The Problem Statement
Globally, the management of pensions carries some short-term or long-term risks. Some of these risks manifest in the areas of policy inconsistencies, political instability, and micro-economy shock. In Nigeria, the social security provision for retired and elderly workers has faced backlashes in recent times. Previously, most private sector organizations have not recognized or prioritized their retired workers for years of service.
Prior to the 2004 Pension Reform Act (PRA), there was a Defined Benefit Scheme (DBS) that was underfunded due to a lack of budgetary allocations. This resulted in a pension deficit of more than 2 trillion nairas in Nigeria. In addition to other challenges such as poor administrative procedures, high levels of corruption or misappropriation of funds, non-compliance by private sector operators, and social and demographic shocks. The DBS, also known as “pay-as-you-go” as introduced by the British government during the colonial era, as it has been operated by the public sector for many years, has failed to fill the gap and is unsustainable. In addition, the failure of the 2004 PRA to fill the needed gap gave rise to the 2014 Pension Reform Act (PRA).
The Federal government has introduced a new contributory pension scheme as an important social security system that could address structural and institutional disconnection in the pension management process. The objective of the Contributory Pension Scheme (CPS) is to enhance the socio-economic capacity of the economy to provide security for pensioners or the elderly. It was meant to replace the old DBS. However, according to PenCom (2019), only 12% of Nigerians are covered by the country’s pension scheme, leaving over 88% of Nigerians exposed to social insecurity in their old age. The issue is that there are currently only 8.41 million Nigerians making contributions to the country’s CPS.
The Policy solution
Pension reform in Nigeria is needed to address some of the inherent challenges, particularly the lack of budgetary provisions. In doing so, the PRA set up a regulatory body known as the National Pensions Commission, which is responsible for regulating, overseeing, and ensuring the effective administration of pension matters in Nigeria. The Retirement Savings Account (RSA) is opened by every employee with a Pension Fund Administrator (PFA) of choice, who serves as the point of transaction, and the contributor can only transfer to another PFA once in a year, during a ‘window’ period. Thus, the scheme allows for the mobility of labour without necessarily affecting the employee’s contribution. Withdrawal from the RSA is subject to the person who is 50 years of age, i.e, employees who have retired from active service, have been appropriately medically certified as unable to function or work anymore; or employees having retired in accordance with the terms and conditions of their employment.
The PRA also provides an option for a voluntary contribution to the scheme, which is taxable at the point of withdrawal before 5 years from the date of commencement of the scheme, whereas the CPS is not taxable at all. As regards the quota contribution of both the employer and the employee, the former shall contribute of at least 50% (i.e., 7.5% of the employee’s basic salary, transport, and housing allowance) as a reward for the employee’s service to the employer or his organization. The combined minimum contribution to the RSA by both the employer and the employee is 15% of the basic salary, housing, and transport allowance, which can be revised upwards upon an agreement between the employee and the employer.
The 2014 Pension Reform Act was intended to consolidate the previous amendments to the 2004 PRA adopted by the National Assembly. These include the Pension Reform (Amendment) Act 2011, which exempts military and security staff from the contribution pension scheme, as well as the Universities (Miscellaneous) Provision Act 2012, which reviewed the retirement age and benefits of university professors. Next, the 2014 PRA incorporated the Third Alteration Act, which amended the 1999 Constitution by applying the jurisdiction of the National Industrial Court on pension matters.
NIGAC Constructive Position/Take
To avoid retiring with tears, moving away from the old DBS to the new CPS is a giant leadership step taken by the Federal Government. A pension is the payment of a stipend to a person who has retired from an active job or business. The 2014 Pension Scheme Act (PSA), which repealed the 2004 Pension Reform Act, incorporated many of the benefits of contributing to the social and economic development of the country, making it mandatory for all organizations with at least 5 employees. The 2014 PSA was assented to by the former President, Dr. Goodluck Ebele Jonathan, GCFR. As the Department for International Development (DFID) put it, “social pensions in developing countries raise the livelihoods of older, poorer individuals and their families above the poverty level”.
The low level of savings in Nigeria is one of the problems associated with increased poverty. The role of pension funds in alleviating this issue is becoming imperative. Pensioners could use pension funds to reduce exposure to poverty. As far as the macro-economic implications are concerned, the new pension scheme could be used to create employment by increasing production capacity by making funds available to firms and investors. The government could also use the pension to expand production during the contraction of the economy by financing capital projects in the key sectors such as transport, energy, water, among others.
Indeed, the potential benefits of the CPS include economic growth, reducing household poverty, and encouraging investment for pensioners. One area of concern is that the current 2014 PRA should not take up to 10 years to be reformed, as exemplified by the previous 2004 PRA. As a matter of urgency, one of the key policy reviews should be the efficient management of the pension fund and its use for the common good of pensioners. Second, PenCom should revoke the non-performing Pension Fund Administrator (PFA) or Pension Fund Custodian (PFC) licenses. Third, pension payments should be made timely and as at when due in order to avoid early death and family burdens. Fourthly, the PFA, the PFC, and the PenCom should ‘think out of the box’ by designing pro-poor initiatives such as empowerment training that could provide a rescue-mission for retirees immediately after retirement, as the whole idea of the pension funds is to take care of pensioners in their old age when they are no longer able to work. Finally, key stakeholders in the administration and management of pensions must constantly evaluate the performance of the scheme, in particular the governance structure, in order to ensure that it serves the interests of poor pensioners.
In conclusion, the Pension Funds are a key driver of retirement support after years of service and, as in other countries, remains a driving force for economic growth, the ability to reduce family burdens and to contribute to sustainable economic growth and development.