Today’s pensions…a clear departure from the past

Despite the level of success recorded so far in pension reform in Nigeria, many people still do not understand the difference between the old pension scheme (Defined Benefit Scheme) and the new pension scheme (Contributory Pension Scheme), and so think that not much has changed in the system. What you find therefore in a closer interaction with some workers and contributors, are a thinking that they would retiree to face the kind of difficulties people in the old pension scheme faced. That the pension money could be embezzled by someone somewhere or that the long distance travelling and queues for verification of retires were still continuing.   But the pension regulator, the National Pension Commission (PenCom) and the operators providing clarifications on some of the issues at recent pension events and customer forums across the country explained that the system has changed and those challenges that charaterised the old system have become things of the past.

Pension Reform

The federal government in 2003 set up a committee headed by Fola Adeola to reform the country’s pensions system. The committee’s work led to the enactment of the Pension Reform Act, 2004 which served as the vehicle for transiting from the rested defined benefits non-contributory pension scheme to the defined contributory pension scheme, popularly known as the contributory pension scheme (CPS).

The act established the National Pension Commission (PenCom) and empowered it to regulate the pension sector and to create structures for smooth operation of the scheme. Under the scheme, employers deduct 7.5 per cent of individual workers monthly salary and contribute at least the same amount which is credited into the workers’ retirement savings accounts (RSAs), managed by the PFAs.

The respective pension fund administrators (PFAs)chosen by individual workers then manage the accumulated funds, which is kept in the custody of pension fund custodians (PFCs) chosen by PFAs.

The pension system has been further enhanced with the coming board of the Pension Reform Act 2014, which has increased pension contribution to 18 percent, with employer to pay 10 percent and employee 8 percent and while the pension window as been expanded to involve more people in the informal sector. This means that the system has been expanded to accommodate employees working in organizations having three or more employees. Total pension assets have grown from N3.39 trillion in December 2013 to N4.45 trillion at the end of July 2014.

Long queues

The old pension scheme had structural inefficiencies that made it difficult to work, and so required the retirees go through that stress to get their pensions. Before now, these schemes were not under the supervision of PenCom but the problem would soon be a thing of the past with the establishment of the Pension Transition Arrangement Department (PTAD) to manage some of these schemes under the supervision of PenCom.

When PTAD concludes its biometric exercise, it would have ascertained the true pensioners and fake ones, so payment would be made directly into the accounts of pensioners and not through a third party anymore thereby ending pensioners’ queues.

When retirees under the old schemes are finally brought under the supervision of PenCom, necessary details about retirees under these schemes would be accurately captured during the biometric exercise to be done once and for all.  Then, pensioners travelling long distances for verification would stop.

Also, in line with Pension Reform Act, the Federal brought the residual pension schemes under the purview of PenCom as a permanent solution to the problems rocking the old schemes.

It established the Pension Transition Arrangement Department (PTAD) to take over the management of three pension offices overseeing the residual defined benefits pension schemes including the Civil Service Pension Department, the Police Pension Office and the Customs, Immigration and Prisons Pension Office (CIPPO).

The department is charged to oversee the transition of the three offices into a single pension administration and management under the supervision of PenCom. This department would take the biometrics of all retirees drawing pension through it to get accurate details about them once and for all and after that there would be no need for retirees under the old schemes to travel for verification.

Limits to investment

Some have argued whytheir pension funds were being invested in low income yielding instruments mostly, making it impossible for contributors to maximise returns on their accumulated savings.While it is good to maximise returns on investment, when it comes to contributory pension scheme, emphasis is not only maximisation of returns but on safety of fund under management.As such, the regulator insists that investment in risky assets should be limited to a certain level.

PenCom prescribes the maximum amount any PFA could invest in certain instruments while the PFAs have shown that such restrictions protect pension savings of workers and retirees from the vicious fluctuations in the system.Since nobody could afford to gamble with his pension so PenCom restricts investments in risky high yield assets like stock and shares, the emphasis is on safety and not maximisation of returns only.  In this regard, government bond is deemed to be the most secured instrument even as the yield is in most cases is not competitive.

Rights on investment

Under the contributory pension scheme, contributors are not allowed to determine how their pension assets are managed. This is the job of PFAs in compliance with investment guidelines and regulations issued by PenCom from time to time to ensure that the funds are there for the contributors when they retire.However, in response to the agitation for maximisation of returns and the right to determine how ones pension savings is invested, PenCom created four variant of funds for different age grades among contributors.

Fund 1, an aggressive fund suits contributors who have appetite for risks, particularly workers under 40 years.  Here up to 50 per cent of accumulated savings could be invested in equities or floating and variable instruments.

The second fund is a mix between aggressive fund and conservative fund for middle aged workers who still have time to recover should the fund suffer losses and up to 25 per cent of accumulated fund could be invested in equities.

The third is conservative fund for people close to retirement and retirees who could not afford to have their investment in floating assets because of the fluctuations in returns and they do not have time to recover from any serious shock, so a substantial part of their fund will be invested in fixed income instruments.

The fourth is an ethical fund including Sharia-compliant funds and suits people who will not want their savings invested in certain instruments or businesses.  It would take care of the religious and moral needs of contributors.