Revised pension Act to spur new growth potential for market
President Goodluck Jonathan recently endorsed the revised pension law, providing opportunity in new growth areas and more sustainable retirement pack for Nigerian workers. Sadiq Mohammed, managing director, ARM Pensions Limited reviews the pension law explaining the salient issues. Excerpts
Federal Government recently signed into law the revised pension Act, what are the salient issues in the law that would redefine the nation’s pension industry?
It is a very good development for the country’s pension sector. It is coming to address a number of critical issues and key amongst them are- Firstly, widening of the scope of the pension net where by employers that have up to three employees are now part of the scheme unlike before when it was five employees and above. So, if you now work for a three man company you are entitled to benefit from the contributory pension scheme.
Secondly, is the fact that the contributions have been increased from 15 percent to 18 percent? Initially, it was 7.5 percent for the employer and 7.5 percent for the employee, but under the revised law it is 10 percent for the employer and 8 percent for the employee, which means contributions on a monthly basis will be 18 percent of total emoluments including basic salary, transport and housing. It also means greater benefit for the employee because they would now be getting wider contributions, and if this is done for many years it means there will be larger accumulation for sustainability at the point of retirement.
There is also a very big issue about the old pension scheme (defined benefit scheme) handled by the federal government being brought under the act and to be managed by the National Pension Commission (PenCom) which makes the process seamless and all the problems associated with it will be addressed over time. And the negative publicity that comes with the old scheme which we have had all these while hopefully would become a thing of the past as PenCom gets deeply involved in the management of that scheme. So, that is also a healthy development as PTAD under the old scheme will now be under the purview of PenCom. Another area in the Act is the provision on how pension assets can be used for national development in terms of helping the country in the area of real estate and infrastructural development.
It is now left for PenCom to come up with workable programmes on how these funds can be applied towards national development. We also have in the Act a provision for criminal proceedings, whereby PenCom can initiate criminal proceedings against employers that continue to default or fail to comply with provisions of the scheme through the office of the attorney general of the federation.
Another one,which is more internal to the industry itself, is the upward review of penalties where PenCom can now slam on pension operators doing one thing or the other that is wrong. The Act now tries to give more room to PenCom to wheel the big stick against operators doing things that are wrong up to the extent of withdrawing license. We think this will bring more sanity to the industry and higher standard of compliance by the operators, and credibility wise, the industry would be better for it. All of these will be in the best interest of the contributors whether it’s fraud or compliance and whatever issues.
Additional voluntary contributions (AVCs) are an underutilized channel in the pension scheme despite its potential for enhancing savings. What is your thought on this, and what is ARM Pensions strategy towards realizing this target?
We have identified additional voluntary contributions as part of the road to the growth of the industry. This is because, apart from what the employer has provided there is an opportunity for people to enhance their pension savings through this platform so that by the time they are due for retirement, there would be substantial amount of money to make the retiree comfortable. It also has implication in the interim, if for example it become possible to buy mortgage with pension savings because the larger the amount you have in your RSA balance, the larger the amount you can use as a proportion of it for collateral.
For instance, someone that has a N50 million balance in his RSA account will be able to get a quality mortgage than someone who has N25 million and you could make choice on which type of mortgage you want to buy. And part of that, additional amount could have come from voluntary contribution, so it becomes an incentive to save more because I know that when I get to a certain threshold it affords me the opportunity to qualify for a particular mortgage and if I don’t I many not qualify. So, far and above what my employer is putting down for me I could decide to make additional contributions. It has far reaching implications, not just at the point of retirement but also in the interim. Secondly, there is a tax advantage. Whatever you put in there is not taxed. If stays there for five years even if you decide to take it, it’s allowed, it’s not taxed and there are also returns . If you put in N100, 000 today by 2019 you could withdraw it if need be and that N100, 000 plus interest accruable. So, I think many people having realized the tax advantage and other products that may come up in future like the mortgage as well as investment returns that will come from a balanced portfolio, will definitely be better than returns on a savings deposit and above inflation rate.
Another benefit that could come from making additional contributions is that, it could be used to plan for your child’s education. If you withdraw a certain amount of money targeting your child’s education and five years down the line if the need be you can access it and tax free, or if the need doesn’t arise, you live it in your balance. For us at ARM, it is a growth product we want to push. To show our level of seriousness in it, we have set targets for ourselves which measures the effort each staff puts in. Since it’s not backed by compulsion, it shows real efforts in testing staff ability to convince someone to make additional contribution. That shows real effort and we will reward staff on this. However, as Nigeria gets better with more middle class population, there would be increased tendency for savings and this will also impact on growth of the pension industry.
Beyond one-on-one marketing, have there been strategic efforts towards public enlightenment on benefits of additional voluntary contributions?
If you look at our communications, we always signed off with a message trying to education our clients or recipients of our mails about AVC and the benefits of AVC. We also make sure that any client forum we have we talk about AVC. We try to reach out to as many people as possible and any opportunity we have to take about AVC we do not hesitate to do so. So, in all the efforts we make to keep close relationship with our clients, we talk about AVC, whether by text messages, emails, AVC newsletters, website and so on and so forth. It’s something we take very seriously.
You are a top player in the nation’s pension Industry, what sets you apart from other competitors?
Let me answer the question this way. I think in the future, say, twenty years from now, this industry would be differentiated by three things and these are what we believe we have today, which we are trying to build upon on continuous bases. One of them is investment expertise. So, twenty years from now a PFA would be differentiated from another based on their expertise on investment. Who is better placed to identify and make the right choice of investment decisions and get better yield or returns? I believe by that time, most of the PFAs would have developed efficiencies for fund mobilization, standard benefit payments and so what will make the difference is each player’s ability to crate investment value for their clients. It is about taking long term decisions on contributor’s funds under management.
The second point would be service, where the client knows almost everything with his account. He knows several platforms he could get information and is happy with the service he is getting from the PFA. The data’s are correct and whenever he needs any information there are several touch points to access the information.
The third point differential is brand and value added service. You need to provide more than just normal pension benefits. You need to be able to provide some other services that clients would need to make a complete financial plan. It could be wills, trusts which are added to make a complete retirement. It could be investment guides or entrepreneurial programmes for some retirees that may want to invest in certain areas, either coming from the company group or through other forms of collaboration. At the point of retirement, what businesses would the retiree like to go into? We can assist you develop business plans and other value added services.