Pension Reform Act 2014…issues and matters arising

The new Pension Reform Bill 2014 which repeals the previously enacted Pension Reform Act 2004 consolidates amendments made to the 2004 Act and also includes significant reviews such as the exemption of military personnel and Department of State Security personnel from the current contributory pension scheme.

The 2014 Act also incorporates subsequent reviews to the 2004 Act such as the Universities (Miscellaneous) Provisions Act 2012 (which revised the retirement age and benefits of university professors) and the Third Alteration Act (which places responsibility for pension matters with the National Industrial Courts).

It also creates a better framework to sanction erring pension fund defaulters though Nigeria’s weak institutional capacity to deal with financial crimes, meaning these provisions have been met with cynicism. For instance, the National Pension Commission (PenCom) has been empowered by the Act to carry out criminal proceedings against employers who fail to remit their share of the pension contributions within a specified time.

However, PenCom’s authority to prosecute these erring offenders is subject to the fiat of the Attorney General of the Federation which is typical of these institutional constraints that has led to cynicism.

Though mismanagement and theft of pension funds comes with more damning consequences as the new Act recommends a decade behind bars and a fine three times the size of the fund for offenders.

The Act also requires employers to open Temporary Retirement Savings Accounts (TRSA) for employees that fail to open retirement savings accounts (RSA) within three months of employment.

Overall, the new Act introduces two significant reforms that could potentially swell the pension pot and registrations. The first of which is the upward review of the minimum rate of pension contribution from 15 percent (with employee and employer contributing 7.5 percent apiece) to a minimum of 18 percent (with contributions from employee and employer increasing to 8 percent and 10 percent respectively).

The second aims to expand the pension base as it revises the obligatory criteria as it brings organisations with as few as three employees into the contributory pension scheme. The 2004 Act compels only organisations with five or more employees to participate in the pension scheme but this has been reduced to three in the 2014 Act.

Pension Funds primed for growth

On the face of it, expanding the contributory pension scheme to cover organisations with as little as three employees could potentially increase and even lead to a spurt in the pension base. However Agusto & Co believes this will not be a significant game changer nor will it lead to a material ramp up in registration numbers in the near term.

Growth in registration into the contributory pension scheme has been stubbornly stuck in the single digit range since 2011. Between 2006 and 2010, new registrations into the contributory pension scheme reflected strong double digit year-on-year growth peaking at 66 percent in 2007.

According to PenCom, the pension scheme has accumulated slightly over 6 million subscribers between 2006 when the first pension fund administrators (PFA) commenced operations till date. While that in itself may be deemed a success, when judged on the back of Nigeria’s 50 million strong labour force, then the scheme seems to be struggling.

The bulk of new signings in recent times has been from first time entrants into the labour force while defaulting employers now seeking compliance have also complemented the numbers.

We believe this trend will continue over the next two years as growth forecasts for the industry up to 2015 reflect only single digit accretion to registrations of new pension savers.

We project a 9.8 percent rise in new registrations to about 6.5million pension savers by the end of 2014 followed by a growth of 9.9 percent to 7.14 million pension savers by the end of next year.

However, our model reflects a brighter outlook for pension assets. Our forecasts indicates pension assets will surpass the 21-29 percent growth range experienced between 2010 to 2013 to about 30 percent in 2014 to reach about N5.28 trillion. We are even more bullish on 2015 when we expect year-on-year growth of 31 percent to 6.9 trillion as our forecast is premised on the increase in pension fund contributions by 300 basis points.

Five is good, three is better, but there are hurdles. 

The bulk of organisations with staff strength of only three are mainly in the informal sector or outside the formal financial system. Pension Fund Administrators typically view this clientele base as cost inefficient because of fragmentation and poor compliance.

Thus, PFAs will not be motivated to invest sufficiently in distribution infrastructure to serve this segment of the market. The increase in employers’ pension contributions to 10 percent will increase labour costs and associated overheads for small businesses. It will also taper disposable income albeit marginally. PenCom’s capacity to sanction erring firms in the informal and semi-formal levels while boosting compliance is also in doubt. Thus we do not project a massive registration drive from this new fold. We believe the largest cache of new registrations will come from the public sector.

With only eight state governments in full compliance and 27 states in various levels of compliance, and one state in total abstention, PenCom’s subtle but effective drive at increasing compliance by the state governments could significantly increase the aggregate registration numbers. PenCom has increased the compliance of states by barring the PFAs from investing in municipal bonds issued by states that have not adopted the contributory pension scheme.

Translating savings to development

Overall we are not perturbed by the expected poor compliance from the semi-formal and informal levels because we believe the pension industry is driven on the philosophy of the inevitability of gradualness where the little incremental steps help achieve the stated goal.

Furthermore, Nigeria’s Gross Domestic Saving as a measure of GDP, at 29.6 percent in 2013 (31.5 percent, 2012), is one of the highest on the continent and reform measures like these will only help to increase household and national savings levels. The debate should now focus on the impact of these savings on the Nigerian economy.