Most salary earners spend a substantial part of their earnings with very little savings while some actually spend their salaries in advance. This is further compounded by the typical African - or should I say Nigerian - family setting where one “gainfully employed” person supports as much as ten or more unemployed family members and friends.
Most people do not believe in planning for the future due to their religious inclinations. They believe it is a sin to be anxious about tomorrow, which includes planning and saving for the rainy day, because it is only God that can take care of tomorrow. Many people hold this view faithfully notwithstanding that they see retirees who are virtually destitute after long years of active service as a result of failure to adequately prepare for the future.
Many Nigerians like to throw money around. They often spend money they do not have to buy things they probably don't need. While citizens of other countries can afford to be profligate and still have a reliable social security system to fall back on in their old age, Nigeria does not have a robust social security system hence the need for individuals to save and invest.
Prior to the commencement of the Pension Reform Act (the Act), the public service pension scheme was largely unfunded which means it was wholly dependent on erratic budgetary allocations. Even where budgetary provisions were made, they were inadequate and usually not released in a timely manner to pensioners. This ugly trend added to the feeling of hopelessness, insecurity and escalated corruption in the active work force as people struggle to get their share of the national cake sometimes before it is fully baked. Regrettably, even in the private sector, most workers were not covered by any form of retirement benefit arrangements, thereby undermining the social security of retirees in the country.
Under the old public sector scheme no contributions were made, and projections were required to be made of the pension entitlements of each employee by the employer, with such projections being determined by the employee's years of service and earnings. Thus, the pension obligations are effectively the debt obligation of the employer, which assumes the risk of having insufficient funds to satisfy the contractual payments that must be made to retired employees. The pension liabilities of the Government at the inception of the Act in 2004 was said to be about N2 trillion. If the reforms had not been undertaken, it was envisaged that in a few years to come, pension obligations might exceed the salary of active workers.
In contrast, under the new scheme, the employer does not guarantee any certain amount in retirement. The payments that will be made to qualifying participants upon retirement will depend on the growth of the scheme assets. As the name suggests, the new scheme is contributory in nature, making it mandatory on employers and workers in the public sector and private sector organisations with 5 or more employees to contribute 7.5% each of the emoluments of the employee into a Retirement Savings Account (RSA). For the military, the contribution is 2.5%, with the government contributing 12.5%. One of the major objectives of the new scheme is to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.
There is no gainsaying that the scheme is an excellent initiative which could be of immense benefit to Nigeria and indeed Nigerians. The maintenance of a RSA gives every employee the responsibility over their retirement savings. This means pensioners will no longer be at the mercy of employers, and are assured of regular payment of retirement benefits as and when due. Under the new scheme, workers are required to choose a Pension Fund Administrator (PFA) who will allocate their retirement savings and diversify their investments over a range of investment instruments. The scheme also affords participants an opportunity to pass wealth to survivors in the event of death.
Apart from benefits to the individuals, RSA maintained by millions of workers would generate massive long-term funds, which will be available for productive investment in the economy. The scheme has the potential to promote national savings, economic growth, and capital market development. Owing to economies of scale, the cost of investing the funds would be relatively lower than if an individual worker were to undertake the investment on his or her own account. Also, having a pension scheme that pays out benefits in the form of a life annuity as provided for by the Act would afford workers the protection against longevity risk, by pooling mortality risk across others. In addition, the scheme aims to secure the dependants of a worker by providing for death benefit of three times the emolument of the employee.
For both the employer and the worker, the new scheme encourages labour market flexibility. The worker is free to move with his account as he/she moves to another place of employment and/or residence. To the extent that a defined contributory scheme aids mobility of labour, it is an important tool enabling workers and employers to adapt to changing circumstances especially in a global environment in which change is a constant aspect of social and economic life.
However, on the flip side, there are potential ambiguities and challenges which need to be proactively addressed. This includes ensuring that all stakeholders play their role especially the employers in remitting the contributions for their employees accurately and timely. Another challenge is how to preserve value and cope with economic downturns.
The National Pension Commission (NPC) whose mandate is to provide overall regulatory and oversight functions on all issues concerning pension in Nigeria needs to brace up quickly to address these challenges. It must guide against contribution evasion which poses a major challenge to the success of a defined contributory scheme since it influences the adequacy of benefit payments to participants. There are a number of ways in which employers may evade contributions: they might fail to register themselves and some or all of their employees; they could portray their employees as contract workers or belonging to other categories that may be considered as non-workers. Others may fail to contribute, or decide to embark on late remittance of contribution.
In addition to addressing these challenges, NPC should provide clarification and guidance on some of the ambiguities and omissions under the Act establishing the scheme. These include questions as to whether expatriates are covered; transfer of old schemes and tax status of payments made from old schemes after they have been transferred to the new scheme. Others include the lack of specific minimum percentage of remuneration that must be represented by the components of emolument defined as basic, housing and transport allowance. Without any restriction as to the minimum percentage of remuneration, some employers could manipulate these components to reduce their pension contributions. The minimum penalty of 2% for default appears to be too lenient and there is no provision for interest for late remittance of contribution by the employer. This could mean that the employee gets less in the event of a late remittance or outright default if not detected in good time.
It will also be necessary to educate employees on the new scheme and create more awareness on the modus operandi of the scheme. Employees need to know that the RSA can only be accessed at the age of 50 years unless the employee is mentally or physically incapacitated. The other exception is where an employee makes additional or voluntary lump sum contributions into the RSA, in which case he/she can withdraw such money before retirement or before attainment of the age of 50 years. To enjoy tax benefit, the withdrawal must not be earlier than 5 years after making the contribution.
Upon the attainment of age 50, the Act provides for lump sum withdrawal, programmed withdrawals or purchase of annuity. Under a programmed withdrawal, the employee collects his retirement benefits in periodic sums spread throughout the length of an estimated life span. In the case of annuity, the employee pays a lump sum to a life insurance company to purchase income in a manner that provides monthly or quarterly inflow to the retiree throughout his/her lifetime. It is a compulsory choice for every employee to choose a pension fund administrator. The Act does not provide for the employer to choose a PFA for the employee where he has refused to do so although this would appear to be a reasonable and logical thing to do.
The new pension scheme should be rigorously monitored and supervised to ensure that the objectives are achieved. The various participants and stakeholders especially pension fund administrators, custodians and employers should be regularly audited and penalised for any non-compliance. In the spirit of the new pension scheme, Nigeria should also provide social security for the unemployed, the under aged who have no financial support and the old who never worked in the organised private or public sector, after all, what is good for the goose is also good for the gander. |
