This piece reviews the PRA 2014 and suggests ways to improve especially in the areas of regulatory functions of the PenCom and effective administrative performance of the PFAs and other stakeholders in the Nigerian pension industry.
The enactment of the Pension Reform Act 2014(PRA 2014) to repeal the Pension Reform Act 20041heralded much discussions on its projected transformative impact but recent data has confirmed PRA 2014’s inadequate coverage. For example, the National Pension Commission (PenCom) reportedly stated that about 12.09% of Nigeria’s population (equivalent of 8.41 million out of 70 million Nigerians of working age) contribute to pension schemes as at 2018. Therefore, less than 13% of the population have a pension scheme thereby leaving 87% Nigerians without any pension cover at their old age; this compares poorly with African peers like South Africa (75%) and Ghana (33%).
This article seeks to evaluate the PRA 2004’s impact since its original enactment a decade and a half ago, and more particularly the successor PRA in the context of the current challenges of pension administration in Nigeria whilst offering pragmatic solutions to resolving them.
Major Developments in the PRA 2014 and Issues Arising
The PRA 2014 compared to the repealed PRA 2004 heralded some new developments which are highlighted below:
Remitting Contributions: An employer is obliged to remit pension contributions within seven (7) working days after payment of salary to the Pension Fund Custodian (PFC) specified by the employee’s Pension Fund Administrator (PFA), breach of which will attract a penalty of not less than 2% of the total contributions that remains for each month or part of each month that the default continues and the amount owed shall be recoverable as a debt owed to the employee’s Retirement Savings Account (RSA).
The issue that arises from this model is that most employees discover later that their employers do not remit to the PFCs. Due to the time, cost and knowledge gap on how to obtain redress, most employees forfeit their interests if the amount is negligible. However, if the salary account of each employer is registered with the PFCs and PFAs, which allows them to deduct the PFs at source just like a bank standing order without recourse to the employer. This will help reduce any form of mischief from the employer.
Revised Contribution Rates: PRA 2004 pegged employer and employee rates at a minimum of 7.5% each (collectively 15%), whilst the PRA 2014 pegged that of employee at a minimum of 8% and employer 10% making 18% in total. The increment should translate to more funds contributed to the pension scheme. However, such rate increment may lead to employers downsizing their staff strength because of the increase in the cost of employment.
Accessing RSAs: PRA 2014 gives an employee, who was disengaged from work before the age of fifty (50) and could not secure another job within four (4) months, the right to make withdrawals from the RSA. The amount that can be withdrawn shall not exceed 25% of the total amount credited to his RSA and such withdrawal can only be made after four (4) months of such retirement or disengagement. This was formerly 6 months under PRA 2004.
RSA for Life: A change of job by an employee that is from one employer to another, does not change the employee’s RSA.
Group Life Insurance: PRA 2004 obligates insurers to pay proceeds of a deceased employee’s group life policy to his RSA. However, PRA 2014 obligates the insurance company to pay such to the deceased’s beneficiary that was named in the policy subject to submission of a valid Will or Letters of Administration to the PFA who shall with the approval of PenCom release the benefit to the personal representative of the deceased. This implies that proper records of the beneficiaries must be kept and updated in case of such incidence.
Tax Exemption Benefits: Interest, profits, dividends, investments, and other income accruable to PFs or assets are not taxable. This brings private sector pensioners on even keel with their public sector counterparts as section 173(3) Constitution of the Federal Republic of Nigeria 1999 (as amended), already provided that: “pension in respect of service in the public service of the Federation shall not be taxed.” However, withdrawal of voluntary contribution if made before the end of the five (5) years shall be subject to tax at the point of its withdrawal.
Pension Fund Investment: Sections 85 to 87 PRA 2014 empowers the PFA to invest the PFs with the objective of safety and maintenance of fair returns on amount invested. Section 86 PRA 2014 provides various securities that the PFs and assets can be invested in, within Nigeria whilst section 87 PRA 2014 expanded the scope of investing the PFs and assets to units of any investment outside Nigeria subject to certain conditions. In a bid to preserve the PFs and assets most of the investments are made in government bonds and bills, which has low returns on investments (ROI).
Given the infrastructural deficit in the country, the PFAs can engage credible investment managers and private equity (PE) firms to invest in profitable infrastructural projects. To ensure compliance, necessary regulatory measures, watertight legal agreements and stable policies are needed to reduce the investment volatility thereby ensuring measurable results for the PFAs and budding investors.
