THE EFFECTIVENESS OF PENSION ADMINISTRATION IN NIGERIA AS IT RELATES TO PENSION REFORM ACT, 2004

THE EFFECTIVENESS OF PENSION ADMINISTRATION IN NIGERIA AS IT RELATES TO PENSION REFORM ACT, 2004

ABSTRACT

Pension Administration in Nigeria in the recent past has been very challenging. The present experience has shown the administration could be relied upon given that is has undergone a lot of reforms poised to make a difference from past experiences. The present PenCom Reform Act, 2004 is fashioned after the model in Chile. It is fully funded at all times; hence, there are no funding gabs. Where there seems to exist one, provision is made for correction within 90 days under PenCom supervision. Safety valves are installed. This is why the administration of pension assets is separated from custody. Furthermore, pension assets are not used as collateral. There is the need by PenCom to closely monitor the activities of Pension Fund Administrators to curtail signs of distress as experience in Latin America has shown that in Chile, where the model is copied from, the nation commenced contributory Pension scheme with 12 PFAs, graduated to 21 and presently only 6 PFAs are on ground either through mergers or acquisition. However, this does not suggest that the pension assets of contributors have gone underground. This is made possible as a result of the safety valves inbuilt into the system as administration function of the PFAs is separated from custody function of the Custodians. The research method adopted was by the use of both primary and secondary data. The primary sources comprised structured questionnaire and oral interviews administered on the respondents. The secondary data derived from textbooks, publications, newsletters and relevant websites. The research method adopted was by the use of both primary and secondary data. The primary sources comprised structured questionnaire and oral interviews administered on the respondents. The secondary data derived from textbooks, publications, newsletters and relevant websites. The hypotheses were tested with the aid of chi-square (x2), tables, simple percentages and ratio analysis. The deduction arrived at the end of this study shows that:

1. There is much improvement in the administration of pensions in the country now than in the immediate past especially in the public sector.
2. Given close supervision, the system can weather any storm that may arise in the course of doing business.
3. There is a steady growth in the Accounting Unit of all PFAs which suggest effectiveness and efficiency in management More so, as the industry is competitive.

Meanwhile, the study recommends that there is the need for PenCom (The Regulatory Authority) to embark on a wide range of public enlightenment especially in the informal sector to encourage voluntary participation. Finally, for further studies, the need to establish a National Databank that would assist the various Regulatory Authorities (CBN, SEC, PENCOM, etc) in no small measure in the formulation and implementation of policies for economic growth.

CHAPTER ONE

1.0       INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Before their former colonies gained independence, the colonial powers in Africa (France, Britain, Spain and Portugal) introduced different models of social security systems to their respective colonies primarily as an extension of their own systems and essentially for the benefit of their respective expatriates working in the public sector in Africa. Later on, the same or different benefits were extended to African workers in the civil service, the industrial sector and urban cities initially as an incentive for a steady labour force and later as a way of satisfying the demands of labour unions. Unfortunately, the rest of the population was excluded. Former North Africa colonies with close proximity to Europe (Algeria, Egypt, Libya, Morocco and Tunisia had employment based pension schemes in places as early as the 1950s and subsequently, Algeria, Egypt and Tunisia expanded their benefits to include unemployment benefits and extended leverage to the self employed.

However, former British colonies (such as Ghana, Nigeria, Kenya and Swaziland) initially focused more on providing benefits for work-related injuries through a worker’s compensation system. Not surprisingly, the first formalized social security legislation in Nigeria began with the workmen’s compensation Act of 1942 for the public and private sectors.

PUBLIC SECTOR PENSIONS REFORMS

The first formalized public-sector pension legislation in Nigeria the pension ordinance was enacted in 1951, with retroactive effect from January, 1946. the pension ordinance was amended several times until the enactment of the Pension Decree No. 102 of 1979 (with retroactive effect from 1974) for federal civil servants and the Armed Forces Pension Decree No 103 of 1979 for the military. The two decrees established non-contributory Defined Benefit (DB) pension schemes based on final salary. Both schemes were funded from operating expenses on a pay-as-you-go basis, with the exception of federal parastatals. In 1997, the parastatals under federal ministers were permitted to make individual pension arrangements and appoint a Board of Trustees (BOT) that administers the pension scheme (as specified in the Head of Service Standard Trust Deed and Rules) and decides on whether to maintain a self-insured pension scheme for their staff, transfer the management of the scheme to a third party pension fund manager or insure with an insurance company by paying a premium.

Remarkably however, the essence of the Pension Decree No. 102 of 1979 was preserved in subsequent federal pension laws for the public sector (including the Pension Act 1990, the Armed Forces Pension Act 1990, the police and other Agencies Pension Office Act, 1993 the police Pension Rights of Inspector General of Police Act 1993, and the insured schemes approved for federal parastatals) until the enactment of the Pension Reform Act 2004 on June 25, 2004.

