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Untold Story of a Pension Scheme

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Pension is important for employees to prepare for their old age when they must have retired from active service. In the past, pension administration was fraught with many challenges ranging from fraud to poor documentation. The reform to pension administration which began in 2004 has by and large brought succour to pensioners. MOSES EMORINKEN writes about the challenges facing pension.

The Contributory Pension Scheme (CPS) came as a beacon of hope to millions of pensioners and prospective retirees because it brought in its wake  expectations of a safe and secured retirement life.

From its inception in 2004 and further amendments of the Pension Reform Act (PFA) in 2014, the CPS has not only surpassed expectations, but has contributed immensely to the economy of the country – pooling over N8.9trillion in pension asset that nine parameters for compliance with the CPS – these parameters are: enactment of law, administrative structure, registration of employees, choice of pension fund administrator, remittance of pension contributions, actuarial valuation, opening Retirement Benefits Bond Redemption Fund Account (RBBRFA), funding of accrued rights and group life insurance.


What’s important to average worker?

Among the nine parameters by PenCom for a fully compliant state to the CPS, remittance by the states for both employer and employee pension contributions takes a chief position because it goes a long way to not only ensure the payment of pensions, but also ensure that the contributors get dividends on their contributions.

These dividends, according to the Commission, can go as high as 150 per cent depending on the timely and accurate remittance of pension contributions by the states.

According to the Head of Corporate Communications at PenCom, Mr. Peter Aghahowa: “The Nigerian worker is very concerned about the timely and complete remittance of his or her pension contributions.

“Also, if a pension scheme fails to deliver on its promises of a safe and secured retirement future for pensioners, ultimately, it is the retirees that will bear the brunt. Hence, there is interest in the complete and timely remittance of their pension contributions.”

In carrying out this report, focus was on remittances – the number of states that are making complete remittances of both employer and employee contributions.

According to the report from PenCom, states that are remitting both workers and employer contribution up to date are Lagos, Kaduna, Edo, and FCT.

Ekiti State has remitted employer and employee pension contributions up till January this year.

Some states are however not under the CPS, but are operating other pension schemes like the Defined Benefit Scheme (DBS) and Contributory Defined Benefit Scheme (CDBS). These states are – Katsina, Kano, Jigawa, Adamawa, Bauchi, Gombe, and Yobe.

States such as Kebbi, Zamfara, Delta, and Rivers are remitting only employees portion of the contribution and some even have huge backlog of unremitted employer pension contributions.

States such as Katsina, Sokoto, Benue, Adamawa, Borno, Gombe, Taraba, Benue, Kogi, Kwara, Nasarawa, Plateau, Ogun, Oyo, Abia, Ebonyi, Enugu, Imo, Akwa Ibom, Bayelsa, and Cross River have not remitted any amount for both employer and employee pension contributions.

Yobe State has done fairly well with DBS. They pay their pensioners as they retire; they don’t have huge arrears.

States such as Ondo, Osun, and Anambra are remitting contributions haphazardly, while Niger State stopped remittances since 2015 and is yet to resume.

It was also gathered that although, there are laws dovetailing from the federal laws which say remittances should be made within seven days of payment of salary; if that is  applied, compliance level by states may be zero.

However, the travesty of the real situation will be to focus on states that have enacted laws for the Contributory Pension Scheme (CPS), which at the moment stands at 24 states. This does not do justice to undressing the real situation of the scheme in the country.

The commission further explained that constitutionally, PenCom has no power to dictate the scheme that a state runs; it can only recognise their scheme and guide them accordingly.

“We will continue to engage states that are yet to key into the CPS on different levels; from the highest level in the state; the engagement is collaborative, labour is also involved.

“However, the implementation of the scheme in each state depends on the law the state has passed; once a state assembly has passed their pension law, we as a Commission are only going to supervise and guide them based on the law that has been passed,” he said.


 CDBS: old wine in new skin?

According to the quarterly report from PenCom, 15 states have made progress in the implementation of the scheme, eight have sent bills for its enactment.

However, following the CPS is the introduction of the Contributory Defined Benefit Scheme (CDBS) by some states – five states, namely, Katsina, Kano, Jigawa, Bauchi, and Gombe. Two states still operate the DBS. They are Adamawa and Yobe states.

