The Pension Reform Act 2014 has brought a new lease of life to pensioners; raising hopes of a better life after their years of labour. The Act has also enabled the National Pension Commission (PenCom) to transit into the next decade of its regulatory functions. Omobola Tolu-Kusimo reports that the Act will further stimulate compliance, improve investment returns for contributors and commitment of pension fund assets to long-term capital needs in the country.
For workers, hope of a good life after retirement, is on the horizon. This comes on the heels of the Pension Reform Act (PRA) 2014, signed into law on July 1, thus repealing the PRA 2004. Expectedly, the PRA 2014 would continue to govern and regulate the administration of the uniform contributory pension scheme (CPS) for both the public and private sectors employees in the country.
Ten years after the pension reform, every Nigerian worker is eager and looks forward to retirement. Their input, loyalty and morale to their employers are also boosted as they work diligently to ensure the success of their organisations.
PenCom Director-General, Mrs Chinelo Anohu-Amazu, said the CPS was novel and seemingly ambitious such that not a few doubted if Nigeria could transit into it and implement it successfully. “Today, 10years thereafter, the scorecard is somewhat self-explanatory. This emanated mainly from the fundamental structures upon which the scheme was built. Indeed, the cardinal principle of separation of custody from management and supervision has resulted in a pension scheme with sound internal mechanism for transparency and accountability.
“Whereas the Pension Fund Administrators (PFAs) manage the pension funds they do not have access to same as custody is vested in the Pension Fund Custodians (PFCs) and the Commission ensures that both parties adhere strictly to regulations governing the pension funds. The ring fencing of pension fund assets and regulatory non-interference has resulted in the consistent growth in a large pool of pension assets of over N4.5 trillion, which are invested in structured and safe financial instruments; a remarkable growth when compared with huge estimated pension liabilities in the public sector prior to the reform in 2004.
“The reform has also engendered a regime of regular payment of retirement benefits to all employees who retired under the scheme since 2007 without any delays as was the practice in the old system. Since inception, 111,210 retired employees have received payouts of over N268 billion. Also, through an enhanced compliance regime, 6.26million contributors have so far been registered into the CPS,” she said.
Despite these records, she added that they are by no means suggesting that the journey has reached its destination.
She added: “We are not unmindful of some challenges that are yet to be extinguished, for instance, issues around the old Defined Benefit Scheme (DBS) in the public sector. In addition, there are some issues that cropped up only in the course of implementing the PRA 2004.
“In the quest to usher the pension reform into its second decade, a major review of the PRA 2004 was carried out with a view to proffering solutions to the noted implementation challenges. Having undergone extensive legislative scrutiny, the PRA 2014 was re-enacted in July, 2014.”
The PenCom boss said some of its salient provisions include the expansion of coverage for private sector employees; upward review of minimum contribution rate geared at enhancing the adequacy of pension benefits; upward review of sanctions and penalties against infractions; informal sector participation in the scheme; standards for the participation of states and local governments in the scheme, amongst others. She called on all stakeholders to support the Commission in order to sustain what has been collectively achieved over the past 10 years, as they focus on the implementation of the new provisions.
At the PRA 2014 sensitisation conference recently organised by PenCom, KPMG, tax partner, Mrs. Nike James, observed that the percentage of contributors to the estimated working population as at 2013 is 7.5 per cent. She said while the number of contributors as at second quarter of this year is 6.1 million people, nominal average annual returns between 2008 and 2012 is 5.9 per cent. Pension fund assets as a percentage of rebased Gross Domestic Product (GDP) in 2014 is five per cent, while real average annual returns over 2008 to 2012 is 5.8 per cent.
James noted that current statistics depict fairly low contribution of pension assets to the GDP and negative real return on investment. “Since 2005, the pension assets have grown annually by 25 per cent. If this rate of growth continues, pension assets will grow to N38 trillion by 2024. The issue now is how do we build capability and capacity to manage such enlarged pool and what is the implication on the roles of the PFAs and PFCs?” she asked.
Looking into the future, she spoke on how the roles of the key players for the next decade can be enhanced. According to her, there is need to leverage PFAs significant investments in equities to demand for strengthened corporate governance and ultimately safeguard pension investments in those companies; set world-class professional standards for pension investment managers of the future; optimise the skills of PFAs and PFCs to remain cutting edge, through allowing diversified asset management and custodial services experience, respectively, as done globally; encourage diversification into alternative investments to improve returns while balancing risk; grow the number of pension contributors, especially from the low income bracket, to enhance long-term economic development while PenCom must provide an enabling environment to implement these strategic imperatives.
The Chief Executive Officer (CEO), Chapel Hill DenhamKey, Bolaji Balogun, while speaking on investment of pension funds under the new regime, highlighted the key take-aways of the new law.
He said the new regulations allow for greater flexibility as it provides greater latitude. He added that oil prices will challenge Nigeria’s fiscal fundamentals hence, the need to begin to diversify away from government risk.
