By ROSEMARY ONUOHA

With the coming into force in July 2004 of the Pension Reform Act 2004, a new pension scheme known as the Contributory Pension Scheme (CPS) was established to replace the previous Defined Benefit scheme, DBS. And as at July this year, the scheme has existed for eight years.

Although the CBS is still battling with some teething problems, pension fund operators are of the opinion that what the pension sector needs is big Pension Fund Administrators, PFAs, and Pension Fund Custodians, PFCs, to effectively cover the entire country.

According to the Chairman, Pension Fund Operators Association of Nigeria, PENOP, Dave Uduanu, the country needs strong pension fund operators so that they can adequately rule the market.

Uduanu said “The pension sector needs big PFAs and PFCs to take up this market. Right now the sector is very small and fragmented. With ten big PFAs we will have a sector that will rather give comfort to contributors who are the owners of the money.”

The CPS
The CBS as the name suggests is contributory in nature and is mandatory for every employee in the Federal Public Service (including employees of the Federal Capital Territory) and employees in all Private Sector organisations. Employers are expected to deduct 7.5 per cent of the employee’s total emolument and also provide a counterpart funding of 7.5 per cent to be remitted into a Retirement Savings Account, RSA, which the employee is expected to open with any Pension Fund Administrator (PFA) of his choice. This makes up a minimum of 15 per cent to be paid into the employee’s RSA. However both the employer and the employee may opt to fund the RSA above the mandatory minimum of 15 per cent. Employers may also opt to bear more than half of the mandatory minimum of 15 per cent.

Challenges of the CPS
Although the CPS is well regulated by the National Pension Commission, PenCom, the scheme is still facing some challenges. According to Idu Okwuosa of PenOp, one of the challenges of the CPS is that many employees are yet to register coupled with the fact that some employers fail to remit or default in remittance. Others are that more enlightenment about the scheme is still required as well as the fact that the five per cent of Federal Government monthly wage bill is insufficient to meet the outstanding pension liabilities.

Government’s assistance
In terms of how government can assist in the development of the CPS, Okwuosa said that strict enforcement of the provisions of the PRA 2004 should be maintained, even as government should consider the option of instituting tax incentives to encourage participation in the scheme. According to her, the government should entirely phase out the non-contributory scheme as anticipated under the Act.

Various arms of the sector
It would be recalled that the National PENSION Commission, PenCom, regulate and supervise the scheme established under the Pension Reform Act 2004 as well as issue guidelines for the investment of Pension Funds. It is the job of PenCom to also approve, license, regulate and supervise PFAs, PFCs & other institutions relating to pension matters; Establish standards, rules and guidelines for the management of pension funds under the Act; ensure the maintenance of a National Data Bank on all pension matters; formulate, direct and oversee the overall policy on pension matters in Nigeria.

The PFAs on the other hand oRetirement Savings Accounts, RSAs, for employees with Personal Identity Number (PIN) attached; invest and manage pension funds and assets in accordance with the provisions of the Act; maintain books of account on all transactions relating to pension funds managed by it; provide regular information on investment strategy, market returns and other performance indicators to the commission and RSA holders; provide customer service support to employees; including access to employees account balances and statements on demand; pay retirement benefits to employees in accordance with the provisions of the Act.

The PFCs rthe total contributions remitted by the employer on behalf of the PFA; notify the PFA within 24 hours of the receipt of contributions from any employer; hold pension funds and assets in safe custody on trust for the employee and beneficiaries of the RSA; on behalf of the PFA, settle transactions and undertake activities relating to the administration of pension fund investments including the collection of dividends and related activities; report to the Commission on matters relating to the assets being held by it on behalf of any PFA at such intervals as may be determined, from time to time, by the commission; undertake statistical analysis on the investments and returns on investments with respect to pension funds in its custody and provide data and information to the PFA and the Commission.

According to Okwuosa, the CPS is user-friendly as the new system allows contributors access to their account balances through the internet and other technology driven platforms. It provides for efficient customer service and good investment returns; give employees the freedom to choose a PFA; is fully funded as well as enhances labour mobility.

The CPS also has instilled a savings culture among Nigerians; provides for life insurance cover for employees; provides protective fund withdrawals modes as well as ensures that invested funds are secure.

CPS impact on the economy
On ways in which the CPS can impact on the economy, Okwuosa  said that it has introduced a nation-wide mass savings culture, allowing PFAs accumulate assets that can be invested in financial markets with the potential to promote depth and liquidity in the financial markets which is critical to the success of any economy. Pension fund activities, according to her, are capable of inducing financial market development through their substituting and complementary roles with other financial institutions, specifically commercial and investment banks.

She said that worldwide, pension funds are noted to be competing intermediaries for household savings and corporate financing which foster competition and may improve the efficiency of the loans and primary securities markets resulting in a lower spread between lending rates and deposit rates, and lower costs to access capital markets while PFAs also complement banks by purchasing long-term debt securities and investing in long-term bank deposits.