Regulation and safety of the contributory pension scheme

The Contributory Pension Scheme (CPS) being regulated by the National Pension Commission (PenCom) has been criticised in some quarters as over-regulated considering the investment options available to the mangers of the fund, the Pension Fund Administrators (PFAs).

However, PenCom was vindicated when its strict investment guidelines prevented colossal loss of pension funds during the global meltdown that hit the country’s capital market particularly between 2007 and 2010.

Pension reform, which is now the in-thing throughout the world, became inevitable in view of pension debacle that was witnessed in the past. To reverse the trend and put a halt to the increasing rate of old age poverty, which inflicted maximum pain on the people, who had contributed so much to the growth and development of their fatherland, the then President Olusegun Obasanjo-led Federal Government jettisoned the defined benefits, non-contributory pension scheme for the present defined contribution scheme with the enactment of Pension Reform Act 2004. The country, therefore, moved away from the Pay-As-You-Go to Pay-As-You-Earn pension system.

The objectives of the contributory pension scheme are to ensure that every person, who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his/her retirement benefits as and when due.

It is also meant to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age, while also establishing  a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the Public Service of the Federation, Federal Capital Territory and the Private Sector.

As at December 2013, about N3.8trillion has already been contributed by workers and their respective employers and it is on record that PenCom’s strict regulations on investment has assisted in reducing, if not eliminate, the problems that bedevilled the old pension scheme.

This was possible because the limit imposed by the Regulation on the Investment of Pension Assets that only certain percentages of pension assets under management can be invested in quoted equities and other fixed instruments.

Prior to the emergence of the present pension regime, Nigeria’s pension scheme was largely in a state of flux as the existing schemes were either underfunded or unfunded; there was weak and inefficient pension administration; most workers in the private sector were not covered by any form of retirement benefits and cases of unsustainable outstanding pension liabilities were rife.

In fact, pension liabilities of the government at the inception of the Pension Reform Act in 2004 was estimated to be about N2 trillion. Financial forecasts projected that in few years to come, pension obligations would exceed the salary of active workers. This was an economic scourge waiting to happen and its prognosis was not encouraging, hence, the need for government intervention through the instrumentality of the Pension Act.

Under the present Scheme, there is the holistic rendition of the pension reform agenda, including emergence of a new scheme where employers and employees (public and private sector) are obligated to contribute 7.5 percent each of the emoluments of the employee into a Retirement Savings Account (RSA).

Again, while pension funds are not left with the employers but are credited directly to the individual RSA of the beneficiaries, neither the employer, the commission nor even the PFAs has access to the money.

The new pension scheme has in-built safeguards to protect the pension fund from all forms of misappropriation with the functions of custody and administration of the funds clearly delineated, a great departure from the old scheme, which was at the whims and caprices of the operators and government functionaries responsible for its implementation.

Under the new dispensation, while the Pension Fund Custodians (PFCs) handle the custody of the pension funds, the PFAs handle the administration with both the PFAs and the PFCs being mandated by the commission to maintain high level of transparency and accountability, thus enabling individual RSA holders to have full access to any information relating to the pension contributions.

Besides, the Commission has also put in place strict regimes, which include daily monitoring of the investment activities of PFAs and the institution of strict pay-out authorisation requirements to ensure that the PFAs are not reckless in their investment decisions, while ensuring that only the right beneficiaries would have access to the pension funds.

This is different from the old scheme, which was non-contributory and as such was solely funded by the government or the organisation and always characterised by inadequate funding and pensioners were not readily paid.

The present scheme has the benefits of, among others, ensuring that every employee receives his retirement benefits as and when due, as well as stemming the growth of pension liabilities in the country.

It also involves securing compliance for evolved regulations, restriction and monitoring of pension fund investment and investment instruments in which pension funds can be invested must be rated to ensure asset quality. For example, investment in the Banking industry must be in Banks with a minimum of ‘A’ rating, and investment in Initial Public Offers must be in companies with a minimum of ‘AAA’ rating.

Also, the Pension Act provides that the PFAs are responsible for opening and administering the RSA for every employee and appoint the PFCs. PFAs also invest pension fund assets and administer retirement benefits.

The PFCs receive the total contributions and hold them in trust for the employees to ensure the safe custody of pension funds as neither the PFAs nor PFCs can misappropriate the funds without detection under the present state of affairs.

 Unlike the old pension scheme, the new scheme has a division of responsibility with a uniform regulation under PenCom, which set the rules and norms and the operators have to abide by it. There are also the people that keep the funds which are referred to as the PFCs and are quite different from the managers of the fund.

The PFA manages the funds and also gives management instructions to the PFC on how to move the money. The system is such that it won’t be possible for connivance to commit fraud under the new scheme.

Even when the PFA is not properly managed and is going under, the funds of the RSA holders is safe because the PFAs are not keeping the funds. All the regulator needs to do is to transfer assets under management to another PFA. It is a very secure system and should be supported by all.