Although the PenCom Regulation on Investment of Pension Fund Assets 2019 only allows a maximum of 5% be used for such PE projects considering its risky nature. This can be mitigated when the services of professionals are engaged. In fact, the ROI generated from PE investments can exceed the revenue generated from government bonds, treasury bills etc. within a space of five (5) years depending on the exit strategy agreed by the parties. Such funds can be hedged or diversified to ensure minimal risk exposure.
Pension Protection Fund (PPF): By virtue of section 82(1) PRA 2014, the PPF was established to guarantee a minimum benefit to contributors in the event of any shortfalls in the investment of PFs and any other use PenCom may determine from time to time. The PPF includes an annual subvention of 1% of the total monthly wage bill payable to employees in the public sector, an annual pension protection levy paid by PenCom and the PFAs (the percentage of which is to be determined by PenCom) and income from the PPF investments.
Freedom of Choice on PFA: Employees are expected to maintain a RSA in his name with any PFA of his choice. The employee is expected to inform his employer of his choice. In line with section 11 PRA 2014, the Nigerian University Pension Management Company (NUPEMCO) was licensed by PenCom in 2019. NUPEMCO, may suffer similar fate like its predecessors such as the Armed Forces that have their own PFA (managed by Military Pensions Board under PenCom’s oversight), because several veterans still have issues with receiving their pensions timeously. Therefore, licensing new ‘public sector’ PFAs may not be expedient, given the systemic issues affecting existing PFAs effectiveness.
The PRA 2014 also increased the fines for a person that operates as a PFA or PFC without a license to a fine of not less than N10 million or 10 years imprisonment or both. For a corporate body, a fine of not less than N50 million, in addition, the directors or officers of the corporate body shall each be liable to a fine of not less than N5 million or to a term not less than 10 years imprisonment or both. Also, the Court may order the forfeiture of the proceeds of the contravention of the offence.
Based on this comparison, can it be said that the PRA 2014 has brought any significant improvements to the Pension industry?
The PRA 2014 relevance is pretty otiose considering the various litigation issues that stems from – PFs non-remittance by PFCs, mismanagement of funds, corporate governance issues, improper recording and bookkeeping, delayed payments to pensioners, failure of some States in establishing RSAs in their jurisdiction thereby depriving the intending retirees the benefit of a better future etc. It behoves on PenCom to ensure that such issues are dealt with timeously so that the confidence of pensioners reposed in the system is sustained.
PenCom has played a huge role in advancing pension compliance through its Guidelines, Regulations and Circulars etc. Amongst them are – Guidelines for Micro Pension Plan 2018; Guidelines For Cross Border Arrangements Under The Pension Reform Act 2008; Guidelines for Appointment to Board and Top Management Positions of PFAs and PFCs 2018; Regulation for the Administration of Retirement and Terminal Benefits; Reg. on Investment of Pension Funds Assets February 2019; Regulation for the Transfer of Retirement Savings Account 2017; Regulation for Compliance Officers, Code of Good Corporate Governance for Licensed Pension Fund Operators 2008 etc.
Indisputably, these Guidelines and Regulations lucidly spelt out the PFA and PFC obligations to PenCom and stakeholders. However, these has not translated to increase in PFs contributors. In fact, only a little over 200,000 private sector employers of labor are implementing the CPS.
A key plank to endearing more participation is to ensure that PFAs’ corporate governance principles are adhered to majorly the audit and whistleblowing functions. The recently adopted Nigerian Code of Corporate Governance (NCCG) 2018 came to the rescue by institutionalizing more generally applicable corporate governance requirements in Nigeria companies. Accordingly, Principle 18 NCCG 2018 on Internal audit function provides for an assurance to the Board on the effectiveness of the governance, risk management and internal control systems, whilst Principle 20 NCCG2018 elicits the external auditor’s role in providing independent opinion on the true and fair view of the company’s financial statement to give assurance to stakeholders on the reliability of the financial statement.
The external auditors are bound by statutory requirements and international best practices in performing their duties, which involves, where appropriate or mandated, reporting any infringement to the regulatory bodies such as the PenCom and the Financial Reporting Council of Nigeria (FRCN), upon pain of sanctions for failure to do so. This is a powerful tool that can be used to monitor potential PFA excesses.
Section 66(2) PRA 2014 compels the PFAs and PFCs to cause both the PFs and company accounts be audited by a qualified external auditor not later than three (3) months from the end of the year. To ensure more accountability, all PFAs should be compelled to notify its stakeholders (especially the pension funds contributors) regularly on their PFs just the way PFCs are expected to report PFs collected to the PFAs within 24 hours upon receipt.
