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. Moreso, 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 1

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  self- insured public pension schemes were being managed by non- professional 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 pre- existing, 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:

(i)      Exclusion  of  labour  union  inputs  and  recommendations  during public hearing by Federal Legislators, particularly the senate, at critical moments of decision making;

(ii)     Absence of “any effective and sustained strategy or measure to offset existing pension liabilities for pre-existing federal pension systems”;

(iii)  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;

(iv)    Absence  of  gratuities  (one-time  lump-sum  benefits) in  the  new pension scheme perceives as a benefit take-away;

(v)     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%;

(vi)    Inadequate labour representation on the Board and exclusion of labour representation at the executive director level of PenCom;

(vii)   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

(viii)  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:

 Loss  of  collective  bargaining  advantage  inherent  in  a  defined benefit pension scheme;

 Exclusion of state and local governments employee as well as people employed in the informal sector;

 History of poor governance concerning pre-existing public pension schemes;

 Fear of an employer’s potential use of downsizing to reduce or control its total contributions into employee RSAs;

 Disagreement with the use of redemption bonds by the federal government to gradually reduce accrued pension liabilities for pre- existing DB schemes under the federal pension system; and

 Delays in payments of due and unpaid pension benefits for pre- existing 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 pre- existing 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 pre- existing 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:

      To create a credible database of existing pensioners;

          To determine the number of existing pensioner, due and unpaid pension benefits and remaining pension liabilities;

          To reduce corruption and fraud in the administration of pre- existing pension schemes;

            To introduce transparency and accountability into pension payment and administration; and

            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 presents 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 pre- existing 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; to ascertain 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:

(i)      What were the problems with the old pension regime and how could it be corrected?

(ii)     How do we sustain the present gains (if any)? (iii)     How desirable is guaranteed/minimum pension?

(iv)   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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