Informal sector…what options for micro pension scheme?

In the next few months, the country’s pension industry would be coming out with what it has described as ‘industry wide strategy’ towards implementation of a Micro Pension Initiative. This is geared towards bringing under the Contributory Pensions Scheme (CPS), informal sector workers who could not be covered by the traditional formal- sector scheme, currently in place under the Pension Reform Act 2014.

According to the National Pension Commission (PenCom), with this new initiative, the industry hopes to cover at least 30 percent of the working population by 2024, whilePension Fund Operators Association of Nigeria (PenOp), hopes with this and other initiatives, the industry will bring pension subscriber base to 30 million from current figure of less that 6 million and assets under management toN20 trillion from current figure of N5.3 trillion over the same period (8-years).

In this vein, the Commission has segmented the informal sector into three broad categories to include low income earners, the high income earners and the small and medium enterprises (SMEs), stating that each of these categories is going to be targeted with appropriate pension products and sensitization programs that meet their peculiarities.

To deploythe strategy, the industry should be looking at a model that recognizes quickly, that informal sector workers are largely employees who work without a labor contract, and also entrepreneurs whose businesses are not registered with the authorities. This means, they are largely unregulated and operate on individual basis.

The strategy should therefore look at a system that is not likely to be compliance based, in other words, it has to be a system that would not require regulatory enforcement.

This is not to say that opportunity to bring some informal sector workers into the formal sector is closed, rather effort should gear towards transforming some informal sector people to join the traditional formal-sector pension scheme.

“It is important not to fall into the error of assuming that all informal sector employment is unattractive and poorly paid.

Whatever approach is implemented to extend  pension  coverage  to  informal  sector  workers,   it  should  take  portability  of  benefits  into   account and ensure that the incentive structure does not encourage informal sector labor at  the expense of formal sector development, expert said.

Since government is not likely to provide subsidy in the name of social welfare scheme to participants in informal sector as found in some Asian countries, it would have to be a system that is voluntary and open for participation, except otherwise.

A voluntary scheme means that the products must display ‘visible’ benefits that would attract informal sector workers to joining the scheme. The benefits must be alluring and convincing enough. So, such pension products for this class of people should come with incentives.

From a report on Pension Systems for the Informal Sector in Asia published in 2009, experts observe that expanding coverage to informal sector workers through mandatory systems is unlikely to work.  Alternatively, voluntary arrangements are needed.  However, because informal sector workers tend to have lower savings capacity and high discount rates, targeted incentive might be required to encourage enrollment.

The report further argues that in designing the pension scheme, it must possess characteristics of adequacy, providing  sufficient  benefits  to  prevent  old-age  poverty;  affordable,  meaning  that  it  is  within  the  financial  capacity  of  individuals  sustainable over  time  and  under  different  scenarios;  and  robust,meaning  that  it  is  resistant  to  major  shocks.

The Pension Reform Act (PRA) 2014 expanded coverage of the CPS to the self-employed and persons working in organizations with less than 3 employees, according to PenCom, in their website on micro pension initiative.Due to their widely dispersed nature and generally low and irregular incomes, there is need to provide a pension plan that would meet their special characteristics.

PenCom believes thata robust technological platform that would support the provision of customer services is necessary to effectively and efficiently register, collect contributions, provide Retirement Savings Account support, pay benefits and provide financial advisory services to this class of workers.

According to the Commission, special mobile phone applications had been successfully implemented in some jurisdictions for financial transactions including provision of pension services to the self-employed and informal sector workers, so the success stories of these applications drive the confidence that similar platform can be designed and implemented in Nigeria. Consequently, the Commission had already commenced the sensitization of service providers and relevant regulators as well as the targeted workers in the informal sector with a view of creating the enabling environment and buy-in.

In addition, special function has been established in the Commission to drive the implementation of the Micro Pension Plan.