Our new pension scheme is one of the best in the world – Ahmad

By ISAAC ANUMIHE

Before the establishment of the National Pension Commission (PenCom) nine years ago, Nigeria had operated, particularly in the public sector, defined benefit (DB) pension scheme, which was largely unfunded and non-contributory. The scheme led to a massive accumulation of pension debt and became unsustainable, largely due to lack of adequate and timely budgetary provisions as well as increases in salaries and pensions.

The administration of the scheme was very weak, inefficient, less transparent and cumbersome, leading to bureaucracy and highly liable to corrupt practices. Owing to the lack of reliable records of pensioners, huge amounts of resources on what became yearly verification exercises were expended, which did not result into the timely and efficient payment of pension. These issues led to the decision of the Federal Government, in June 2004, to introduce a system that is sustainable and has the capacity to achieve the ultimate goal of providing a stable, predictable and adequate source of retirement income for each worker in the country.

Thus, the Pension Reform Act 2004, which was signed into law ushering in a Contributory Pension Scheme (CPS) that is fully funded, privately managed and 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. Director General of PenCom, Mr Mohammad Ahmad, who will complete his term in the commission this month, in this interview, spoke on the journey so far, the challenge in setting up a functional pension scheme and the way forward. Excerpts:

In the eight years of pension administration in Nigeria, what have been the greatest challenges in pension administration?

Basically, we started an industry that never existed, like I always say. There are three issues that we needed to focus on. One, we had a pension reform that is intended to have a scheme, that is fully funded and privately managed in a more efficient manner, a scheme that is meant to replace other old schemes, particularly at the Federal Government level, so that it can be more transparent. And the reform also provided that it should be managed by regulatory entities. But beyond that, of course, it should be regulated and supervised by a government agency called the National Pension Commission (PenCom).

Today, we have a National Pension Commission and some of us have been associated with this institution from the beginning, and we hope that by the end of December or middle of December, we are exiting and other people will take over from us, so we have regulatory supervisory institution that is charged with the responsibility of regulating and supervising pension matters, weather at the federal level, at the state level or in the private sector.

Pensioners have accumulated over a period, so we do have an industry. We have been able to license and regulate operators, private sectors, asset managers and custodians. So, in essence, these are the things we have been able to do. Of course, there were challenges, and the challenges included for instance, one, having to be able to explain to Nigerians what this is all about, having the educational enlightenment, and we want to say that with your support, we have made some achievements but, of course, we are far from what we wanted to have. So, public education and enlightenment is something that must continue, to ensure that at least people understand. As an industry and to be precise, as a regulator, we decided to focus on educating and enlightening Nigerians to have their buying-in because. If people buy-in, they have voluntary compliance; they know what they are doing and so, they know the benefits and, therefore, they can easily comply, that is one.

But beyond that, of course, is the fact that we needed to go to the next level so that people would comply. I need to tell you what we have been able to do…and that takes me to the next issue, compliance.

Do private sector employers get their employees to registere and if they so get their employees registered, are they contributing? 

As we have always said, for the formal sector of the Nigerian economy, majority of the employers are complying. But as you are aware, the bulk of our employers are actually in the informal sector, given the fact that we are looking at the employment of five workers and above, now how do you capture that?  Historically, an economy like the Nigerian economy, managing the informal sector is the most challenging, weather you are dealing with tax issues or you are looking at compliance issues. The reason is we don’t have a structure of what an informal sector is all about.  Businesses are not properly regulated; they are not properly registered, till date. You cannot go to any agency or office in this country where you can pick the list of active registered businesses or employers of labour. Recently, SMEDAN and, I think National Bureau of Statistics, did some survey of SMEs that employ three workers and above, and they came to a figure of about 40 million, if you multiply that by three, that would give you a rough estimate of what the employment situation of the country is, at least three workers and above. So the challenges…how do you get the data to work on and how do you also structure the issue of getting the benefits to be paid.  Somebody, who has a grocery store earns income on a daily basis and, therefore, at the end of the month, he would have used that money for something else, so how do you ensure that he pays his contribution, or on behalf of his employees, regularly. So, we needed to have a separate structure of how payment of contribution should be done and how Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs) can go and get the money. It is in that regard, for instance, that we are developing a regulatory framework for the informal sector. We also want to link it up with an important aspect of the pension reform that has not been implemented, and that is the ‘mini pension guarantee’.

The intention of the mini pension guarantee is to take, for instance, if a contributor has saved for a X number of years, maybe for 15 or 20 years, then that person is guaranteed a minimum pension, come rain come shine. And the whole essence is to encourage national saving.  We are still working on that structure and we hope with that, there would be incentive for people to save. The third issue, of course, has to do with the states. The states are supposed to establish their own pension scheme. We have been able to work with them to commence the contributive pension scheme, the flagship, of course, in this country is Lagos State. They have very effective contributive pension scheme. We have about 21 states that are in different stages of compliance but, unfortunately, the compliance has been a bit slow and haphazard. The reason being that it is not mandatory for them, so what they did was to enact their own laws. Ideally, the law should have compelled them, but you know the way and manner people comply in this country. Some of them that had started paying the contribution stopped or pay haphazardly. But we would continue to engage them.

