By Godwin Onoro, Executive Director, Pal Pensions Limited.
Globally, matters pertaining to taking care of retired and aged citizens are of great concern to government. The concerns bother majorly on the non-availability of funds to pay the aged citizens who worked for the government, resulting in huge pension liabilities. The schemes in Nigeria prior to the commencement of the Pension reform were Pay As You Go and Defined Benefit in the public sector and Provident Fund/Nigeria Social Insurance Trust Fund (NSITF) for the private sector. Whilst a few private organisations have some forms of exit benefits, these were not sustainable pension arrangements as they do not provide for savings to cater for the employees’ livelihood during old age.
In our country, this concern was decisively addressed by our former President, Chief Olusegun Obasanjo, with the introduction of pension reform which resulted in the enactment of the Pension Reform Act (PRA) of 2004. The scheme is a Contributory Pension Scheme and it heralded the commencement of a journey with a definite destination.
The PRA took effect from 2005. On its commencement, there were obvious skepticisms as to whether the scheme would not fizzle like other schemes before it. There were schemes that Nigerian workers contributed a portion of their salaries to and there were no clear cut guidelines as to how they could collect their contributions or when they are no longer alive, their Next of Kin could collect their contributions.
The skepticism was real, very well expressed then by all and sundry. This skepticism was perhaps driven by the percentage of contribution by both employers and employees. In the PRA 2004, the percentage contribution was 15% with employers contributing 7.5% and employees 7.5% of the Basic, Transport and Housing component of their remuneration. The contribution rate was enhanced to 18% with employers contributing 10% and employees 8% in the PRA 2014. The schemes prior to the enactment of the Act were unsustainable as they were not funded, not designed to cover every Nigerian, inadequate administrative structures and enlightenment of the public and no uniform standard for administering them.
The Pension Reform Act was therefore established to address the challenges of the old schemes: Pay As You Go/Defined Benefit Schemes for the public sector and the Provident Fund/Nigerian Social Insurance Trust Fund (NSITF) in the private sector.
The PRA is a journey with definite destination. The destination was well thought out and can be measured. This is one of the attributes of leadership, identification a problem, assembling of resources to tackle the problem, setting objective and providing clear cut directives for achieving the objectives. The PRA has clear objectives, no ambiguity; stakeholders are well identified, there is a clear path to achieving the objectives and success of the scheme can be measured
Let us begin the journey with a cursory look at the objectives of the PRA which are stated below:
• Establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the public service of the federation, the public service of the Federal Capital Territory, the public service of the state governments, the public service of the local government councils, private sector and the informal sector. The inclusion of Micro Pension Scheme has enabled the participation of the informal sector workers, self employed persons and owners/employers of small and medium-scale enterprises such as road transport workers, lawyers, artisans, musicians, actors and actresses; just name it and it is covered under the scheme;
• Make provision for the smooth operations of the Contributory Pension Scheme
• Ensure that every person who worked in the either the public service of the federation, Federal Capital Territory, states and local governments, private sectors and the informal sector receives his/her benefits as and when due;
• Assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.
The National Pension Commission, a key stakeholder of the scheme is saddled with the responsibility of enforcing and administering the provisions of the Act. It has made requisite provisions for the smooth operations of the scheme. A typical journey has a start and end points and the activities that take place between the two points; the mid points. A lot happens at the midpoint particularly in a competitive environment. So, there is the need for standardization of rules and ensuring that all play by the books. The National Pension Commission (PenCom) has ensured standardization of rules from the start of the process to its end point which is the payment of benefits to account holders.
Let us take a moment to look at the midpoint activities. The employees in case of those in employment and individuals, for those who are self-employed, select the Pension Fund Administration (PFA) of their choice. The PFAs request for the documents needed to onboard the person and the registration process which leads to creation of Retirement Savings Account with Personal Identification Number (PIN) issued by PenCom.