A lot of Nigerians are aware of the embattled Defined Benefit Scheme (DBS) and how it operates, however, the novel scheme – CDBS, seems to have a lot of grey areas that industry experts and stakeholders are yet to fully understand.

Although more researches are being carried out into it, it seems to work in a similar fashion as the DBS does, maybe save for the addendum of the contributory to the DBS, and the fact that they make some contributions.

There are events to prove the sorry and pitiable state that the DBS put many  Nigerian pensioners and their families.

Still, some states seem not to take the exercise serious. The big question will now be – If you say you are running a DBS, are you running it well?

From findings, in the DBS, one doesn’t need to go to school to supervise it. But some of the new schemes that are coming up now like the Contributory Defined Benefit Scheme (CDBS), need to be properly understood and studied. Hence, states need to be weary in quickly embracing and latching upon it.

Information from the apex pension regulator revealed that it is currently studying the scheme and working out a framework for the CDBS because some states are already doing it. This the Commission intends to undertake in order to better supervise and regulate that type of scheme.

There are always exceptions to every rule, as Jigawa State seems to be doing well (100 per cent) with the CDBS and works closely with the PenCom for support and technical advice.

Information from the Commission revealed that the state for instance, has been successful in operating the CDBS and it works 100 per cent closely with the state, even though the scheme is new to both the state and the Commission.


Worry over rate determination

One topic that continues to raise a groundswell of debate among stakeholders in the pension sector is whether or not the percentage contribution benchmark for the CPS or any other pension scheme is scientifically determined.

How do you know that 18 per cent will suffice to guarantee a pleasant retirement for the Nigerian worker?

Investigation revealed that there is a big question mark on the CPS and CDBS in terms of the proportion of contribution because it is largely not scientifically determined.

That is why some people are complaining that their benefits under CPS are not comparable to DBS.

The simple reason is because the 7.5/7.5per cent  decided in 2004 was not a science. What makes anybody think that 7.5 per cent  was enough contribution that people will retire and be happy about?

No wonder in 2014 it was jacked up to 1 per cent . Even the 18 per cent, what is the science behind it?

The apex regulatory body for pension in Nigeria and other stakeholders seriously need to have this very important conversation for the collective good of the people.

It is the same extension to CDBS. You determine a rate of contribution, and it wasn’t scientifically determined; there was no actuarial valuation at the point that decision was taken. So, you cannot say whether or not that 20 per cent or 25 per cent that is put in that pool and is being managed, whether it can guarantee the payments that are embedded in a DBS.

Because in a DBS the payments are straight forward. What gives you the comfort that the contributions that are being made in those proportions can pay these people out when the time comes?

There is a risk imbedded in the CDBS that one day people will retire and there will be no money to pay them because the contributions that are being made now are based on per head contributions of workers.

If anything that is happening in the country is anything to go by, take a case like Kaduna State, its workforce between 2016 and 2018 have dropped by close to 40 percent because at one time in 2017, the governor decided to retire everybody that has two years to go; all people that are 33 years in service, and those that were 58 years old were sent on forceful retirement.

Meanwhile, if Kaduna were doing CDBS the total pool of contributions was based on per head of workers contribution, the number has dropped. This means that the amount that will aggregate in the pool will drop. So, a day will come that somebody will retire and there is no kobo to pay him or her, because the number of workers that are contributing to it has dropped. This is a risk that the system runs.

You don’t need science to know the likely implication of running a scheme like the CDBS – a rate of contribution that is not scientifically determined, and some of the inner workings of that scheme, the scheme runs itself, meaning the cost of running that scheme is borne by the scheme.

Unless that is checked, there are tendencies that  the cost of running the scheme will increase significantly in years ahead.

A time may come when the returns made from the investments of that scheme are all taken up by the operating cost. It may mean that the N1 you put in today remains N1 for the next five years. That is a diminution of the scheme.

This is not an outright condemnation of the scheme, but a sign of caution on the need for both the PenCom and states doing it to study it well before rubber stamping it.

The CDBS can never be the same with the CPS because of the differences in its structures, framework, processes, and workings.

