Analysing Nigeria’s Contributory Pension Scheme and economic growth

Analysing Nigeria's Contributory Pension Scheme and economic growth

By Rukayat Adeyemi

The Pension Reform Act 2004, which was repealed and replaced with the Pension Reform Act 2014, established a mandatory Contributory Pension Scheme (CPS) for workers in both the public and private sectors.

Section 4 of the Act provides for a mandatory minimum contribution of 10 and eight per cent of employee’s monthly emolument by the employer and employee respectively.

Stakeholders in the pension industry say the CPS, being a funded scheme, has accumulated a huge pool of long-term investable fund, which is being invested, leading to national economic development.

As prescribed, each employee is to open a Retirement Savings Account (RSA) into which the contributions are to be paid, with a Pension Fund Administrator (PFA) licensed by the National Pension Commission (PenCom).

PenCom was established under section 17 of the Pension Reform Act, to regulate and supervise the effective administration of pension matters in the country.

The PFA is to manage and invest the fund in the RSA, from where a contributor will draw benefits on retirement, in line with the provisions of the Act.

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Being a mandatory scheme, CPS has compelled employees and employers in the public and private sectors to collectively save a minimum of 18 per cent of an employee’s monthly emolument into the employee RSA, from where employees will be paid retirement benefits.

Section 51 of the Act provides for Closed Pension Fund Administrators (CPFAs) and section 56 provides for Pension Fund Custodian (PFC’s).

CPFAs are some pension schemes in the private sector existing prior to the introduction of the CPS in June 2004 and allowed to continue, subject to guidelines issued by PenCom.

The companies are required to have operated a fully funded existing pension scheme with assets of at least N500 million.

There are four PFC’s responsible for the safe keeping of pension assets in their custody, and in all, there are 32 licensed pension operators in the industry presently.

Mr Ivor Takor, Executive Director, Centre For Pension Right Advocacy says the CPS, being a mandatory scheme, has increased national savings.

Takor, also a legal practitioner, explained that this arises as pensions fund liabilities have a long maturity period and consequently, are open to long term investment through long term equity stakes.

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He said that Nigeria’s Net Assets Value of Pension Assets under the CPS stood at N12.78 trillion, which was a huge achievement.

“This is against a background of the Federal Government’s budgetary pension deficit estimated at N2 trillion as at June 2004 when the CPS took off, and a non-existing pension industry before the CPS took off.

“Of the 12.78 trillion Net Assets Value, 64.17 per cent was invested in FGN Securities, 6.75 per cent  in Ordinary shares, 16.5 per cent in local money market securities, 0.70 per cent in states governments securities .

“Also, 1.22 per cent  was invested in Real Estate, 0.52 per cent in Mutual Funds, 7.49 per cent  Corporate Debt Securities, 0.52 per cent Infrastructure Funds, 0.27 per cent  Private Equity, 0.63 per cent Cash and other assets.

‘’Investment of pension fund in federal and states governments’ securities has assisted these governments to cost-effectively manage their national debts, thereby contributing in the solving of their financial needs and contributing to the stability in the market of government debts, ” he said.

According to him, pension fund flows into the economy as an independent financial intermediary, as the nation’s private business enterprises no longer rely on banks as the sole sources of outside capital for the financing of their businesses.

He noted that pension fund has gotten into real estate, infrastructure and mutual fund, thereby providing a domestic source of borrowing, which does not attract excessive high interest rate.

The legal practitioner said pension fund has also impacted positively on other sub sectors of the financial sector of the economy.

Takor said that the fund was pushing for improvements in the architecture of allocative mechanisms, including investment, risk management, better accounting, auditing, brokerage and information disclosure.

He said through the fund, insurance supervision and management for Group Life Insurance and annuity, new securities and rating agencies had developed.

“The fund has developed equity market, which is enhancing overall economic development.

“The role of pension fund in the growth of life insurance companies in the country has increased and this has significantly assisted in the growth of the insurance industry, ” he added.

The advocate said that the transfer of resources in favour of long term assets by the fund has significantly impacted on the nation’s Gross Domestic Product (GDP) growth rate.

Takor emphasised that the growing size of pension assets was impacting on the financial landscape, with a growing role of institutional investors, which are the PFAs and Life insurance companies.

“This is indicative that the CPS is impacting positively on the economic growth of the nation, ” he said.

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According to him, PenCom and pension operators have provided employment platform for thousands of job seekers, thereby helping to reduce the rate of unemployment in Nigeria.

Takor noted that CPS has grown significantly in the past 17 years by providing painless access to retirement income to members of the scheme as against the unsustainable pay-as-you-go defined benefits scheme.

He said it was commendable that the Pension Reform Act 2014 had been expanded to cover CPS to self-employed and persons working in organisations with less than three employees through the establishment of the Micro pension plan, effective January 2019.

“This category of workers constitute a large percentage of the working population in the informal sector, segmented into three broad categories; the low income earners, high income earners and the SMEs, ” he said.

According to him, the CPS, in spite of its remarkable achievements, has its challenges, ranging from low coverage, lack of political will especially on the part of state governments.

Takor expressed worry that 24 states across the country had enacted laws on the CPS and out of these, only four states were fully implementing the scheme.

According to him, full compliance with the provisions of the Pension Reform Act 2014 by the federal and state government would enhance improved service delivery by pension operators and increased public awareness.

On his part, Mr Mark Ogbonna, Secretary, Nigeria Building and Road Research Institute (NBRRI) Pensioners Association, while lauding the successes recorded through the CPS , called for an overhaul of the scheme to further improve its contribution to the nation’s growth.

Ogbonna said that government at all levels and employers of labour must be more committed to the remittance of their employers’ pension contributions.

He said the National Assembly should also fast track processes toward legislation on the review of the lump sum to an appreciable percentage to improve the well-being of the retirees.

“It is sad that some state governments are defaulting in the remittance of the pension contributions while some in the private sectors are not also faithful with the contribution.

“When retirees receive an appreciable percentage of their total savings as lump sum and timely too, they would be able to invest in a viable business that would also contribute to economic growth,” he said.

Without gainsaying, the CPS, being operational since 2004, has contributed to driving the nation’s economy through the huge pension fund available for investment into various sectors of the economy.

While the National Assembly recently moves to review the percentage of lump sum payable to retirees from the 25 per cent of the total savings currently in place, government at all levels and employers of labour have been charged to show more commitment to improving and sustaining the scheme.


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