The pension fund is now over N3.8 trillion, but it can become bigger, if the informal sector participates in the scheme, says Managing Director, AIICO Pension Manager Limited, Mr. Lounge Eguarekhide. He tells OMOBOLA TOLU-KUSIMO, in this interview, that the Contributory Pension Scheme (CPS) will be enhanced, if the government raises the pay of low income earners to enable them cover basic needs and still have something to save.
How is the Contributory Pension Scheme (CPS) different from the old one?
The Pension Reform Act (PRA) 2004 establishes the CPS for all Nigerian employees in the private and public sectors. The CPS is absolutely a revolution. I used this word very emphatically because if you look at how people accessed pension in this country under the former arrangement, the defined benefit scheme, you will discover it is, indeed, a revolution. Under the old scheme, government retirees or pensioners were paid pension on a specific calculation after retirement so they know what they will get but it was not well funded by the government. Most pension arrangements in the private sector were also not funded and so you would have pensioners waiting in long queues or there was no record of what their pension is. Most times, they cannot even access the pension because there is no money.
With the current arrangement of the CPS where it is contributory, the pensioner pays a certain amount which is deducted from the pensioner’s account and it is marked by the employer. The total contribution required is a minimum of 15 per cent. The employer is expected to contribute minimum of 7.5 per centand the employee 7.5per cent. The employer could choose to contribute the entire 15 per cent or could choose to weigh the percentage contribution from the employee. But there is a contribution that happens every month and that contribution goes to a Pension Fund Administrator (PFA) of which AIICO is one. The PFA does not actually receive the money. It goes to a Pension Fund Custodian (PFC) who then informs the pension administrator that money has been contributed for its management by its contributor, and the pension manager goes and invests the money in approved investment areas or sectors. Now this shows that there is a separation of roles, the contributor appoints the PFA, the PFAs appoints its custodian and all of these activities are supervised by one regulator, PenCom. It wasn’t this way in the past.
I would like to say that PenCom has done a very fantastic job since the inception of the PRA 2004 because we have had a structured contribution management, well supervised investment management, adequate regulation and to cap all that off is that you have a very organised process of the contributor accessing their benefit at the time the benefit becomes due. The contributor is notified by the PFA six months before retirement and is advised to prepare his or her document. Once these documents are prepared, the documents are sent for approval to PenCom at the point of retirement. This should not take more than two weeks if all the documents are intact and the retiree gets paid. The retiree gets paid every month and not later than the 24th of every month. There are no long queues because your money goes straight to your bank account. It is very organised and that is in my view, a revolution when you compare it to what it used to be.
What does the 2013 Pension Reform Bill pending at the National Assembly seek to address and what is your take on it?
My view on the pension reform bill is that there is no process that cannot be improved. We all have our imperfections as human beings and as long as we live on this earth, there will always be room for us to improve. One of the areas the bill seeks to address is a situation where the pension Act can be more far reaching.
A good example is the current Act; the PRA 2004 which describes private sector contributors as employers that have a minimum of five employees. The Act says that you can join if you have three or less employees. They are trying to draw in participants in what is largely described as the informal sector.
The regulator has also tried to see whether the percentage contribution from employer and employee can increase because many times people have said that the benefits are not lucrative for the retiree. But in my own view, that complaint is misplaced because if you had only eight years to accumulate your contributions, the benefit of compounding would be much less than if you have say 20 years.
In my view, I think it is still early days and if people give it time, they will get more benefits. As manager of the funds, we will be able to invest more in instruments that will generate more improved return as time goes on. The bill also tries to address the transition arrangement between the old defined benefit scheme and the new one by putting all of those transitory departments directly under the supervision PenCom in a very active way. The bill is ambitious also by prescribing that states and local governments sign up to the CPS compulsorily. But I don’t think that is democratically practical and I don’t know how legal it is but I am also not a lawyer so I cannot really tell if it will work or not. The PRA 2004 is for the federal civil servants and those in the Federal Capital Territory as well as private sector organisations that have a minimum of five employees each. Now, the Bill describes the federal civil service in the FCT, private sector employers of minimum of three and also includes all states and local governments.
There is an outcry from the employers as a result of the proposed increase in contributions in the new bill. What is your view on this?
