17April2014

 

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Pension reforms: To be, or not to be?

A few years ago, it was common sight to see aged pensioners struggling – and often dying - in the process of obtaining what was rightfully theirs: their pensions. Due to the chaotic and punitive conditions suffered by these senior citizens who more often than not travelled great distances to Abuja to receive their dues, many simply gave up the ghost – some literally died while standing in queues.

Those that persevered were subjected to sleeping on the streets under harsh weather conditions and begging passersby for what to eat. To reward our parents and grandparents who had devoted their lives to serving Nigeria in such cavalier manner speaks volumes about our essence as individuals and collective humanity as a people.

Any discourse about the issue of pension reforms in Nigeria must begin with critical questions: What systems were in place for pension administration and how effective where they? What happened to the funds that were expected to be set aside for these pensioners over the years? Was there not a less cumbersome means of pension funds administration? What are the gains and losses of a decade of pension reforms, and what more do we need to do as a country to widen and deepen the social security system?

Pension, which is essentially setting aside monies for use in old age when one can no longer work and earn much income, was first started in the 1880s in present day Germany when Otto von Bismarck introduced social insurance programs that became the model for other countries and the basis of the modern welfare state. Bismarck introduced old age pensions, accident insurance, medical care and unemployment insurance. Bismarck appreciated that society has a responsibility to put in place a safety net for the old, the vulnerable and disadvantaged. Decades later, John F. Kennedy concurred with Bismarck’s vision when he observed that “if a free society cannot help the many who are poor, it cannot save the few who are rich.”

The first attempt at pension legislation in Nigeria was enacting the Pension Ordinance of 1951 which allowed the Governor-General to grant pensions and gratuities applicable to public sector employees, in accordance with the regulations, which were reviewed from time to time with the approval of the Secretary of State for Colonial Affairs in the UK government.

In 1961, the National Provident Fund (NPF) now the Nigerian Social Insurance Trust Fund (NSITF) was established by an Act of Parliament. It was established in line with the International Labour Organization’s (ILO) Social Security (Minimum Standards) Convention 102 of 1952 and sought to cater to employees in the private sector of the Nigerian economy.

Subsequently there were; the existing civil service pension scheme covered by the Basic Pension Decree 102 of 1979, the Local Government Pension Scheme which was established in 1977 and the Armed Forces Pension Scheme created through Decree 103 of 1979 by the Murtala-Obasanjo administration. There was also the Pensions Rights of Judges Decree No.5 of 1985 as amended by Decrees Nos. 51 of 1988,29 and 62 of 1991. The Police and other Agencies Pension Scheme Decree No. 75 of 1993 which took retroactive effect from 1990 represented another landmark development in the history of the Nigerian pension system and sought to cover the largest public sector organization in Nigeria – the Police with its nearly 400,000 officers and men.

There was one fundamental flaw with all these schemes – they mandated in the laws pension entitlements, called “defined benefits’ in pension’s parlance, without setting aside any cash to pay for the future liabilities. The assumption of successive governments in Nigeria (and indeed in many countries) is that there will always be tax (and oil) revenues to pay for future pension entitlements. This held true until the mid-1980s when profligate spending accompanied by collapsing oil prices and resultant debt burdens brought our economy to its knees. Pension payments became erratic and current arrears built up, and unfunded future liabilities escalated.

When the BPE was tasked with the responsibility of privatizing public enterprises in 1999, we realized that the unfunded pension liabilities in NITEL, then estimated at N43 billion and NEPA at N75 billion would make difficult if not impossible to privatize the companies. Who would buy a company with such hidden, future liabilities, in addition to over-staffing, attitudinal and other problems? Drawing on a seminal paper by a Nigerian lawyer Jude Uzonwanne of Levin & Srinivasan LLP, New York, the BPE presented a memorandum to the government in year 2000 warning that unfunded pension liabilities in public enterprises alone amounted to nearly N500 billion, while the rest of the public sector had another N1 trillion of the same.

 

The Obasanjo administration realized that a ‘defined contribution’ system needed to be put in place to replace the unfunded, defined-benefits “pay-as-you-go” pension scheme prevalent in Nigeria. A steering committee on pension reforms under the chairmanship of Fola Adeola worked at resolving the problem first in public enterprises, then nationally, with many outside stakeholders and select BPE staff. Many people like M K Ahmed, Dr. Musa Ibrahim, Chinelo Anohu and Aisha Umar that ended up being foundation staff of the future Pensions Commission played active in the committee and the aftermath.

 

The Fola Adeola team did extensive and commendable work and attempted to reform the pension structure in the country due to the gross inefficiency and poor administration of the previously launched schemes, culminating in the enactment of the Pension Reform Act 2004 (PRA 2004). In line with this, National Pension Commission (PenCom) was established to regulate and supervise all pension matters in the country.