Therefore, states that are doing CDBS cannot be regarded as compliant states because they are introducing other pension schemes aside the CPS.

Also, some states that are committed to DBS are doing well. Yobe State for example has done fairly well with DBS. They pay their pensioners as they retire; they don’t have huge arrears.

The pension stratosphere changed from DBS to CPS because it wasn’t working, but if Yobe is working, our only prayer is that it is not person-dependent.

If it works well because of the governor there today, when he is no longer there, they will be like any other state and that leads to the challenges that DBS had; they will start to be experiencing it.

Aghahowa said: “The Commission is mandated to supervise all pension schemes, so, whatever you call your pension scheme, if you pass it and drag the commission into it, how do you drag the commission – see what we are doing. If you offer your law to our Commission to review it, then you have brought yourself to our court.

“Constitutionally, we have no right to say you must put in A,B,C,D, because constitutionally you have the powers to design your pension scheme the way it suits you, but what we do, is that our parameter for compliance are what helps us select our babies.


“If you say you are running a contributory pension scheme, we expect to find all the nine parameters (characteristics); if we don’t find those parameters, yes you are running a pension scheme but we won’t call it contributory.

“We have model state laws for contributory pension scheme; we expect you to adopt the major ingredient of that law in your law, and those major ingredients include many or all of those parameters that we have there.

“If you have a law and invite us to take a look at it, we will do. You may tell us you want to continue with define benefits scheme, but look at it, it is fine we will take a look.

“We want to expect that when people retire, you pay them their benefits based on the dictates of the scheme you run; how much of their gratuity do you pay, do you pay on time, or as the practice is all over the country.”


Impact of haphazard remittances 

Aghahowa said the effect of haphazard remittances by states on the Commission is tertiary, the primary effect is that it is affecting the contributor directly.

“It is not good enough for you to tell me ‘don’t worry we will pay’, that is not the way this scheme is designed to work; it is designed to work in a manner that seven days after you pay salaries, you remit complete pension contributions (employer/employee).

“Once remittances by states are done in a timely and complete manner, the workers in turn will reap very good dividends and returns on their investments.

‘’It is obvious then that the labour force in the states will either benefit from or suffer the consequences of partial remittances.

‘’On the larger economic scale, it also means we are not having so much funds coming into the system; because the more funds you have coming into the system, the more funds you have to invest in infrastructure, and other things that can help economic growth in different ways,” he said.

Therefore, not funding the RSA affects both the retirees and the economy of the country.

According to findings, between 2011 and 2017, a number of PFAs returned 100 per cent double of what was given to them in 2011.

‘’We also found out that, as at February this year, the amount of uncredited contributions from Akure was over N1.2billion (that is, funds still hanging somewhere). Port Harcourt figure for December 2018 was N1.4billion. When the Commission raised the issue, few states appeared to have done some reconciliations and there was a token reduction.

‘’More states and PFAs have started to take the matter seriously now,” PenCom said.

The President, Pension Fund Operators Association of Nigeria, Mrs. Aderonke Adedeji spoke on the issue, saying that the “non remittance and, or irregular remittance has several implications. The most important and of greatest concern is the impact on contributors as they run the risk of lower than expected pension at retirement.”

She explained that the this shortfall in funding means the PFAs cannot invest such funds, thus denying the contributors  income on their RSA. “The income element of an RSA is a critical part of the funds that make up the pension at retirement. Consequen, the country’s objective of eliminating old age poverty becomes challenging,” she said.

Mrs. Adedeji listed other implications of delayed, or non-remittances as the slower growth in the nations pool of long term funds which is necessary to drive economic development, saying Pension funds, if given the right legislative and executive government support, as well as an effective regulatory environment, have the potential to transform the economy.

She said the impact of pension funds on nation building is evidenced in many countries. In South Africa, she said, the pension assets are almost the same size as the GDP, whereas in Namibia, it is over 80 per cent as against Nigeria where it is estimated at on a paltry seven per cent.

Granted that the pension scheme in Nigeria is relatively younger, the fact remains that we still have a long way to go, she said, adding though that there is room for improvement in the funding.

Source: thenationonlineng

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