I think that we should take things slowly. If we have people contributing 15 per cent, 7.5 each and the compliance rate is at best 50-55 per cent if at all and you now try and increase the rate, what do you expect to happen? It will increase non-compliance. It has been expressed during the hearing on the reform at the National Assembly and most people are of the view that we should maintain the rate and just try and drive compliance. For employers who choose to go beyond the minimum 15 per cent, they can do collective bargaining and decide voluntarily to do a higher rate rather than make it compulsory and then make a lot of people fall under the non-compliance bar.
Expectation is high among operators to get the informal sector on board just as PenCom gets set to release guidelines on it. What are your plans on the informal sector?
I don’t think that the informal sector is a question of guidelines but a question of reality. I have said this to my management team and at a forum where it has been discussed with PenCom, listening. I have also expressed my views in writing. I think that our economy is very weak. People don’t get paid very good salaries. So just talking about the informal sector by using numbers would not work. The popular analysis is that there are 80 million workers and only five million have signed up while the remaining 75 million have not signed up. The way it works is that people will buy what they need and if they don’t need it you can’t force them to buy. The fact that you don’t have the so called 75 million people subscribed to pension arrangement means that it is either they are pressured, they do not have a need for it or they do not believe in it.
In my view, more than 75 per cent of this 75 million earn subsistence income such that they can’t start a savings programme. It does not make any logical sense for somebody who earns N18,000 and has to pay rent and send his children to school to subscribe to a pension plan. I don’t think that we need to reinvent the wheel. I think that what we need to do is to drive compliance from the formal sector. There are a lot of things that need to be done for the informal sector to fully come on board. If you look at the Indonesian and Asian model, you will discover that they have driven compliance by incentivising the contributors that if an informal sector participant makes a contribution, the government matches it either 100 per cent or even 200 per cent. So if a vulcaniser manages to put up N2,000 as contribution to pension, the government matches it with say N2,000 and in some cases N4,000. So it is in my interest to find a way to contribute so that I can get access to a price. If that incentive is not there, there is no value for me because with the little money I earn, I have to take care of so many responsibilities. Until you actually improve incomes such that disposable income can cover basic needs and still leave something to spare, I think it is an illusion to think that the number of subscribers from the informal sector will grow. Now, that is speaking very broadly but if we narrow it down, I think that we can segment the informal sector in more details. I think we have many small organisations that do not fall under the CPS now. We have small businesses such as consultants, lawyers, accountants, little enterprises maybe tailors who are fairly organised. They have to find a reason to contribute to this. This is what we the operators are trying to figure out in association with PenCom.
I think that the number that we will be looking at beyond what we have signed up on the informal side will not be more than another one or two million. That is on the private sector side.
What is the level of compliance by the states?
I think there is also a huge market, reasonably huge, we have about seven states, maximum of eight that have subscribed fully to the CPS. The other 28 have not subscribed so what is going to happen to them? Should they not? I think that if they do the numbers properly, they will find out they are short changing their workers if they do not subscribe because gradually your pension liabilities continues to grow and if you don’t fund your pension liabilities, one day the chicken will come home to roost. That is number one.
Number two; it is an incentive for serious minded state to subscribe to the CPS because in states where they have subscribed to the pension, they found out that in trying to make provision for workers’ pension they will solve the problem also of ghost workers because you have to register to collect your pension and once you register, a ghost cannot have an account and access the pension. So in many cases where there have been registration and maybe one should not be saying this because all sort of things happen in the civil service but once you register under the CPS and payroll is organised such that you make payments to people who have registered, you find out that you have streamlined a lot of the waste in the system. People who are not registered on the payroll in truth are cut off and they have reduced the liabilities of ghost workers just by subscribing to the CPS. If you ask some of the states where the CPS have been embraced. They will tell you that it is an added benefit they have been able to get.
What does PFA entail?
I think that people do not have the clear understanding of what this business is. This business is a specialised assets management business but it is broader than an assets management business because we also have to do administration.
There are lots of support services that you have to invest in and the income you get from managing pension is probably a two-line item. You get your management and administration fees. The business is a game of numbers and skill and until you achieve the minimum economic scale, it can be an absolute nightmare, but that is the reason Pencom introduced the minimum capital of N1 billion so that minimum quality standards can be met by licensed operators and I guess the hope was that if the minimum capital was increased, it will induce operators to combine their business as it made sense but most people have decided to increase their capital to see whether they can carry on and see what happens when contributors are allowed to transfer their account among PFAs because the smaller PFAs believe they can serve some contributors better than the larger PFAs that have a lot of customers and perhaps are not able to perform as far as service delivery is concerned. My experience is that there is often a flight to safety, a flight to size; a flight to more durable structure. I believe this is why the prescription for N1 billion naira recapitalisation by PenCom came up. There were 25 licensed PFAs but today we have 19 and it could shrink even further.
