Minimum Pension Guarantee…contributors buffer still being expected

With contributor’s welfare in mind, the Contributory Pension Scheme (CPS)targets increased funding that guarantees greater benefit for contributors through the implementation of the Minimum Pension Guarantee (MPG) programme.

The MPG, which stakeholders say offer a buffer to support small pension contributors, would further boost confidence in CPS and pension administration.

ThePension Reform Act provides that all RSA holders who have contributed for a number of years to a licensed PFA shall be entitled to a guaranteed minimum pension, as may be determined by the industry regulator, the National Pension Commission (PenCom).

Sections 82 and 84 of the PRA 2014 provided for the establishment of a statutory Pension Protection Fund (PPF) as a means of actualization of the MPG.

Pension Protection Fund (PPF) is a (usually statutory) fund established by governments to offer additional support for pension payment to eligible pensioners. In the UK, it is called Pension Protection Fund while in the US it is called Pension Benefit Guarantee Corporation. The Minimum Pension Guarantee (MPG) in the other hand refers to the minimum pension which an occupational pension system has to provide for employees/ contributors irrespective of contributions.

Expert says that under the prevailing pension regulations in Nigeria, one of the ways to achieve the pensioners’ social welfare goal is the implementation of the guaranteed minimum pension (GMP) as provided in section 84(1) of the Pension Reform Act (PRA) 2014 as amended, which states that “all Retirement Savings Account (RSA) holders who have contributed to  licensed Pension Fund Administrators (PFAs) for a number of years to be specified by the Commission shall be entitled to a guaranteed minimum pension as may be specified from time to time by the Commission”.

Pius Apere, managing director/CEO, Linkage Assurance Plc discussing on the issue recently said the GMP is akin to an income support from the government and can be considered as a variant of social security policy that ensures redistribution of resources to its populace. In this case, it acts as a safety net for pensioners.

Thus, the introduction of guaranteed minimum pension (GMP) in section 84(1) of PRA 2014 is quite appropriate with the aim to reduce the risk of volatility in standard of living in retirement facing the pensioners. Thus, the investment risk and cost of GMP are not only borne by RSA holders but also by PenCom, Pension Operators and Government, Apere stated.

The GMP is usually to protect the scheme members (RSA holders) against some of the risks of low investment returns, particularly in the event of exceptionally poor investment conditions, for instance, during the global economic crisis in 2008 and particularly the economic down turn currently being experienced in Nigeria.

“Indeed, the funding of GMP is the responsibility of the government in other jurisdictions (such as in the UK and Chile, just to mention a few) to ensure that pensioners will not have less than a certain amount to live on. In Chile the cost of funding the GMP is expressed in terms of the nation’s Gross Domestic Product (GDP). This metric is more appropriate than that specified in (a) above, since private sector employees in CPS who retiree may also qualify for GMP. There is no indication that the Federal Government has started contributing the required 1% of its employees wage bill since the Government is still struggling to fund the accrued pension liabilities of existing pensioners under the old DB pension regime.”

Apere also noted that the Current Annual Pension Protection Levy (APPL) is 3% of management fee earned by operators, as determined by PenCom in October 2016. The current levy is not likely to be adequate to fund the GMP for private sector retirees.

“The income from investing PPF is likely to be small as fixed income securities may constitute a greater proportion of its investments relative to investing in equities.”

The expert further posited that as employees of organizations with less than three employees as well as self-employees shall be entitled to join the CPS (section 2(3) of PRA 2014), the number of future retirees qualifying for GMP is likely to increase exponentially over time. Thus, there will be a corresponding increase in future GMP liability which is also likely to put a strain on PPF, having considered the funding methodology as stated in the Act in the light of present economic situation in Nigeria.

But, the number of retirees qualifying for GMP will be reduced if many employees are encouraged to make annual voluntary contribution (AVC) and this will in turn reduce the strain on PPF, Apere further argues.

“Thus, the adequacy of the PPF will be tested if the GMP is fully implemented to take effect retrospectively, thereby allowing all those who have retired since the contributory pension scheme was established in 2004 to qualify for the GMP provided the level of pension in payment is below the GMP to be set by PenCom”.

The objectives of the PRA 2014  is to establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the public service of the Federation, the Public Service of the Federal Capital Territory, the Public Service of the State Government, the Public Service of the Local Government Councils and the private Sector and

Make provision for the smooth operations of the contributory pension scheme.

It is also to ensure that every person who worked in either the public Service of the Federation, Federal Capital Territory, States and Local government or the Private Sector receives his retirement benefits as and when due ; and assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.

The provisions of this Act shall apply to any employment in the public service of the Federation, the public Service of the Federal Capital Territory, the Public Service of the state, the public service of the local governments and the private sector.

In the case of the Private Sector, the Scheme shall apply to employees who are in the employment of an organization in which there are 3 or more employees.