Also, Principle 19.1 NCCG 2018 enjoins the Board to establish a whistle-blowing framework to encourage shareholders to bring unethical conduct and violations to the attention of an internal and/or external authority to verify the allegations and mete necessary sanctions. In fact, Principle 19.5 NCCG 2018 compels the Board to ensure that no whistle-blower is subject to any detriment on the grounds of making such disclosure. Contrary to Principle 1 NCCG 2018, the FG has not up till date appointed board members of the NSITF.
PFAs should consider high value investment interventions such as government infrastructure projects compared to its usual investments in government securities (treasury bills, bonds etc.) that has little ROI but less risks. For instance, the PFAs can take a cue from the Nigeria Sovereign Investment Authority’s (NSIA) US$11 million investment in the Lagos University Teaching Hospital (LUTH) Advanced Cancer Treatment Centre. The NSIA-LUTH cancer treatment centre is a public-private partnership (PPP) arrangement executed as a Build-Operate-Transfer model whereby NSIA takes 100% ownership of the centre and is expected to revert to LUTH after ten (10) years of operations. The Infrastructure Concession Regulatory Commission (ICRC) has lots of PPP based projects which the PFAs can invest in.
Recently, RSA holders were required to upgrade their National Identity Number (NIN) and Bank Verification Number (BVN) before they can have access to their pensions. Instead of clogging the pension system with all these requirements, a consolidated identification number having a multiple usage should be adopted to ease the stress on many existing and intending pensioners across the federation.
The Tradermoni model, currently adopted by the FG to encourage financial inclusion in Nigeria, can be adopted in pension administration in Nigeria, whereby various pension agents are allocated to various zones under the auspices of the PFAs and PFCs to make easy pension registration, monitoring and payment of funds through their tech-enabled phones that contains pensioners’ details. Although the Guidelines for Micro Pension Plan 2018 (MPP), an initiative expected to attract over 20 million workers and N3 trillion of pension assets, practically gives an opportunity to explore the Tradermoni model.
The MPP covers employees of organizations with less than three (3) employees as well as self-employed persons at the grassroot level may not achieve great result if the leadership and the regulators do not take ownership of the initiative. Notably, the MPP provides for a flexible approach to Micro Pension Contributors’ (MPC) contribution by allowing contingent withdrawals which can only be accessed after three (3) months of making the initial contribution.
Other unanswered issues regarding the MPP are how to identify the MPCs. Given the fact that the MPP is voluntary, how will the MPCs be incentivized to make the initiative attractive? What are possible pension collection, recording and payment structures that will further engender more participation? Processing and payment of contingent withdrawals takes two (2) working days. Conversion from MPC to mandatory contribution if the organisation has three (3) or more employees, but participants in mandatory contribution are not allowed to convert to MPP.
For instance, in advancing the Tradermoni, Vice President, Prof. Yemi Osibanjo visited market places and participated in the process of sensitizing the citizens about its benefits. Similar approach was used in propagating the Obamacare campaign which is grassroot driven. PenCom can, through its radio program title ‘PenCom on the Radio’, enlighten the people about the MPP. However, the radio programme should not be substituted for physical visits to conglomerations of the target (intending) pensioners.
The PRA was introduced to change the mindset of many Nigerians who had been culturally attuned to the belief that their social safety net is their family and friends (children especially are expected to take care of their aged parents, etc), personal savings and investments, but not pension schemes. Over 87% of Nigeria’s population are yet to be covered despite the huge potential of pension schemes as a vehicle for mobilising funds for national development. Today, pension funds are strategic investors and can make significant contributions towards reversing Nigeria’s infrastructure deficit.
The foregoing is an eye opener to stakeholders (particularly the government and the regulators) that more still needs to be done especially in raising the restriction limits placed on PE related investments, considering the dire need to harness more funds in executing infrastructural development projects in Nigeria.
These projects would create more job opportunities and as well empower many people enrolled to the pension scheme. Apparently, the PRA seems to be thriving considering the structure put in place to ensure compliance, however we still have a long way to go in regaining Nigerians trust in the system especially in the management and easy disbursement of their pension contribution when the need arises.
(Originally published as a LeLaw Thought Leadership piece http://lelawlegal.com/pdf/Pension%20Reform-Gabriel.pdf)