Are there merger and acquisition talks among the existing 19 operators?
People would combine their businesses if they find that it makes more sense to have stronger entities than to have control of smaller entities that are not able to deliver service.
What are your limitations?
I think that our biggest limitation is really the fact that the investment environment in the country is not right for some of the things you will like to do as a pension operator. It is important to note that pension money is not high risk money. It is money that you must have ready to pay the contributors when their time falls due and so you must invest it very carefully. You cannot take PenCom money to go and build the road that you have no idea how the money is going to come back. But we are human beings who live in an environment and would want to see the improvement of our environment and with pension fund money being long term money, the tendency is to think that it will be used to propel the infrastructural development but it has to be done in a very structured way. I think that as operators, we would like to see infrastructure bonds from government guaranteed for starters. This will make us to know that the user of the funds and the investors can get used to the processes that are required such that once we get more comfortable and we can see budgets coming off the table, we are encouraged to do more.
The pension money is not supposed to go in one direction and not come back. There were certain projects which I will not want to mention right now that a lot of monies invested on and lost. That can easily happen to pension and these are the greatest challenges we find. As it is, we are limited to money market investment and largely Federal Government bonds. Fixed income is simply a factor of the environment in which we work. We would like to do a lot more creative investing in a secured way but we can only do that in an environment where contract is well respected and the objective is well understood. We want to do a lot real sector investing but the environment is not right for it right now. These are our limitations.
What are your limitations in the capital market?
My background is in stock broking, so if anybody would have an understanding of what goes on in the capital market, I would certainly be the one.
Yes, there is an increased interest investing in the equities market. I think that this year, most pension fund administrators have increased their exposure to the equities market and you will see that the index dipped 47 per cent last year but you need to ask yourself: Where are the new companie? Where should we be investing our money? It comes back to the same real sector debate. We need to have new companies coming on the assembly line. That is how value is created. I started stock broking over 20 years ago and the companies leading the market are still the same Unilever, Nigerian Breweries or Nestle. We haven’t found new champions. Okay, maybe we have got a Dangote here but we need to find a lot of smaller companies that are growing, such that if you invest in the equities market, when it was small, you can grow with it as it matures. That is what happens in a capital market. Look at a company such as Apple, for instance where an investor bought Apple at a time when it was small and grew. That is what you invest money on. You don’t invest money just because you are passionate about a sector. You invest money because there is value to be created and it is that value that we are looking for. I think that it is early days, and what we need to understand in the financial services sector in this economy is that there is a process of development and until you are ready, don’t come out. The pension funds are accumulating and what this means is that people who have genuine projects and genuine development aspirations can have access to it. It means we are beginning to get a pool of long-term funds which can be accessed, but it must be accessed in a structured way for structured objectives.
You put money in a venture,venture brings good return, the person who provided the money is happy, the person who set up venture goes on to something bigger, then creates employment and for us it is an added advantage because we create employment, we manage new pension accounts, so it is a virtuous circle but we have not gotten there yet. So, we have to proceed cautiously and it will take time. Let us look at the pension funds as being with us for beyond my life time, beyond your life time, beyond our children life time. It is a facility that is supposed to help this environment grow not only for infrastructure but to provide for people when they can no longer be actively engaged in employments along with other added advantage. It can also fund development.
What are your projections for this year?
I think that the processes are stable. The regulatory environment is still stable even though there’s been a transition in the executive management of pension commission. The pension industry has continued to grow from strength to strength. I think that the investment return is going to be a lot better this year than it has been over the last two to three years. Compliance has improved because PenCom has appointed recovery agents that have done some work in improving compliance to the CPS. For this year, I think we are going to see some of these consolidations but the distraction of elections would probably slow things down on the government side. So, we are not likely to see a lot of recruitment on the government side; rather hopefully with recovery in some of the sectors, particularly the new electricity management we have, we would see growth in pension account 2014.