 

Some of the highlights of the PRA 2004 are that the scheme would be contributory and fully funded, mandatory for organizations in the private sector with five staff and above, portable, provide full pension rights in the event of dismissal and the contents of Retirement Savings Account (RSAs) cannot be deducted by employers for any outstanding financial obligations among others.

 

How the contributory pension scheme works is that the employee contributes 7.5% of their income while the employer provides a minimum of 7.5% of the employee’s income into the RSA of the employee. For a country like Nigeria with huge income disparities and numerous low income earners, the total amount to be accumulated by an employee who worked for about 30 years on the current minimum wage of N18,000 monthly would roughly amount to N972,000.00 - less than a million naira for a lifetime of employment unless the contributions are invested in safe, but high yield investments that would increase faster than the rate of inflation and exchange rate deterioration.

 

The initiative, while laudable on paper and a major improvement over the old, unfunded system, has still not translated to alleviating the plight and hardship of current pensioners in the country, many of whom are not covered by the scheme. A lot more work has to go into the structure and manner in which pensions are administered in order to achieve the desired aims. It is time to look at the nearly ten years of experience of administering the PRA and enact amendments to improve the operations of the sector, and abolish the transitional arrangements that have led to the theft of billions of Naira under the office of the Head of Civil Service of the Federation.

 

As at 2012, 23.9% of the labor force was unemployed according to the National Bureau of Statistics (NBS). This invariably implies that a whopping 76.1% of the labor force is gainfully employed. According to the CIA World Fact Book, the total labor force in the country was 52.5m in 2011. Using 2011 statistics to calculate even though the numbers must have risen giving the teeming population of graduates churned out daily from our institutions of higher learning, the probable number of employees in the country is nothing less than about 39.9m at present.

 

However, of the total employed population across the country, only a paltry 13.2% (5.28 m) of workers had been registered under the scheme as at September, 2012 since its inception in 2004 according to the immediate past CEO of the commission. The statistics are bleak for the pace of work carried out in the whole of 8 years, and more needs to be done!

 

In addition to the snail pace at which the scheme is being executed, a major issue with the pension administration in Nigeria is execution at the state level. At the end of 2012, very few state workers were beneficiaries from the scheme; mainly because the states are allowed to enact their own laws and the PRA 2004 is not binding on them. So far, about 21 states have adopted the contributory pension scheme while 14 others have initiated the process of enacting versions of contributory pension schemes in their states. Lagos state is the only state according to Pencom that has fully funded its pension obligation to its workers. Katsina used to be another until recently when arrears have accumulated without any justifiable cause.

 

Another noteworthy area is private and informal sector participation in the scheme which has been particularly poor. Many reasons come to the fore here. How do you enforce an act when there is no data on the number of private companies or informal businesses contributing to the GDP of the nation? Majority of small businesses evade the scheme because of the cost to them and minimal penalties for evasion. Pencom has barely been able to cover the urban areas much less the rural areas. The implication of this is that the scheme is highly imbalanced; focusing mainly on employees of the Public Sector and urban dwellers while neglecting the private and informal sectors as well as the rural areas.

 

To worsen matters, the Pension Reform Task Team (PRTT) set up sometime in 2010 to bring some sanity to the system and ensure that pensioners received their pensions as and when due, rather than perform their tasks, only succeeded in embezzling the funds at their disposal. While claiming to have uncovered misappropriated funds, the committee itself depleted pensioners’ funds worth billions of naira on frivolities and corruption.

 

Pension funds, the world over, are designed not just to provide respite to employees in their post-retirement years but are meant to boost economies by improving their financial markets, accumulate re-investable savings and contribute to the GDP. Funds accumulated from pension deductions ideally, would be channeled into creating employment opportunities and financing infrastructural projects such as electricity, transportation, housing e.t.c. As at September 2012, the accumulated pension funds had amounted to some N2.94 trillion quite impressively. Whether this will translate to visible infrastructural development in the next few years is an entirely different matter.

 

It is imperative that the government critically analyzes the pension structure and make amends where necessary so that the scheme does not die a natural death. Pensions could be a very important aspect of the economy if done right with multiplier effects across many sectors. A contributory pension scheme where pensioners die in the course of claiming entitlements is definitely not a step in the right direction. It will certainly hamper on employees’ productivity while still active. One where those at the helms of affairs are embezzling retirees’ hard earned funds, is without doubt a disgrace to the nation as a whole.

The pension schemes adopted must take into cognizance our peculiarities as a nation and those in our economy. It should not be implemented in the typical fashion of other economic policies which are just cut and paste models of those obtainable in the more advanced nations. It should be tailored to the needs of the beneficiaries. The structure, direction and sustainability of the scheme must be clearly articulated so that it does not end up as another haphazardly implemented project. Most importantly, it should achieve its purpose which is securing the future of employees in the most convenient manner.

By: Nasir Ahmad El-Rufai