As he prepares to exit PENCOM, the Director-General Muhammad Kabir Ahmad spoke to a select group of journalists including Nduka Chiejina (Assistant Editor) on the PenCom scheme. He said it is an improvement on the previous one and is designed to encourage savings. Excerpts
After eight years of the contributorypension scheme administration inNigeria, what are the prospects and challenges?
Basically, we started an industry that never existed. There are three issues that we need to focus on. One, we had a pension reform that had intended to establish a scheme that is fully funded and to be privately managed in a more efficient manner. A scheme that was also to replace other old schemes, particularly at the federal level so that we can have a more transparent scheme. The reform also provided that it should be managed by regulated entities, but beyond that, should be regulated and supervised by the government agency called the National Pension Commission.
Today, we have the National Pension Commission, some of us have been associated with the scheme from the beginning and, hopefully, by the end of December, we are exiting and new people would take over from us.
We have a regulatory and supervising institution that is charged with regulating and supervising pension activities, whether at the state, federal or in the private sector. Pension assets have been accumulated over a period of time. We do have an industry and quite a few states have also complied with that.
We have also been able to license and regulate operators, like asset managers and custodian. In a nutshell, these are the things that we have been able to do.
Have there been challenges?
There are challenges. As an industry and precisely as a regulator, we decided to focus on educating and enlightening Nigerians to secure their acceptance of the scheme, because if they buy-in, you will have a voluntary compliance. They know what you are doing, they know the benefit and so they will voluntarily comply.
The next issue is compliance. Private sector compliance. Do they get their employees registered? Are they contributing? For the formal sector, majority are complying, either they have got their staff registered and are paying regularly, or at least their staff are registered and the payments are not regular.
But the bulk of employers are actually in the informal sector, given the fact that we are looking at employment of five people. Now, how do you capture that group? Historically, an economy like Nigeria’s managing the informal sector is the most challenging, whether you are looking at a tax issue or compliance issue.
The reason is that you don’t have a structure as per what the informal sector is all about. Businesses are not properly registered. Today, you cannot go to any agency or office in this country where you can pick a list of active registered businesses or employers of labour.
Recently, SMEDAN and I think the National Bureau of Statistics did some survey on employers that employee three to five workers and hey came to a figure of about 14 million and if you multiply it by three that gives you a rough situation of what the employment situation is. The challenge is how do you get the data and how do you structure issue of getting the benefits paid.
What is the way out?
We needed to have a separate structure of how payment of pension could be done and how PFAs can go and get money. We are developing a regulation on regulatory framework for the informal sector where we believe the bulk of our employees are. We also want to link it up with an important elements of pension reform that has not been implemented, that is the mini pension guarantee.
How?
The intention of the mini-pension guarantee is to encourage saving. We are still working on the structure and we hope it will be incentive for people to save. If I started saving, let’s say N100 every month and at the end of 20 years, my pension is not up to N18,000, then the government would have to pay the difference so that I can have something to fall on.
The third issue has to do with the states. The states are supposed to establish their own pension schemes. Lagos is the flagship; they have a very effective contributory pension scheme. We have about 21 states that are in different stages of compliance, but unfortunately, the compliance is a bit slow and haphazard.
The old scheme is under probe because of corruption. People are scared that the new scheme may go the old way. What are the striking differences between the old and the new scheme, and what have you put in place to ensure that the new scheme does not go the old way?
At the federal level, prior to 2004, we have what we called, the defined benefit-Pay As You Go. In other words, the Federal Government never set aside money for the payment of pension. On an annual basis, it had an estimate, X number of people would be retiring, let’s pay pension. Funds were not been made available, that is one reason.
The second reason is that it was a defined benefit based on final salary. Come rain come shine, the employer has agreed that when he/she retires, I am going to get 80 per cent of my salary for the rest of my life. This is how it was structured, but it was not funded. Beyond that was that pension departments were established, where the government paid money to them to pay pensioners. They placed the money in the banks, what happened and what is still happening is what brought about the Senate public hearing.
The Federal Government disburses money to the pension departments, they open bank accounts, keep the money in the banks in a fixed deposit accounts, as a result of which people who are retired are not put in the payroll. Those on the payroll, their names are on-and-off. Every year, there is a verification exercise, the administration was not transparent. It was cumbersome. You have to come to Abuja for the verification.
It appeared that those in charge of the pension administration took advantage of the internal weakness the offices created. At the end of the day, you have the government making payment and somebody in between is getting the benefit.
On the other hand, the contributory pension scheme ensures that it is fully funded. In other words, funds must be set aside on a monthly basis. You don’t need to wait for budgetary allocation.
Two, an employee must open a retirement savings account where his collection is paid into. It is an account owned by an individual that can be traced. If somebody touches that account, there are appropriate sanctions that can be taken. The money is privately managed by licensed institutions that are regulated by the National Pension Commission with specific rules and regulations. They are monitored and supervised and, therefore, you can easily challenge them.
Beyond that is the fact that you have two institutions- the administrators and the custodians. The administrator that manages the fund does not have access to the fund.
