‘Private sector workers are major beneficiaries of the pension reform’

The nation’s pension industry is going through a growth phase that has further increased responsibility and commitment in the scheme for both the employer and employee. Misbahu Yola, managing director/CEO Legacy Pension Managers Limited and chairman, Pension Fund Operators Association of Nigeria (PenOp), reviews the law seeing bigger growth potential for the sector. Excerpts:

The recent signing into law of the 2014 Pension Reform Bill has ushered in a new era in the nation’s contributory pension scheme; what are the key issues in the law?

First of all, we haven’t seen the details of the revised law yet, though we have seen some highlights in the newspapers. Yes, we are aware of some of the proposals. I think there are probably four critical issues we are told is in the law.

One, it has become mandatory for organisations having three employees and more to enrol in the scheme, which hitherto was five employees or more. So, it’s going to bring a number of small and medium scale enterprises and part of the informal sector to be part of the CPS.

The second point which I think is critical is the contribution rate, which has been increased from 15 to 18 percent. It will now be 8 percent employee and 10 percent employer, meaning that while the employee has got a slight increase from what they were paying before, the employer has got additional one-third of what it was contributing.

The third point, which I understand is included, is that contributors can now have access to part of their pensions so that they can make part payment for a primary mortgage. These are the three significant issues. One other point again is that if you lose your job now, you don’t have to wait six months to qualify having access to a part of the balance in your Retirement Savings Account (RSA).

Hitherto, you have to wait for six months without getting a job before you can qualify to access part of the money which is 25 percent. This has been amended to four months, which is a shorter period to wait. Until we see the details we won’t know if the rest proposals scaled through. But for the contributions, which have been increased, we need to also see the effective date, that is, from what month is it taking off. That would be critical.

With increase in contribution rate as well as expansion in contributor net, what impact does this have on the growth of the pension fund?

I think the issue of three employees and more, on paper should bring in more people into the scheme. So, probably we see the number of contributors go up from 6 million to something higher.

But that’s really on paper because the tendency is that those with just three employees may really be the informal people. Theoretically, it should translate to higher numbers. May be sooner or later, perhaps in future, it will be everyone who works, whether employer of two or one, because pension should be for everybody.  Everyone will retire from formal work whatever trade you are doing, so, you will need something when you are no longer in that trade. I imagine that in the future it will be for everyone, but for now, we expect that it should boost the numbers.

The increase in the contribution I believe will address a particular problem. The general complaints, which are never that, pensions were not paid regularly and on time, but, that it is not enough. It is a matter of what you contribute. The administrators cannot perform magic. We are not money doublers, so there won’t be magic.

The returns are descent. So, if you want to really have better pensions in the future, then you have to save more. I guess, that was the reason for additional contribution right from the beginning. This means that if what you want is higher than what you are likely to get, then, contribute more.

So, for that reason the increase was necessary. PenCom would have been hearing from retires especially the public sector. You know, those of us from the private sector never had pensions, so we may not have much reason to complain unlike those in the public sector who are uses to pensions. So, the pension reform was a major boost for people in the private sector because pensions were non-existent, except for big organisations and multinationals.

Essentially, the law is targeting to boost the amount of money you collect as pension. So, for this increase the federal government being the biggest employer of labour would have to come up with more 30 percent of what it has been paying in the past. From 7.5 percent to 10 percent is about 33 percent.

For the private sector, I imagine that in the short run it would be some challenge for most employers because is mandated on them. A lot of them in the past may have been struggling with 7.5 percent, sometimes they do it, and sometimes they don’t. In the short run, it will be an issue but I believe over time it becomes part of us and the system will run smoothly.

For employees, they should be happy, but for employers they might see it as burden, but it will turn out to become more of motivation for staff and subsequently increased effort towards productivity. In totality, the society is better off when people have descent pensions and quality life in retirement.

Government and analysts are projecting a pension growth of $100bn in the next 20 years from the current $27.2bn presently. Do you agree with this projection?

I think it will take a shorter time to realise $100bn because even in 10 years if we grow at 10 percent annually in compounding basis, even when you are not taking into consideration the contributions.

The growth is more than 10 percent and from what we saw at the presentations during the pension summit we are growing at 30 percent and that is why it will happen in a shorter time than 20 years, unless something catastrophe happens. Last year, we were talking about N3.5trn and today we talking about N4.2trn, meaning that about $10bn has been added, and that is about 30 percent.

A number of issues were raised at the just concluded World Pension Summit, and the consideration to deploy pension funds to infrastructure was critical. What is your take on this? 

You don’t have to reinvent the wheel. There are so many things that have to be put in place before you can successfully place pensions on infrastructure. If you listened at the summit, somebody said whichever way you look at it government owns infrastructure.

So, what is important is to have the right structure that is safe. If you don’t develop such, there is no way you can have pension funds into infrastructure because people will have to be paid cash not in cement, iron road or in something else at the point of retirement. We have to ask ourselves: if we put this money in infrastructure, how do we get it back. It has to be designed as done in many countries and it can be done here.

Some other things including governance is important, like you heard the World Bank lady said at the summit that pension money is not venture capitalist. You don’t take risk with it. So, you are not going to wake up and say I want to build railway, bring the money. No, if we cannot see clearly how the money will come out, we are not going to put it. For us to do that, government has a lot of work to do. Government has the Infrastructure Concession Commission; it has the Debt Management Office; it has the Ministry of Justice; it has investment experts and it has infrastructure experts all available, so, let them sit down and design a workable draft.

A number of ingenuity needs to be brought in for this to happen. Canadians are a very excellent example. They invest in waterways, electricity and even across borders. We have some Canadian companies that own water utilities in Europe. They didn’t do it over night, it was properly planned and so we have the benefit that somebody has done it. We are not going to reinvent the wheels, let’s ask how it was done.

But I think the most critical thing and of concern is policy summersault. There has to be policy consistency because whichever way you look at it government owns infrastructure. In contract, there must be sanctity of contract. Then, the judicial system; in case there are issues arising, how quickly do you get it resolved because you are dealing with contract.

Remember the Lagos Airport with Bi-Courtney; remember the cancellation of contract on Lagos-Ibadan Expressway and you know the issue that happened with the Lekki-Epe toll road. All those issues have to be considered. If you remember also during the summit, somebody said government must do the funding.

There is a difference between funding and financing. Government has to do all the ground work, all the feasibility studies, all the design, all the environmental issues, all the compensation, all the approvals, so that when all of that is done it now becomes financeable.

But to get it to that level where it can be financed, it has to be done by government. That means, as pension administrator, if you enter when it’s not ready, you would have spent five years in it before take-off of the project. You are not going to put in money in second Benue Bridge when it’s at design stage; you are going to put money in Manbila power when it’s at design stage. It is not financeable and if you make the mistake to go into it, you end up paying a lot of fees.