“Nigeria’s infrastructure and economy urgently require long-term capital and the pension funds represent our largest pool of long-term capital. International capital is not coming to build Nigeria, only Nigerians will build Nigeria. PFAs and financial markets operators must deliver the risk managed structures and products to commit pension fund assets to long-term capital needs,” he said.
The CEO of Financial Derivatives Company Ltd, Bismarck Rewane, on his part, spoke on the importance of the CPS. Rewane pointed out that the Federal Government is eating the biggest pie out of the N4.5 trillion pension funds while 34 per cent is invested in corporate entities locally. He added that only four per cent is invested in state government bonds and one per cent invested in foreign entity.
“Pension funds are instrumental in funding the fiscal programme of the country. While it is important to ensure that savings are deployed in a manner to ensure safety and fair returns to the fund members, it is time to explore better investment outlets for the country, which will offer security and fair returns to the fund members,” he said.
On investment of pension funds under the new regime, the Executive Director, Business Development of the Nigerian Stock Exchange (NSE), Haruna Jalo-Waziri said it’s been observed that PFA portfolios are significantly controlled by Federal Government securities, which are mostly traded on the OTC window.
According to him, changes in the PRA 2014 showed that the scope of investments was expanded from an asset class point of view in Section 86 (i) of the PRA 2014, allowing for PFAs to invest in specialist funds.
“Also, Section 73 (c) of the PRA 2004 was modified to expunge the clause for “good track record having declared and paid dividends in the preceding five years” on ordinary shares of public limited companies listed on a Stock Exchange in Section 86 (d) of the PRA 2014. Section 86 (b) of the PRA 2014 provides for the investment in debt instruments issued by state and local governments, which was not originally stated in the PRA 2004.
“Any offshore Investments required Presidential approval as stated in Section 74(2) of the PRA 2004, but this has been amended to only the proportion of pension assets in offshore investments, as stated in Section 87(1) of the PRA 2014”.
He queried that to what extent should pension managers ensure that they maximise the risk-return trade-off? Does prudent investing for pension manager translate to passive investing? Would PFAs change their asset allocation from an extremely conservative approach to maximise growth in asset? To what extent do pension managers ensure they achieve best execution for investors through participating in liquid and transparent markets? Are PFA activities contributing to the depth of the capital market?
He also pointed out that with increased asset size, can pension fund managers contribute to financing infrastructure in Nigeria? If PFAs continue to increase allocation to fixed income instruments, what is the effect on interest rates given their turnover in this space? Does the PRA 2014 explicitly provide for hedging of positions by pension fund managers as the NSE is positioned to create a derivatives market? And will investment guidelines be amended to allow for pension fund managers to explore opportunities in securities lending?
Jalo-Waziri said PFA investments in Nigeria have been steered only with capital preservation in mind.
“The true representation of the value proposition by any pension manager should be based on their ability to not only increase contributions or preserve capital, but as well grow the assets. There is the need to re-evaluate investment of pension funds towards creating long-term value for the entire economy,” he said.
The Group CEO, UBA Capital Plc, Mrs. Oluwatoyin Sanni, said the industry has recorded phenomenal growth since the PRA 2004 was enacted, noting that from a meager N265bn pension assets in 2006 when the scheme kicked off, pension assets have grown by an annual average of 58 per cent, reaching about N4.5 trillion as at the end of August, 2014.
“Although this growth looks impressive, the relatively low penetration of pension assets given the size of the Nigerian economy leaves much to be desired.
“Nigeria has about 60 million work-force populations implying that less than 10 per cent of potential members currently contribute to pension fund. But increasing integration of the informal sector into the mainstream economic sectors will drive greater participation especially, from SMEs while ongoing reforms in key sectors will reduce current level of unemployment, and propel increased contributions,” she said.
She explained that there are critical building blocks for promoting the growth of pension schemes in Nigeria, stressing that pension managers must continuously improve technical and technological competence in order to enhance the growth of the industry.
“The industry is highly concentrated, hence opportunities exists in the possible re-capitalisation of the already existing pension managers for better operation and mergers and acquisitions among industry players for economies of scale and technology sharing.
“There is also the need to strike a balance between protecting investors via regulatory restriction on investment outlets for pension funds and fostering industry competitiveness through more liberal policies regarding asset allocation,” she said.
The Principal Partner, Austen Peters & co., Dr. Timi Austen-Peters, while setting an agenda for the industry said in about a space of 20 years Chile’s pension fund assets increased from 0.8 per cent of GDP in 1981 to 55.8 per cent in 2002, yielding an annual average gross real return of 10.4 per cent.
“In that country the pension fund assets of PFAs stood at $170 billion in September last year,” he added, wondering where Nigeria’s PFAs will be in 2024.
The Managing Director, Travant Capital, Mrs. Sanyaolu Okoli, said the new act adopts an aggressive stance towards obligating compliance; however a series of structured incentives may also prove effective. “In Nigeria, the problem is rarely a lack of laws, but rather, a lack of enforcement of those laws,” she said.