The second issue is that in spite of the prospect, the private sector, which initially was reluctant in joining this scheme, the reason being that they felt suspicious of government scheme, are now the greatest contributors. And now, private workers are joining the new scheme. The future of this economy is not about government business, it is about the private sector. Employment can only be generated by the private sector and we hope and pray that we would be able to build on that. I think these are the national issues I would like to dwell on.

There seem to be a lack of confidence in the scheme; and what is the striking difference between the old and the new scheme?

At the federal level prior to 2004, we had what we called the defined benefit scheme. In other words, the federal government does not set aside money for the payment of pension, but on annual basis it has an estimate that X number of people would be retiring, so let us pay pension. So, funds were not being made available and, therefore, that becomes an issue.  And the second issue is a define benefit based on salary, come rain come shine. My employer has agreed that when I retire, I am going to get 80 per cent of my salary for the rest of my life, that is how it is structured but it is not funded.  Beyond that, of course, is the fact that a pension department was established, where the government send money to them to pay pensioners, so they place the money in banks. What happened and what is still happening is ‘why the public hearing at the Senate becomes relevant. The federal government sends the money to the pension department, they open account with the banks, keeps the money in banks. Of course, in fixed deposit accounts or current accounts, as the case may be, and possibly take from it because there is an incentive that if you keep money with bank A without utilizing it; without paying pensioners, there is an incentive such money brings from where it is being kept. As a result of which people that have retired are not even on the payroll, those that are on the payrol have their names off and on, and all the time there has to be verification exercises. So, the system was cumbersome and not transparent. You have to go and beg; you have to come to Abuja to get some of these things done. I needed to appear for the public hearing. The people in charge of pension department took advantage of the internal weaknesses of the process and created that problem and, at the end of the day, you have government making payment and the pensioners are not getting the benefit, and somebody in between is getting the benefit. So, you have fund that is not in a dedicated account and someone is using the money.

On the other hand, the contributive pension scheme says that first and foremost it must be fully funded, so there is amount that is set-aside on a monthly basis so you don’t need to wait for budgetary allocation for that. Two; an employee must open a retirement savings account while his collection is being paid into that account, so it becomes an account owned by individuals and can be traced, so if someone tampers with that account, there are appropriate actions that can be taken. Unlike a situation when you have a pool account and somebody decided to take money from there and refuse to pay pensioners. I think it is privately managed and licensed by National Pension Commission with specific rules and regulations and that we monitor and supervise and therefore, we can easily challenge, but beyond that, of course, is the fact that we have two institutions. We have the Administrators and the Custodians. The Administrator does not have access to the fund, and each one of them is supposed to report on the fund so clearly there is segregation of duties. And even in the event of default, whatever happens to the fund, the shareholders of the Custodian is obliged to make good whatever fund that may have been lost either as a result of fund trapped in the banks or any other financial institution.

These are clearly defined so it is impossible that what happened under the first pension department would happen under the contributive pension scheme. And that is why today we do not have any incidence that funds have been diverted because it is extremely difficult. In any case these funds are even invested in diverse portfolio, in treasury bills, in treasury bonds, in equity and so many other instruments. So, it is not as if there is a fund kept in a vault of the national pension commission, they are being managed in different portfolio.

But what has the government done to address the issue of this pension departments, the Pension Reform Act provided for the pension department, ideally it is a very simple process, it is a payroll and the movement of the payroll of a pensioner is very restricted, you don’t give pensioner annual increment. So if am earning N10,000 as a pensioner, except there is a pension increase which affects all of us, my pension would continue to be N10,000 till I die. Ideally it is a very simple process that should not have attracted the kind of problem that we are facing. But because of the fact that the bulk fund are being moved, the funds are being kept and played around with by the various persons, and they took advantage of that.  That is why pensioners are suffering, so what we are saying is that let us now implement under the ambit of the law that says we need a single department which all the pension departments, weather civilian, Police, Customs, Prisons, Immigration and parastatals would now be in one department, that is what we call the pension transitional administration department, the government has given approval and already there is an inter- ministerial committee which the DG PENCOM chairs, to ensure that at least it is implemented.

How many people have retired since the inception of the scheme?

People retiring under this scheme started retiring in July 2007, so we can just say five years, in the last five years, how many have retired. As at September, 54,000 contributors have retired under the new scheme and close to about N150 million in lump sum have been paid to these group of retires both from the public and when I say public it include both the federal and the state governments, for the states that has joined the scheme are the private sector and they are being paid as at when due. However, there is also another challenge and the challenge is that for those that retired under the federal government, we have a period that arrears were built up, from last year, that’s towards the end of last year to this year.

