FACTS OF THE MATTER – BILLS TO EXEMPT SOME GROUPS FROM THE CONTRIBUTORY PENSION SCHEME (CPS) – MATTERS ARISING
Background
• Nigeria’s pension industry has grown over the last 18 years since the Pension Reform Act (PRA) was initially enacted in 2004. The industry has ensured that the average Nigerian worker is able to retire in peace and dignity. The act brought about the professionalization of pension fund administration and the growth of the pension industry in Nigeria. There are many gains that the pension industry has achieved and there is a great need to protect these gains and expand the benefit to other groups within the country.
• Over the last number of years, we have seen many actors try to reverse these gains, usually from seeking to amend the act that would allow groups of people to leave the scheme. These acts are typically done through legislative actions as certain groups sponsor bills to exit the Contributory Pension Scheme (CPS)
Recent bill to exit the National Assembly staff
• On the 27th of May, (two days to the handover date) President Buhari signed a “Bill for an Act to amend the Pension Reform Act, 2014, to Exclude/Exempt the National Assembly Service from the Contributory Pension Scheme and Establish the National Assembly Service Pension Board; and for Related Matters (HB 2025)”.
We are not convinced that this bill was passed in goodfaith, especially when standard and due legislative processes were not followed.
• For this particular bill, all the stakeholders like the workers union, labour, the Pension Fund Operators, the Regulators, Employers of labour, the Head of Serviceand other critical stakeholders were not engaged in the process. We are thus forced to question whose interests this bill was geared to serve.
• This much we said in a number of newspaper publicationsearlier in the year when we got wind of the Bill, In our publication we advised the former President not to assent to the Bill as the process was flawed, non-consultative and the bill was retrogressive in nature- especially at a time when most countries are moving towards a contributory pension system
Other parties also have bills before the National Assembly for exit
• As we speak, the Senate has passed a bill to create the Police pension board and exit them from the CPS.
• In addition, a bill to exit the FCT and Area councils from the CPS has passed second reading at the House of Representatives.
Their action goes against the stated position of the FG
• It is pertinent to note that the Federal Government had earlier issued a white paper stating that the Police Force or any other government agency should not leave the Contributory Pension Scheme as the scheme was the Federal Government’s way to have structured and sustainable pensions for its employees.
• Furthermore, economic analysis and actuarial reportshave shown that it would be impractical and irresponsible to move the police or other sectors of the Federal Civil Service from the current Contributory Pension Scheme (CPS) to a Defined Benefit Scheme (DBS) because of the amount of funds this would cost and the effect it would have on future retirees.
There are two pertinent and major issues against the overall agitations to leave the CPS – These are, Sustainability and transparency
1. Sustainability of Funding additional Pension liabilities.
a) These requests for an exemption from the CPS means taking Nigeria back to the dark ages before the pension reforms. This was a time when retirees had to depend on a defined benefit system; where the federal government paid lump sums to retirees directly from its coffers. At the time of the reform, it was estimated that the Federal Government had a pension liability of over NGN 2 trillion. Past experiences have proven that this system puts a lot of burden on the federal government, making it unsustainable.
b) Following the pension reform, and the coming on board of the Contributory pension scheme (CPS) in Nigeria. The Federal Government’s liability on employees is being limited to the portion of the employee’s salary that is meant to be deducted on a monthly basis. The liability for Federal Government employees has been transferred to private sector fund managers to administer this process. This is in line with the trend world over has helped to limit this liability and pass on the liability effectively to the private sector fund managers to administer and fund
c) The sustainability of moving any group back to the pay – as – you – go Defined benefit scheme under their proposals are near impossible, given the Federal government’s struggling finances at the moment. The Federal Government has been saddled with consistent health workers and University workers strike over contractual salaries that are either being owed or not implemented. Furthermore, the contractual debt service burden has risen over the last couple of years. Late last year, this National Assembly passed the 2023 budget that was signed into law earlier this year. That budget has a deficit of 10.78 trillion Naira that is proposed to be funded by debt, with debt service accounting for 6.3 trillion Naira in this year’s budget. It is pertinent to note that these figures do not take into account the proposed burden that the exit of these groups will cause on the Nation’s finances. What the country does not need right now is another contractual obligation in the future on funds it does not have, especially when it has mapped out a system for addressing this under the Contributory pension scheme (CPS)
In summary, the proponents of these bills and the legislators have not done a thorough an analysis on what the passage of these bills would mean for the finances and future of the Nation. For example, based on estimated preliminary actuarial liability estimation as at 31st October 2021, the Federal Government’s actuarial liability for the estimated 320,00 staff of the Nigeria police (serving and retired) is put at roughlyNGN 2 trillion if it is to switch the police back to the Defined Benefit scheme. (This is an independent report by an actuary). This liability includes an amount of NGN 338 billion that will need to be paid back to the employees whose salaries have been deducted under the CPS. This amount of circa NGN 2trillion will have to be provided at the outset and invested with an expected annual return of at least 10 % to accommodate the retiring officers over the coming years.
The actuarial liability for the National Assembly staff has not been computed and factored before the hurried passage and signing of the Bill
2. Safety and Transparency inbuilt into the CPS
a) The CPS which Nigeria currently practices have inbuilt checks and balances embedded into the system. The model is such that the Pension Fund Administrators (PFAs) who administer and make investment decisions do not have custody of the funds. The custody of all the pension funds is held with separate and independent entities – the Pension fund Custodians (PFCs). These PFCs are owned by three of Nigeria’s largest banks. Furthermore, these banks give irrevocable guarantees on pension funds held in their custody, so if anything happens to the fund’s whist in their custody, it will be refunded by the parent organization. This is a very transparent model. In essence, there is a guarantee on all funds contributed outside of possible diminution by investment activities.
b) As a second level check, all members of the board of PENCOM are also screened by the legislature who have oversight over the Commission. That being the case, the legislative arm has the opportunity to further strengthen the governance process of individual pension operators through this process if they feel that any issue in any pension fund needs increased focus. This they can bring to bear on any of the groups seeking to exit. This aspect goes to buttress the point that the legislature, if they are very concerned about the fortunes of any of these groupshave the opportunity through the current process to propose adjustments within the current framework
c) The pension act specifies that all pension operators, Pencom and the Federal Government should contribute towards a pension protection fund (PPF). This PPF, will amongst other things, be utilized to ensure that eligible pensioners will be paid for any shortfall arising from any possible financial losses arising from investment activities and the funding of a minimum pension guarantee for eligible pensioners. This fund more or less protects the vulnerable pensioners within the system under a transparent framework. All Retirees also enjoy these pooling benefits.
• The summary here is that the CPS as currently practiced in Nigeria has inbuilt checks and balances and administrative safeguards unlike the previous Defined benefit scheme run by the government that is opaque and prone to corruption. The CPS is one scheme that we can point to that is institutionalized and not based on the whims of individuals. It puzzles us why anyone would want to exit from this sort of system. Under the current system, we can tell how much has been contributed by employees and their employers. We can tell how much has been invested; the returns on investment. We can tell how much has been paid under the in-retirement benefits. We can tell how many people have been paid, etc. Thesame cannot be said of the previous system or groups that exited a number of years ago.
• Corruption thrives in secrecy. If indeed we are serious about transparency and accountability, we should be talking about getting all groups back to the CPS to benefit from these inbuilt safety and transparent structures.
• We should be focusing on consolidating the gains of the Pension reforms and getting all the states of the Federation and More Nigerians to benefit from the reforms of the CPS rather than scheming on how to exit various groups of people.