Clearly, there is separation of duties and even in the event that there is hiccup. Whatever happens to the fund, the shareholders of the custodian is oblique to make good whatever fund that might have been lost, either as a result of fund trapped in any of he banks or financial institutions.
It is impossible that what happened under the old scheme would happen in the new contributory scheme. That is why, today, we have not heard of any incidence that the funds have been diverted. It is very difficult.
This funds are invested in diversified portfolio. It may be treasury bills, bonds, equity and so many other instruments. It is not as if the funds are kept in a vault of the pension board.
How has it been administered so far?
The people retiring under the new scheme started retiring in July 2007. Basically, five years. In the last five years, as at September this year, 54,000 contributors have retired, and close to N150 billion have been paid as lump sum to those in the public and the private sectors that have contributed.
However, there is also another challenge. The challenge is that those who have retired under the federal and the state government, we have a period that arrears were due for, towards the end of last year to the middle of this year. Section 29 of the Pension Reform Act provides that the Federal Government should be setting aside five per cent of its bill into a Pension Fund Account, to be managed by the Central Bank of Nigeria for redeeming such liability for those who are retiring under the new scheme.
But the five per cent was not been paid. The reason being that appropriate appropriation was made by the budget office, but it took us a long time to convince the National Assembly that this was a statutory requirement. Up till the middle of 2011, and in that intervening period, we had a large number of people that have retired, either as a result of tenure system, and it was not anticipated.
It was not part of the five per cent, or people that voluntarily retired or deceased employees.
How are you addressing that?
National Pension Commission encourages employees to come and register so that we can calculate their liability and advise the government one year in advance. Those who are retiring in 2013, we have already captured and advised the government how much will be required. Until recently, employees don’t want to do that.
But since the records are there, why can’t the PfAs do the update, get the data from the organisations and pay the retirees?
Let me tell you how it works. The PFAs write to all the prospective employees, six months in advance. Majority do not care to respond. Some will say they have not seen the letters, or were busy tidying up. It is only the employees that can provide those documents.
For us, six months is enough to provide these documents and the benefits are processed in advance. We don’t have that problem with the private sector, it is the civil servants at the federal level, who normally do not think the process is relevant, but it fast-tracks the process, that is our concern.
A pensioner lamented that after the lump sum is paid, what he takes home every month is very little to take care of his family. Another one complained that he retired at the same level with his colleague but his colleague was in the old scheme but earns better pension than who that operates the new scheme. He also raised another issue about increase in salary, saying whenever there is an increase in salary, it affects the take-home of pensioners but it is not the case with the new scheme. There is also this issue that says after 20 years, you must have finished your fund; after that what happens to the pensioner?
Let me take the three issues one after the other. They are two different schemes. The defined benefit Pay As You Go Scheme is the final salary scheme. In other words, when you retire you get 80 per cent as your pension for life. I can tell you it is one of the most generous in the world.
Except for Saudi Arabia that has a 100 per cent, Netherlands has about 105 per cent, most African countries have under 40 percent, or what they call replacement ratio. Most emerging economies have under 40 per cent. 40 per cent is the ILO Convention.
There are two things, you either have your money now, or you assume that somebody is going to give you money. The group of people you are looking at, are those who work for the Federal Government. The private sector does not have that because they do not have the money to support such a generous scheme. The point is that in this new scheme, you will have your money, the money is there. The other schemes are dependent on budgetary allocation, which may and may not come.
Obviously, it is lower in the new scheme than in the old scheme, because the new scheme is about sustainability. The cohorts of those who would be retiring in the next 10 years, perhaps from 2007, their pension will be low, but those who have time to save, I can tell you that by the end of the day, they are going to accumulate more money than those under the old scheme because they have longer time to save.
How are the assets invested, where and at what ratio?
Investment management is the most critical aspect of the contributory pension scheme. We contributed over a period and, therefore, the returns on investment is supposed to go into our savings. What we do is to ensure that the investments are managed in a more transparent manner.
What we did was to issue an investment regulation. Generally, there are two options. You either allow the investment manager to decide because he is a professional, a very transparent person, he can take a decision on your behalf. Most developed countries have that because they have a more transparent process.
The other option is a restrictive regulation, clearly defined bucket. These are the areas for you to invest in and these are the requirements. There must be rating, performance-based mark and there is also the limit. You cannot invest more than X per cent of your portfolio in a particular class of asset, or in a group of assets.
The last time we did a comprehensive work was in December 2010. What we did was to see how you diversify investment instruments. As at today, there are basically three instruments where pension assets are invested. Federal Government Bonds, which takes about 60 per cent. It came down from about 80 per cent. Interbank placement, money market instruments and then the equity market. For money market, I think it has dropped to about 14 per cent and for equity, it is about 12 per cent.
The reason you have substantial portion of the asset being invested in Federal Government Bond is because they are sovereign risk and they offer the highest yield.
Of recent the states are coming to the capital market to raise bonds, but we have requirements. For pension assets to be invested in state bond, the state must be in compliance with the contributory pension scheme and that has assisted us in getting quite a few of them to come on board and to join the new scheme. We hope that will encourage others to do the same.