And this is what happened, section 29 of the Pension Reform Acts provides that the federal government should be setting aside 5 per cent of its wage bill into a pension fund account to be managed by the Central Bank of Nigeria for the purpose of redeeming past liability of those who are retiring under the new scheme. However, the 5 per cent was not being paid, the reason being that appropriate appropriation is made from by the budget office at the National Assembly, the amount were not being appropriated as required.  Can’t the government or the regulators undergo their own process since they know people would retire?

Now let me tell you how it works, the PFAs write to all prospective retirees six months in advance, you are going to retire, please ensure that all your documentation is ready, and majority do not care to respond. They send SMS, they send letters, some will say they did not see the letters, some will say yes they have seen the letters but I was busy trying to tidy up.  So we have that challenge, for instance, one is being asked to provide all letters of employment, evidence that he has worked with that organization and other documents that have been listed. It is the employee that needed to file those documents and for us, six months is sufficient enough to provide these documents and the benefits are processed in advance but generally, actually it is the civil servant, we don’t have such problems with the private sector, it is just our civil servants at the federal level who will normally do not think about issues that are relevant.  But it fast tracks the process and that is our concern.

On the small take-home after the lump sum has been paid.

Let me try and pick the three issues one after the other. There are two different schemes, the defined scheme benefit of the pay as you go is the final salary, so in other words, when you retire, you get 80 per cent as your pension for the rest of your life, I can tell you it is one of the most generous in the world, except for Saudi Arabia that has 100 per cent, Netherlands has about 105 per cent, most African countries have under 40 per cent as theirs are what you call replacement ration.  Most African countries and most emerging economies have under 40 per cent. Forty per cent is the ILO convention that ideally that it should be up to 40 per cent. The second issue is that, there are two things you either have your money now or assume that someone is going to give you money. Take for instance, because the group of people we are looking at are those who work for the federal government, the private sector does not have that, because they don’t have the money to support such generosity, but assuming if you had worked for the Nigerian Airways, okay, you will not even have the 80 per cent, because that institution must have been dead or National Shipping Line  as the case may be or so many other government agencies that have gone down, or NITEL, for instance and NEPA very soon.  So the point is that this new scheme is that you have your money, your money is there. The other scheme, the old scheme is that you are depending on budgetary allocations that may or may not come basically. So, but the most important thing is that this is the money you have. So obviously it is lower under the new scheme than under the old scheme because the new scheme is about sustainability, how do you ensure that? But beyond that is the fact that the old scheme was terminated as at June 2004, so you may be a permanent secretary today but perhaps you are a deputy director in 2004, and therefore your pension will be low, and somebody who was a director in 2004, will even earn more than you do. So basically, the old scheme has been terminated and the new scheme takes off. There is no doubt about it, the comfort of those who will be retiring in the next ten years from 2007, their pension will be low. But those who have time to save, I can tell you at the end of the day, they are going to accumulate more money than even under the old scheme, basically because they have a long time to save. The second issue about the limited time, after 18 years or so or 15 years, there is a slack inside, it is over 20 years but that is not the issue, the mortality table we are using today in Nigeria is the one that the British used in 1955, and secondly we don’t have mortality table. The mortality rate in this country is still very low in sub- Saharan Africa.

Most contributors are not aware of how their money is being managed.

Now as at today, what contributors have is what we call retirement savings account statements on a quarterly basis, you can have a hard copy, some PFAs can give you access to their websites so that you could see your balance 24/7. That gives you the idea of how much has been contributed by your employers and what has been added over a period and you get alert for some of them. By the time we create these funds, you will now know which fund you want your money to be invested.  So that means to a larger extent we have addressed that concern. Certainly and basically that is the truth. On the issue of minimum pension guarantee, what this is saying is that there are small savers, those who fall under the low income earners, who may not contribute enough, but perhaps migrant workers. I work for six months with Julius Berger and during rainy season, JB’s business has dropped so I have been rationalized and then the following year I move to Dantata and Sawoe, a road construction company, then I start a job, so I have a certain interval for which I have saved over a period but such savings would not accumulate huge amount over a period, for that reason, what the law is saying is that for those of us who have saved over a minimum number of years, when they are retiring, the pension they would take would be their minimum salary as their pension so that nobody would be earning pension below the minimum wage. That is the idea, as long as that person contributes, that is an incentive for people to come on board.  Now the challenge we have today in our society is that who bears that cost?

What is your reaction to the current debate that pension fund could be applied to financing capital projects?

Honestly that is what pension assets should do because pension assets are long term assets and they should finance long term assets.  And because they finance long time liability, they are available. I started work at the age of 23 and I am retiring at the age of 60, for instance, or 35 years after service, so I have 35 years to save, those funds are available for investment and therefore we can have a conference and decide to issue a bond of 20 years, and they take the money and invest in infrastructure.

It is good, however, there must be clearly defined rules and regulations.