn N1 million, and that is what we are trying to let them know, she said.”

Anohu-Amazu further stated that the role of pension and social security systems transcend the payment of retirement benefits, to eradicating old age poverty, creation of employment and stimulating growth of local economies.