Meanwhile, Leadway pensure PFA, Managing Director, Mrs. Ronke Adedeji, while speaking to reporters at a media retreat organised by the Pension Funds Operators Association of Nigeria (PenOp) in Lagos, said PFAs would not invest in infrastructure if some certain conditions are not met by the Federal Government especially, as it relates to the security of contributors fund.
Adedeji said operators want guarantee for funds before investing in infrastructure, expressing worry over how the funds can be recouped, especially with the state of inconsistent government policies which have been the bane of business growth and development in the country.
She also noted that pension funds should not be considered idle money, which can be thrown at troubles without spelt out mechanism to recover the investments.
“Such investments thrive in other climes, but the proposed plan should be done with clear guidelines specifying how the funds would be recovered and water-tight commitment that policies would not affect it.
“As an operator, we are merely holding workers’ money meant for their retirement. We will not be able to tell them when they come for their benefits that their money has been tied down in infrastructures,” she said.
Head, Risk and Compliance, Stanbic IBTC Pension Managers, Idu Okwuosa, said the operators are not opposed to the demand, but their concern is that there should be proof and guarantee for the funds.
She noted that one of the ways such initiative can thrive is for government to hand-off totally and allow competent private sector operators manage such infrastructure, adding that events have shown that Public Private Partnerships (PPP) often fail due to government involvements.
Until June 2004, pension system in Nigeria was plagued with long queues, disappointments, broken promises, and countless hours spent under the rain and scorching sun by pensioners. Before 2004, many Nigerian workers do not like to retire from work even when they have reached and passed retirement age. This led to some reducing their age while others would do all sorts to remain at work. They fear to stop working because they do not want to be part of the despair that rocked the pension sector then.
Indeed, it was a time of hopelessness for pensioners in the country, a time when the Federal and state governments and employers in the private sector were not paying their retirees pension. The public service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits were budgeted annually.
The annual budgetary allocation for pension was often one of the most vulnerable items in budget implementation in the light of resource constraints. In many cases, even where budgetary provisions were made, inadequate and untimely release of funds resulted in delays and accumulation of arrears of payment of pension rights. It was obvious therefore that the Defined Benefits Scheme could not be sustained.
In the private sector on the other hand, many employees were not covered by the pension schemes put in place by their employers and many of these schemes were not funded. Besides, where the schemes were funded, the management of the pension funds was full of malpractices between the fund managers and the Trustees of the pension funds.
This failure came with negative consequences, foremost among which was untold hardship experienced by retirees especially, in the public sector and creation of estimated liabilities of over N2 trillion.
The scenario necessitated a re-think of pension administration in Nigeria by the administration of former President Olusegun Obasanjo. He commenced the pension reform process in 2003 with the inauguration of the Fola Adeola Pension Reform Committee. The highpoint of the Committee’s recommendations was the establishment of the Contributory Pension Scheme (CPS) for both the public and private sectors through the enactment of the Pension Reform Act (PRA) 2004.
The reform was envisioned as a well thought out process of addressing the myriad of pension problems in the country. Unlike DBS, PRA 2004 established a fully funded, privately managed CPS based on individual accounts for both the public and private sector employees in Nigeria. The Act also established the National Pension Commission (PenCom) as the sole regulator and supervisor of all pension matters in the country.
The pension industry now boast of a total pension funds from a deficit of two trillion naira to N4.5 trillion with coverage of 6.26 million Nigerians under the CPS. A report on the role of major players in the contributory scheme by KPMG highlights global comparator countries.
It said the Chilean pension scheme, which was the model used for the Nigerian Pension Scheme, showed Chilean’s total amount of pension assets in 2012 CLP 77.54T (Naira) Nominal average annual returns over 2008 to 2012 is 2.7 per cent, real average annual returns over 2008 to 2012 is 0.1 per cent.
In 2008, Chile modified its pension scheme to include a social assistance scheme for those whose contributions are not sufficient for their needs in retirement.
Mexico is an emerging economy and operates a contributory scheme like Nigeria. Total amount of pension assets in 2012 is MXN 1.9 trillion, nominal average annual returns over 2008 to 2012 is 7.7 per cent, real average annual returns over 2008 to 2012 is 3.2 per cent while pension funds asset as a % of GDP in 2012 is 14.1 per cent
Mexico also operates a form of social insurance scheme in addition to the contributory scheme such that minimum benefits are guaranteed and premiums are paid upfront to that effect. The social insurance system helps reduce the risk of erosion of value of pension assets as a result of inflationary pressures.
Recently, PenCom celebrated 10 years of pension reform in the country with an assemblage of private sector leaders, the icons of the pension reform and other important stakeholders as well as usher in the strategic focus of the reform in the next decade.
However, as the country transits into the next decade with the PRA 2014 guiding the industry, experts and stakeholders want to see a rapid growth in the number of pension contributors, commitment of pension fund assets to long-term capital needs, greater level of enforcement of pension laws by PenCom especially in the private sector, among others.
Former President, Olusegun Obasanjo while speaking on his expectations of the pension industry in the next 10 decade, challenge PenCom to have coverage of not six million Nigerians, but at least 15 million Nigerians.