In general, the preserved features include gratuity, pension, disability and survival benefits; and retirement provisions based on normal retirement at age 60 or 35 years of service and early retirement with 10 – 34 years of service for reduced pension benefits.

PRIVATE – SECTOR PENSION REFORMS

In the private sector in Nigeria, the emergence of pension scheme for employees did not begin until 1954, when the Nigeria Breweries Limited established the first DB pension – and – gratuity scheme. The United Africa Company (UAU) followed with a similar scheme in 1957 (Femi O. Odulana, 2007). Four years later, Nigeria established a National Provident Fund as its first formalized social protection programme or employees in the private sector. Established in 1961, the National Provident Fund (NPF) was mostly a savings scheme. In addition, the NPF provided basic old age, disability, death and unemployment benefits (temporary unemployment) and it required equal employee and employer contributions of four naira (#4.00) per month.

However, the NPF saw only modest changes until it was replaced in 1993 with another social insurance scheme, the Nigeria Social Insurance Trust Fund (NSITF). Established by Decree No. 73 of 1993 of the Federal Government of Nigeria to provide retirement, disability, funeral and survivor benefits to employees (and their survivors in the event of death) in the private sector, the NSITF scheme is also a contributory, employment based, defined benefit pension scheme. The NSITF scheme, which took over the assets and liabilities of the defunct NPF, became operational on July 1, 1994. All registered members of the new scheme and their contributions were similarly transferred.

The NSITF scheme was amended in 2001 to increase the contribution rates and to change the basis for determining contributions and in 2002 to introduce a minimum pension benefit. Although the scheme made it mandatory for all employers and employees in the private sector to register with the NSITF, No-complaint or defiant employers, their directors and other principal officers were not aggressively prosecuted.

Almost a decade after its implementation, 2004 the NSITF scheme was replaced with a more transparent, defined contribution pension scheme, commonly referred to as Contributory Pension Scheme.

PUBLIC AND PRIVATE SECTOR PENSION REFORM

The contributory Pension Scheme was established by the signing into law of Pension Reform Act (PRA) 2004 on June 25, 2004. The new Act contains creative safeguards for securing retirement benefit payments, well thought-out ideas regarding the administrative and management of pension fund assets. The new pension scheme is a decentralized pension system with individual retirement savings accounts privately managed by professional pension fund managers. In addition, it included an employer-life insurance scheme.

Even so, old concerns (such as poor governance and high administrative costs of running preexisting public pension scheme in the transition) have resurfaced and new concerns (such as potential impact of new demographic trends on the security of retirement benefits and the risk of outliving one’s retirement assets) have emerged. Although allowed to fully participate as licensed pension operators, the insurance sector complained about none representation on the Board of PenCom.

1.2       STATEMENT OF THE PROBLEM

Before the enactment of PRA 2004, the Vision 2010 Committee identified some issues and problems of pension schemes regarding administration, coverage, funding, benefits and asset management. The administrative problems of public pension schemes include: poor records – keeping procedure at pension office; tedious benefit payment procedure resulting in delays in payment and hardship for pensioners; delays in reimbursing state government for pension paid on behalf of Federal and Military Agencies; poor staffing, training and motivation of pension officers; and lack of MIS/ICT facilities for efficient and effective performance (Vision 2010, 1997, 24).

All contract and daily paid workers are not covered by public pension scheme. Most public pension schemes are unfunded, subjecting pensioners to the cash position of the government and delays in benefit payments. Most pension benefits are not reviewed regularly nor adjusted to reflect increases in the cost of living. The size of maximum pension benefits in the public-sector schemes is not uniform, varying from 80 per cent to 100 per cent of final salary (Vision 2010, 1997, 25). Finally, asset allocation criteria for public pension scheme are conservative and do not allow for optimal management. In addition, the asset of some selfinsured public pension schemes were being managed by nonprofessional managers, in spite of the availability of fund managers who are adept at using sophisticated investment, risk management and hedging techniques to minimize the impact of inflation, currency devaluation, and other adverse economic factors on pension fund assets.

Prior to Pension Reform Act, 2004, the earlier pension schemes were not fully funded, administration was not separated from custody and despite the initial participation of employer unions, organized Labour and trade unions in the design process of PRA 2004 and their eventual representation on the board of PenCom by NECA, NLC and NUP as specified in the Act, they still had some concerns about PRA 2004 and the change to a contributory pension scheme from a plethora of preexisting, non-contributory defined benefit pension schemes in the public sector. For example on July 20, 2004 the NLC, TUC, and CFTU formally presented their concerns about the PRA 2004 and the contributory pension scheme at a joint press conference.

