Micro pension – what is it?

The effective demand for financial services by low-income groups is evidenced by the rapid growth of the global microfinance industry. Low-income groups have diverse financial goals such as financial leverage, capital appreciation, capital preservation and risk management. These goals call for a range of financial services; including micro-credit, micro-savings, micro-insurance, remittance products and micro pensions. From the perspective of social equity; access to affordable and well-managed financial products (i.e. that enable financial inclusion), is desirable.

A number of studies have illustrated that low-income groups understand the value of saving for retirement. Indeed, some low-income households resort to borrowing to acquire assets, which they hope will provide financial security during old age. There are also instances when poor individuals are willing to accept negative interest rates from deposit collectors for the service of collecting their small deposits over a period of time, which are then returned to them as a lump sum at a later date, to ensure financial discipline.

As the poor typically have multiple demands on their scarce resources, savings that are targeted or are specifically aimed at a life-cycle/family event might motivate them to save more if the appropriate savings instrument is available. Field studies indicate that there is a preference among the poor for small, frequent contributions that are collected at their doorstep. A limited duration of illiquidity and features that discourage early withdrawals by members could also help increase savings levels.

The concept of a “micro-pension” refers to long-term savings by relatively low income Informal-sector workers, with the objective of obtaining income security during old age. Though informal-sector workers may not “retire” in the formal sense like employees in the organized sector; they need to prepare for the eventual reduction in earning capacity that will occur during old age, particularly as a result of ill health.

Micro-pensions therefore aim to provide a flow of income to coincide with this decline in earning capacity. Although the availability and use of some microfinance products such as micro-credit and micro-insurance have shown rapid growth; the assets were not pooled into a diversified investment portfolio, therefore exposure to otherwise avoidable investment risk was likely to be high. The risk was further accentuated as a result of the geographical concentration of typical MFI members and the absence of collateral for loans.

The Pension Reform Act (PRA) 2014 expanded coverage of the Contributory Pension Scheme (CPS) to the self-employed and persons working in organizations with less than 3 employees. This category of workers constitutes the larger percentage of the working population in the country.

The Pension Commission has set a covering target of 30 percent of the working population in Nigeria under the CPS by the end of 2024.The informal sector is strategic to the realization of this objective.

The Micro Pension Plan is an initiative conceived within the context of an industry wide strategy by the National Pension Commission (PenCom) to bring this class of workers on board. In addition, due to their widely dispersed nature and generally low and irregular incomes, there is a need to provide a pension plan that would meet their special characteristics.

In implementing this initiative, PenCom has segmented the informal sector into three broad categories; the low income earners, the high income earners and the SMEs. Each of these categories is going to be targeted with appropriate pension products and sensitization programmes that meet their peculiarities.

However, it is evident that a robust technological platform that would support the provision of customer service 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. Coincidently, 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. The success stories of these applications drives 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.

A micro-pension scheme is typically designed as a Define Contributory scheme. The scheme essentially operates on the principle of voluntary savings, which are accumulated over a long period and which incorporates features that are designed to sustain savings discipline.

To be continued next week!