Director-General, Lagos State Pension Commission (LASPEC), Mrs Folashade Onanuga was one of the experts who started the implementation of Contributory Pension Scheme (CPS) in the state. In this interview with Omobola Tolu-Kusimo, she speaks on the feud between pension and insurance regulators over life annuity payment and why state governments should embrace the CPS to clear their pension liabilities, among others.
Since the implementation of the Contributory Pension Scheme (CPS) started in Lagos, how has it fared?
The Scheme was enacted in Lagos State in 2007, but it did not start operations until February 2010. According to the Act, we must have the pension commission that would oversee pension matters in the whole of Lagos State. Consequently, the state pension bill that was signed into law on March 19 stipulates that the CPS must be coordinated by the LASPEC. So, the commission came into being by the virtue of the CPS of the Pension Reform Act (PRA) 2004, now replaced with PRA 2014. Even the old scheme, which is the pay as you go, must be supervised by the commission. So, in Lagos State, we have two sets of retirees and we have been able to separate them.
Some are under the old pension system, while others are under the CPS. Before we commenced with the CPS, an exemption period of March 31, 2010 was given to some workers, who may want to retire. This is why you cannot see anybody going into the Pay As You Go Scheme anymore because the exception period was over as at March 31, 2010. If you were in service before April 2007, there was a certain aspect of your entitlement that ought to be paid up by the government, which is called accrued right. This commission ensures that the accrued right is credited into the RSA account of the individual.
Let me also state that we have two sets of retirees under the CPS: those with accrued rights and those without accrued rights. The set with accrued right are those who were in service before March 31, 2007, when we started, while the set without accrued rights are those recruited from April 2007. For those who have accrued rights, we still have a lot of work to do because a major part of their entitlements is under the old scheme, which is to be paid into their accounts as accrued rights. We have to look at their employment record to be sure that the entitlement of somebody, who has worked in Enugu State before coming to Lagos is captured and so we still have to request for the establishment part. But it takes a little bit of time to ensure that we pay them their dues and pay correctly. For those, who joined service after April 2007 till date, if they leave service today, their money is already sitting in their account and they can start to draw their pension from the following month. All we need to do is to issue a clearance letter to enable them access it and they are free. I must note that these set of people are the easiest for us to handle in Lagos today.
The issue of ghost retirees has been a challenge. What is the experience in Lagos?
The issue of ghost retirees cannot happen again in Lagos and this is the beauty of the CPS. Unlike the Pay As You Go entitlement, which is pension gratuity and obligation paid by the state to individuals. In the new dispensation we don’t pay to any individual, but into the RSA accounts of workers. It then becomes the responsibility of the PFAs to pay entitlements. So, the issue of ghost retirees does not arise as it has been totally eradicated in Lagos.
Let me also say that the CPS has been running in the country for about 12 years and there has not been any incidence of fraud recorded because of the way it has been created. You cannot open two accounts because we maintain a database of all retirees with PenCom. This is one of the successes that we have been able to record in the state and even in the country at large. So, in terms of paying entitlements, we have made payments till date. We’ve been paying pensions in the past, but there has been an increased tempo in the last one year. Before this administration we used to pay pension in terms of accrued rights on a quarterly basis, but since the government of Akinwunmi Ambode we have been paying it monthly. The accrued rights are paid into the RSA managed by their PFAs. So, in essence the state government is totally removed from the process of paying retirees for life. Under the CPS we don’t have any business with pensioners. You cannot come to Lagos and say you want pension increase. It won’t happen because we don’t pay you pensions. It is the responsibility of the PFAs to pay pension. Lagos State’s obligation is to fund your account and it is left for your PFA to invest it and earn you good returns. The government will also continue to maintain its liabilities until the last pensioner dies.
How many workers are still under the Pay As You Go scheme?
We cannot envisage when the last person will die until it happens. We have different agencies in the state under the old scheme. We have Teachers Establishment Pension Office (TEPO) with over 6,000 retirees. We also have the main stream and local government retirees. In all, we have about 13,000 retirees under the old scheme and what that means is that government will continue to pay them pension. If pension increases from the federal government, it has to be domesticated in Lagos State. The fact that the Federal Government has increased pension by 53 per cent does not automatically mean that Lagos must also increase it. It has to be domesticated and must be in line with the resources of the state. If we have money we may even pay more than that, but the fact remains that whatever is done at the federal is not automatically binding on any state.