The three unions expressed their key concerns and views in the following areas:

1. Exclusion of labour union inputs and recommendations during public hearing by Federal Legislators, particularly the senate, at critical moments of decision making;
2. Absence of “any effective and sustained strategy or measure to offset existing pension liabilities for pre-existing federal pension systems”;
3. Lack of actuarial analysis in the determination of the funding level for the redemption bonds to be used in reducing the accrued pension liabilities for pre-existing DB schemes under the federal pension systems-labour unions’ claim that the funding level specified in the Act, 5% of monthly Federal Wage Bill, was arbitrarily determined without a database on the actual federal employees covered under the transitional provisions of the Act;
4. Absence of gratuities (one-time lump-sum benefits) in the new pension scheme perceives as a benefit take-away;
5. High employee contribution rate ( a 114% increase) from NSITF 3.5% to 7.5% in light of other salary deductions such as income tax (10-15%) and the National Housing Scheme contribution rate of 2.5%;
6. Inadequate labour representation on the Board and exclusion of labour representation at the executive director level of PenCom;
7. Constitutionality of the inclusion of private pensions in PRA 2004 since, according to Section 173 of the FRN Constitution, the National Assembly can only legislate on “pension, gratuities and other like benefits payable out of the Consolidate Revenue Fund or any other public funds of the Federation;” and
8. Need to retain pre-existing, funded employer-sponsored pension and provident schemes in the private sector and some federal ministries, departments and agencies (NLC et al, 2004, 1-4). Other organized labour concerns about PRA 2004 included:
9. Loss of collective bargaining advantage inherent in a defined benefit pension scheme;
10. Exclusion of state and local government’s employee as well as people employed in the informal sector; v History of poor governance concerning pre-existing public pension schemes;
11. Fear of an employer’s potential use of downsizing to reduce or control its total contributions into employee RSAs;
12. Disagreement with the use of redemption bonds by the federal government to gradually reduce accrued pension liabilities for preexisting DB schemes under the federal pension system; and
13. Delays in payments of due and unpaid pension benefits for preexisting Federal DB Pension Schemes.

Obviously, though employee unions and trade union were aware of the additional burden on employers in the private sector (1% addition to employer contribution rate over NSITF 6.5% and an employer-pay-all life insurance coverage), a major concern for employees in the private sector about the new pension scheme is a whopping 114% increase in employee contribution rate from NSITF’s 3.5% to 7.5%. even worse, the contribution rate for public sector employees who are now participants in the DC pension scheme but who were prior participants in pre-existing, non-contributory public DB pension schemes went from zero to 7.5% (or 2.5% for the military).

Lastly, the prerequisite before introducing efficiency, transparency and accountability into pension payment and administration of any preexisting public pension scheme are the physical verification of the number of existing pensioners, creation of a credible database of existing pensioners and determination of employer outstanding pension liabilities. The need to complete such verification exercise before commencing benefit payments may have caused delays in the payment of due unpaid pension benefits to existing pensioners in preexisting federal pension scheme.

Pension Verification Exercises

The verification exercises for existing pensioners in the federal systems were conducted from April 2 though April 23, 2006 by PenCom in collaboration with appointed consultants; the Officers of the Heads of Civil Service, Accountant-General, Auditor-General and Budget Office of the Federation; and pension offices of federal ministries, departments and agencies. The exercises covered three categories of pensioners the federal pension systems: federal pensioners with federal share and pensioners who were not yet on pension payroll. Conducted at specified locations at federal ministries, departments and agencies in all the thirty six states of the federation and the FCT, the exercises included pensioners from six major pension departments, namely; the Military, Police, Office of the Head of Service, Federal Universities, FCT Administration, and Customs, Immigration and Prison. Although not in the federal pension systems, the verification exercises also covered retired primary school teachers. However, retired primary school teachers are covered by their local government pension systems. The main objectives of the verification exercises were:

1. To create a credible database of existing pensioners;
2. To determine the number of existing pensioner, due and unpaid pension benefits and remaining pension liabilities;
3. To reduce corruption and fraud in the administration of preexisting pension schemes;
4. To introduce transparency and accountability into pension payment and administration; and
5. To ensure prompt payment of pension benefits though direct deposit of such benefits into pensioners’ bank accounts (This Day, 2006, 29).

In August 2006, the Finance Minister of the Federation and the Director-General of PenCom announced the results of the verification exercises. The results indicated 260,000 pensioners in pre-existing federal pension systems and 75 billion naira of due and unpaid pension benefits. The Finance Minister confirmed that the Federal Government was considering the use of government bonds to finance the 75 billion naira of pension arrears (This Day, 2006,28). This approach was expected to provide the cash needed to offset the pension arrears. More details of the verification section present a brief summary of PRA 2004 and key feature of the Contributory Pension Scheme.