The RSA Holder gives the evidence of registration with a PFA to his/her employer for pension remittance by the employer to the PFA through a Pension Fund Custodian. For self-employed individuals, the remittance of pension can commence immediately as it is self-funding. The employers make pension remittances on behalf of the RSA Holders to the Custodian which in turn advises the PFA of the pension remittances. The PFAs credit the RSA Holders with the amount remitted by their employers and inform the RSA Holders of the receipt of their pensions through SMS alerts and/or emails. With the credit of the RSA Holders, a liability is established in the books of the fund. These pensions are to be invested immediately to create assets for the Fund and as the Accountants put it, for every debit there must be credit. The fund valuation process is performed daily and it is at this point the growth of the fund is determined. The processing of onboarding, receiving pension remittances, crediting of RSA Holders and investing the processed remittances continue until one attains retirement age or elect to retire on attainment of age 50. At retirement, the payment process kicks in. Again, there are standardized processes, required documents and uniform template for this process.
The RSA holders submit documents required to process their payment, PFA conducts the needed due diligence and compute the RSA Lump Sum and monthly pension. Upon PFAs discussion and agreement with the RSA Holders, the PenCom’s approval is sought by the PFA. The RSA Holders’ bank account is credited on receipt of PenCom’s approval. The payment of pensions (redemption) are also accounted for in the Fund.
Whilst the start point is onboarding, the end point is payment of retirement benefits to RSA Holders. All activities are supervised by PenCom, the regulator. Various circulars exist and pronouncements are made for the guidance of the Operators.
One of the objectives of the scheme earlier mentioned was the guarantee that everyone who subscribes to the scheme receives his/her benefit as and when due. I am sure there will be some agitations as to the term “as and when due.” The PRA 2014 addresses this as it provides that a holder of a Retirement Savings Account shall upon retirement or attaining the age of 50 years, whichever is later, access his/her benefit under the scheme. The payment of benefits to retirees commenced in July 2007. Since then, retirees who have submitted the documents required to pay their pensions have been paid their lump sums and are either on Programmed Withdrawal with their PFAs or on Annuity with their chosen Insurers.
The payment of monthly pension which is akin to their salaries are usually paid on or before the 24th of every month. As they say it, the proof of the pudding is in the eating. Again, a journey with definite destination, payment of pensions a definite destination.
Another objective of the PRA is assisting improvident individuals by ensuring that they save in order to cater for their livelihood during old age. Savings, a word everyone knows, talk so much about but difficult to practice. The difficulty in practicing it could be due to poor remunerations, family size, ones’ responsibilities, high cost of living and loss of real value of the national currency. Savings provide succor when the unexpected happens and helps to preserve ones’ dignity. Everyone needs savings. As aptly captured in the Act, the scheme assist subscribers save to cater for their livelihood during old age. The beauty of such savings is that when invested, they generate returns. Remember the elementary theory of Investment. Income less consumption gives savings and savings when invested gives returns which enhance the value of the savings.
Again, the journey with the quantum of accumulated pension assets as definite destination. From the scheme’s small beginning, pension assets have grown to about N12.3 Trillion as at December 2020 and are still growing. These Assets are made up of two components; viz the pension remittances and investment returns (growth) as a result of investment activities. When the funds were setup in early 2006, the unit price then was N1. Today, a good number of the PFAs have grown their unit price to over N4 for the flagship fund. No one sets a destination and on its arrival would not know he/she has arrived. Savings have been accumulated by the RSA Holders to cater for their livelihood during old age. Under, the old dispensation, whilst provisions were made for retirement of the workers, these were not backed up with budgetary provisions. But with the Contributory Pension Scheme, the contributions are being made and invested. Investment done are such that cash is available at any time to pay RSA Holders’ pensions. No hassle at retirement or whenever cash is required to make any pension obligations.
A well planned journey unarguably is a pleasurable journey and this is the position with the PRA. For all subscribers to this scheme, I enjoin you to have a smooth ride to your retirement as you have planned and saved for it.