In terms of increases, yes, Lagos State has been increasing pension packages like we just did with the 15 per cent and six per cent. But the new one that has just begun at the federal level is yet to be implemented in the state. But we are currently looking into it. We want to have something that is adequate and commensurate, taking into consideration inflation and the state of our economy, and of course, the power of the naira. All these are being looked at for the Pay As You Go pensioners.
What is your advice to other states that are yet to join the new scheme?
Like I said earlier, it is very important for you to be sure of a project before you start it. Some started the CPS and could not implement it because they did not get it right from the beginning. Lagos is a model state because once we start a project, we don’t look back. We are able to take a futuristic look into what we are going into. Some states rushed and started to contribute 18 per cent, but they got stuck in the middle and could not continue. In Lagos, we are not like that and that’s why we are a model state. The Federal Government started it in 2004, but we did not implement it until 2007 when we were convinced we could fund it. Since then, we have not stopped. We have put in place features such as ICT infrastructure to ensure that once your salary is paid, contributions are deducted and credited to your RSA account. The government from the very first day, based on a lot of discussion, was made to understand that the CPS is based on commitment and it was ready to be committed to that course.
Under the old system, pay as you go scheme, all the liabilities fall on the government and that is why majority of them still have pensioners as far back as 2010 yet to be paid. They keep on loading the liabilities on the government without making provisions for it. At the end, the government is tied to the employees for life.
All over the world, the Pay As You Go has been acknowledged as very expensive way of funding retirement liabilities and a lot of countries are going out of it. So, for you to stay in the old system, it shows that you lack understanding of what is going on globally. This means you are not thinking of a solution, but compounding your pension problem. If the people that introduced us to it are moving away to something that is more affordable, why should we stay and be stucked?
So, I think there is need for more education of major stakeholders, because with all due respect, they are just creating a mess for themselves. In Lagos today, we can sleep with our eyes closed. Yes, we may have funding challenges because the liabilities of the CPS are huge. Apart from the contributions to RSA accounts, the accrued rights obligations are huge. Our past service liabilities in terms of contribution is about N200 billion. On a yearly basis, our obligation is about N15 billion and we have budgeted for it.
Like I said, where there is an understanding, there will be a way. In terms of people, who have their entitlements under the old scheme, we have determined their liabilities. We know that it will be x billion naira and the government, having been made aware, is already looking for funds to provide for it. People say we are getting it right, it is not just because the fund is available, but because of the commitment. There are so many things contending with state funds today but the state government understands the fact that it has to invest in its workers to get their commitment to the business for which they have been employed. This year, for instance, accrued rights is about N16 billion. If we take into consideration the funding percentage, which is indicated in our law to fund accrued right which is a paltry five per cent of the salary, it is nowhere near the N16 billion that we have for funding accrued rights. Governor Ambode is aware of this and what he has done is to inject additional 6.5 per cent so that there won’t be a gap.
How much has the state paid till date under the CPS?
In terms of contributions, we have paid nothing less than N70 billion as at December. We have paid almost N21 billion accrued rights in one year and this is just to tell you how huge our funding obligation is. We had a few obligations in the past, but like I said we are still a lot better than other states. It is the fund that was injected with the normal funding obligation that has been clearing our backlogs.
How do you monitor the PFAs taking these contributions from you?
There is need to understand that the PFAs don’t take contributions, but they invest them. These contributions are with the PFCs, so there is no risk with the PFA. If a PFA goes under today, it means nothing under the CPS because the funds is sitting with PFCs, who have no other responsibility than to hold the pension fund assets in custody while they give report to PenCom. The PFA cannot ask the PFC to transfer funds. Our business with the PFAs is to ensure that they grow the funds because they are the ones, who invest and on paper.
LASPEC meets them once in two months to know how they are investing the funds. PenCom has given them investment guidelines to follow. For instance, they can’t do more 35 per cent in money market, 30 per cent in corporate bonds and state bonds 10 per cent and 100 per cent in treasury bills because treasury bills are secure. For us, we want to know whether you are a risk lover or a risk neutral person. In which case, if you are a risk lover, you will take risk and the risky aspect is with the equities and so if you go the higher mark, we will know that you love taking risk. There are some that are risk averse and there are risk lovers. It depends on them but our own is to monitor them that they are not jeopardising the assets of our people because in this new scheme, if an individual loses fund, he will bear the brunt.