As at today, we have about N3 trillion pension that have been contributed. The growth rate per annum is about 30 per cent annual growth of pension asset. Hopefully, in the next five years, you can estimate what that means. It is a gradual process and it has been consistent so far. The private sector have been contributing significantly to that.
Some people don’t know how their contributions are invested; again, can you throw more light on the issue of minimum pension guarantee?
As at today, what the contributors have is what is called the Retirement Savings Account statement on a quarterly basis. You can have a hard copy, some PFAs can give you access to their website so that you can see your balance 24 hours seven days. That gives you an idea how much has been contributed by you, by your employer and what returns are earned over a period and you get an alert on that. But by the time we create these funds, you now choose where you want your funds to be invested.
On pension guarantee, what is it is saying is that there are people, particularly, small workers who may not contribute enough. Or migrant workers who have worked for six months, rationalised and moved to another company the following year, and within the interval I saved and that savings will not accumulate huge amount over a period. For that reason, what the guarantee is saying is that for those of us who have saved for a minimum number of years, when they are retiring, the pension they will take is minimal, it is an incentive for people to come on board. The challenges we have today in our society is: who will bear that cost. Could it be part of social security? But someone at the age of 60 needs to be taken care of. At least, let him have a minimum wage. It is a conditional grant that you are supporting an individual who has made an effort. In the long run, national savings promote economic development and for every country to succeed, it must have national savings. The idea is to assure somebody that at the end of the day, there is something for you and this will encourage even those who are not saving to join. The benefit for the government is that large funds are been made available and instead of borrowing from banks, the government can borrow and invest in infrastructure. Worldwide pension assets constitutes an average of about 100 per cent of the GDP in most countries. They rely on pension and insurance assets for growth and development and not on bank assets. That is what we hope the pension reform will promote.
What is your response to the debate that pension asset should be provided to develop infrastructure in the country?
That is what pension assets should do because pension assets are long term assets and they should finance long term assets. Because they finance long term liabilities, they are available. However, there must be clearly defined rules and regulations. There must be clearly defined terms. Exit terms that those investments are secured.
In a country where you borrow from outside to finance projects when you have pension assets lying, how far have you gone with your offshore investment? How far about marginal players? What would you like to be remembered for and what would you call your major challenge?
We believe the ICRC needs to play a greater role. MDAs should be able to work with the ICRC to come out with clearly identified long term projects that long term funds can be invested in, that is the starting point. Concessionaires should also come out with a real starter process. Should we continue to finance infrastructure from the budget when we have private sector? I don’t think so. There is this debate that make the bride beautiful before you offer it to the groom, is that the argument? If an activity can be financed by the private sector, give it to the private sector to finance. Why don’t we have all the enabling environment for them to finance that. As a country, we need to agree on that. If we do that then we don’t need to borrow to finance infrastructure.
The last time we interacted with the media, we said there are two PFAs that have not complied. The IGI and Citi. IGI has indicated their interest to comply. To the two of them we issued notice to the board. Our law says that you must give notice for revocation. You can’t revoke immediately and the notice is 28 days, which means you are given the opportunity to meet up. Most likely, for IGI when our board meets we may take a decision and ask them to return the licence, because they are prepared to do that. They have the funds and they say they are going to do that. Unfortunately with the Citi Trust, they decided to take us to court, we are in court with them. As at today, you could say we have 21 PFAs, plus IGI.
Do we expect more of them to have merged? Yes. We raised their minimum capital from N150 million to N1 billion. The argument was that is the N1 billion not too small? Of cause not! They are asset managers and don’t need huge capital. They don’t take credit risk. But they needed capital for expansion to provide effective services to the public. We have been discussing with them. We encourage mergers and acquisition. What we are saying is that the more accounts you have, the better you are generating resources to manage your business. We say, for instance, if after 90 days, there is shortfall in this N1 billion capital, we can withdraw the license. It is a huge task, especially for some of the marginal players for them to maintain that N1 billion continuously. We will continue to encourage them through moral suasion. It is better to operate in a bigger environment and get more reliable returns than to be a managing. In most countries, Chile, Mexico started with a large number but over the years ended up curtly with six or seven. Some people say no you will create an oligarchy. The bottom line is that the stronger they are, the better.
What the law provides for offshore investment is that no pension assets can be invested abroad except with the approval of the president and in accordance with the rules and regulations of the Central Bank of Nigeria. Let me tell you why we have been reluctant. One, we needed long term funds to be invested in infrastructure. Domestically, we need funds, and encouraging funds to be taken outside would not be in best interest. The second issue is that our operators and us need to understand investment instruments. Thirdly, we needed to build confidence. We don’t want contributors to start saying we contributed and PFAs take my money abroad. We needed that confidence that Nigerians would trust PFAs, will trust PenCom. In the intervening period, what we did was to say that for private equity fund to provide only five per cent, the funds they generate they can invest 75 per cent locally and invest 25 per cent abroad. The reason is that most of them have cross border establishments. Also, PE funds are usually provided by outsiders.