Pension Reform Act (PRA) 2004

The PRA 2004 was created on June 25, 2004 to repeal or replace prior, confusing patchwork of pension laws. However, only the pension provisions in the Nigeria Social Insurance Trust Fund (NSITF) Act 1993 were replaced by the Act. In addition, the PRA 2004 established a uniform contributory pension scheme for both the public and private sector.

In pension parlance, the new pension scheme is known as a Defined Contribution (DC) pension scheme while pre-existing pension schemes in the public sector and the NSITF scheme for the private sector are known as Defined Benefit (DB) pension scheme. As both names suggest, a defined contributory pension scheme specifies both employees and employer regular contribution rates into the scheme, but a defined benefit pension scheme specifies benefits at retirement in form of a formula. In addition, a DB pension scheme may be funded in advance or on a Pay-As-You-Go (PAYG) basis (Gbitse Barrow, 2008). For instance, the NSITF scheme was funded in advance through periodic employee and employer contributions. In contrast, most preexisting scheme under the federal pension systems are non-contributory DB schemes funded on a PAYG basis by the federal government with zero employee contributions. However, as a result of consistently high rates of returns plan assets over time, advance funding may generate pension fund assets which exceed pension liabilities. The sponsor of such a DB scheme benefits from any surpluses by reducing its future funding contribution levels to the scheme. On the other hand, any shortfalls may force the sponsor of DB scheme to make up for such deficits through planned increases in its future contribution levels.

Clearly, the new law introduces Nigeria’s first coherent policy on social security. If social security reform is a means for social development, change and progress, this seems to be a step in the right direction. PRA 2004 features quite a list of creative, innovative and well-conceived ideas on the design administration and management of a national pension scheme, including the investment of its assets.

The following are key features of PRA 2004 and the new contributory pension scheme established by the Act:

1. Conversion to a uniform, more transparent, defined contribution pension scheme from the NSITF scheme and well as a patchwork of predominantly pay-as-you-go, non-contributory, public-sector defined benefit schemes;
2. Employer-pay-all life insurance policy for each employee based on a multiple of (at least 3 times) annual emoluments.
3. Individual retirement savings accounts with monthly contributions based on annual emoluments (Annual emoluments are the sum of basic salary, housing and transport allowances);
4. Equally split minimum employee and employer contribution rates: 7.5% each; except for the military (2.5% by the employee and 12.5% by the employer);
5. Privatization of the management of the pension scheme and custody of its assets;
6. Management of the pension scheme and custody of its assets by licenced, professional Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs);
7. PFAs and PFCs must be special purpose vehicles (That is they cannot be involved in any other business model except the management and custody of pension funds and assets);
8. Transfers of assets of all pre-existing private-sector pension schemes to licenced, professional Pension Fund Custodians (PFCs);
9. Measurement and publication of the performances of pension fund administrators;
10. Establishment of a new 13-month Commission (the National Pension Commission) that is responsible for the regulation and supervision of all pension-related matters in Nigerian;
11. Expectation of efficient governance through strict supervision and examination of pension fund operators and enforcement of penalties for non-compliance; and
12. Improving public and stakeholders relations through education and client-focused dispute resolution.

1.3       OBJECTIVE OF THE STUDY

The objective of this study includes; ascertaining if there is any improvement in the management of pension in Nigeria as regards the Pension Reform Act of 2004 to critically evaluate the reason why the preceding regime was not very effective, again, to ascertain the bottlenecks and the way forward.

1.4       THE SIGNIFICANCE OF THE STUDY

The benefits inherent in this study shall be of immeasurable value. It is of interest to state that the Regulatory authority in the pension industry will see areas for further amendment of the Act, and formulation of policies of effective supervision. They players in the industry such as the PFAs and the PFCs will further enhance their performance and will be poised to serve their esteemed clients better. If the recommendations herein are implemented, the various contributors under the scheme and even pensioners who are already drawing pensions will be guaranteed enhanced benefits through better services, guaranteed/minimum pension, etc.

The government shall also benefit from this study through a stable and effective pension administration that would be a pride to behold unlike the immediate past that was characterized with woes and untold sufferings.

The ever increasing investment funds in the system will generate much economic activities and enhance our Gross Domestic Product (GDP).

1.5       RESEARCH QUESTIONS

The following research questions will be adopted in the cause of the study:

1. What were the problems with the old pension regime and how could it be corrected?
2. How do we sustain the present gains (if any)?
3. How desirable is guaranteed/minimum pension?
4. How is public awareness best handled to ensure the needed education on the present scheme becomes an integral part of the scheme?

1.6       HYPOTHESES

1. The present pension administration in Nigeria is not effective
2. The prospects are not bright and the system is unsustainable

1.7       THE SCOPE OF THE STUDY

The study seeks to evaluate the effectiveness of our present pension regime with reference to past experiences. It also proffers solution to make the industry dynamic and be able to effectively overcome future challenges. Emphasis is on the players in the Nigerian Pension Industry.

 

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