That is why we must monitor the PFAs to ensure that you are a risk neutral person. We also want to be sure that they are paying our pensioners on time, giving regular information on the RSA account, create awareness and other responsibility that they are mandated to carry out over our contributors and retirees. One of the other things that we did to aid out the pension payment process was that we issued a flyer detailing the two benefit modes, which are the annuity and programme withdrawal.
There was a circular from PenCom, directing PFAs not to transfer funds for annuity purposes to insurance companies. At present, some retirees are stranded because their funds cannot be transferred to insurance companies. What is your take on this?
This is a burning issue now and very technical. In my own view as a neutral person, the annuity business is risky, totally different from the fund management business of PFA. A PFA is a fund manager. An annuity service provider is into the business of risks, which is insurance. It is about whether this person will die early or at a longer period and as such, they are two different businesses. The PFA, who is just managing your money, is in the business of saying I am investing it for you and whenever you die, your relatives will have a balance, including the return on investment to receive. I am just managing your fund.
The other one, which is insurance, is saying the money you bring to me to pay your monthly pension, with is no longer your money, is premium. This is because what you are doing is entering into a contract with insurance, that for as long as you live, the insurance company will be paying your pension. So, what you are bringing into the company is consideration for the promise to pay you pension for as long as you live and that is why it is no longer your money, but premium.
Insurance is a pool of fund and the annuity fund, just like motor insurance, goes into the pool. There is a guarantee period for those that will die under 10years. But for those that died after 10 years, nothing is paid to their dependants. However, if they live for 100 years they will continue to collect their pensions. The pension element is there on both sides. If the contribution from the PRA is what gives rise to the contributions to buy annuity, then it means PenCom must put an eye on it.
This is because there is a difference between myself as an individual going to an insurance company that I want to do annuity, that is, I have come on my own. My money can remain with the insurance company. But if it is the CPS that wants to ensure that pensions are paid as and when due, then the PFAs should keep the money with custodians. If an insurance company is taking annuity from the RSA, in my own opinion, PenCom must put an eye on the disbursement of that fund because the individual did not come willingly.
We have had instances where insurance companies collapsed and people drawing pension got their pensions stopped. So, to secure the benefits of people, who take annuity, I am strongly of the opinion that the fund should be paid to custodians to secure it. You can’t secure the one with the PFAs, which is programme withdrawal, and leave annuity hanging. However, PenCom needs to note that it does not have control over annuity fund. It only has control over programme withdrawal funds with PFAs.
NAICOM is represented on the board of Pencom. So, NAICOM regulates the insurance firms and Pencom regulates the PFAs. The body representing insurance, that is well verse in the insurance industry, should be allowed to regulate annuity while the funds are kept with custodians. There is no way they will make headway if they don’t get this area right. NAICOM must let PenCom know the way insurance operates and the latter should accommodate it within the ambit of custodianship arrangement.
So, was there a lapse in the law from the beginning?
It is not a lapse. It is because people don’t understand the two businesses very well. The fund must be strictly regulated and if it is regulated from contribution point and is not being regulated up to the point of payment, then there is a disconnect somewhere. It is crucial for us to note that if an insurance company goes under, it will put the annuitant at risk.
But what happens when PFCs that are subsidiaries of banks go under?
The PFC is just a custodian and subsidiaries of banks. The money transferred to them is not held in physical cash. They only execute investment instructions, which state where and who to invest with. For instance, Oceanic PFC has gone under, but there is no outcry because they are not holding physical cash. This ensures that the PFAs do not do hanky-panky that we are noted for in the country. I think it is a war between the insurance and pension industry, but it is very easy and that is why they need to seek opinion. I think it is just about the two industries understanding each other’s business very well. Insurers must understand that this fund is not coming to them by their own effort, but from the RSA account. PenCom cannot say they are regulating PFAs and leave the other leg. But the funds must be there only for annuity purposes and then the regulator, who supervises them, must monitor the way they invest it and that it is separated from the companies’ funds. PenCom has to stay away from regulating the annuity business. They just have to go back to the drawing board. There must be a separation.
What are the things to be done to boost retirees’ welfare?
We are looking at our retirees having identity cards that will allow them to have access to free medicals in government hospitals.
We will also be having a programme called Retirees’ Day Out with the governor very soon. It is a maiden one.
