CAN MY PENSION BENEFITS BE SECURED THROUGH MY LIFE
TIME
INTRODUCTION
All over the world, people worry about their future and studies have
shown that social security generally, particularly pensions constitute a large
chunk of this worry for many folks. People even already start worrying as soon
as they start work but not many of them prepare for the future they worry about
because there will always be the temptation to believe that your working life
is spread before you and it stretches over a whole lot of thirty five years or
for even longer if you are in the private sector or self employed.
But experience has shown that it is a tough world and the best laid
plans can go awry, there is always the malignant hand of fate and in a country
as ours where life expectancy is now ridiculously as low as forty nine years or
less, where not many people can find jobs and those who find are poorly paid
and more often than not with aged parents and siblings to cater for, then the
worry of the average Nigerian worker about his future and his pension benefits
about quadruples compared to his contemporaries in developed economies where
most things work and there are numerous safety nets to cushion the effects of
unemployment and other worries that is a man’s life.
In our country therefore, pension benefits have become a very topical
issue because it does get dire when a man retires from active service and there
is no pension to fall back on and where there is, it is often inadequate and
you may have to wait for months and in some cases years to receive what should
be a monthly stipend to keep body and soul together.
This paper therefore attempts to answer the
question posed “Can my Pension Benefits be Secured through my Lifetime?” by
looking at pensions generally and its historical origins, pension
administration in Nigeria, the need for reform, the Pension Reform Act, 2004
and the Security of Pension Benefits therein.
DEFINITION OF PENSION AND A HISTORICAL EXCURSION
A common definition of pension is that it is a form of deferred
compensation of a worker, a retirement plan to provide secure income for life.
Pension fund therefore can be defined as savings indirectly accumulated during
active working years for investment to yield good returns for use on
retirement. It is a pool of resources accumulated from the employer and
employee with the aim of providing financial security for employees when they
finally leave paid employment.
By the provisions of the Pension Reform Act, 2004 pension fund means;
“an
investment fund within the Pension Scheme which is intended to accumulate
during an individual’s working life from contributions and investment income,
with the intention of providing income in retirement from the purchase of an
annuity or in the form of programmed withdrawal, with the possible option of an
additional tax free cash lump sum being paid to the individual”.
In the case of a pension fund, during the active working lives of such
employees, agreed or statutory amounts are deducted from their salaries and
paid into a fund. The fund managers use their expertise to choose the best and
safe windows of opportunity in which to invest the fund with a view to
maximizing returns on the investment. The funds could be invested in bonds,
equities and real estate amongst other investment vehicles. The fund often held
by portfolio managers (institutional investors), is a major source of
investible capital in the advanced economies of the United States of America
and Europe.
The earliest record of payment of public sector pension dates back to
the Roman Empire times when in 13BC, Emperor Augustus Caesar paid pension to the
Military and loyal civil servants. This was to secure the active loyalty of
troops who were then the sole determinant of power in the realm and further
conquest. The pension was first paid from Augustus’ personal funds and later
taxes of 5% were levied on inheritances and 1% sales tax to meet the pension
liabilities of the emperor. Three
thousand denarii’s was paid to Legionnaires after 20 years of active
duty and 5 years in reserves. This had the effect of making beneficiaries
instant millionaires by the standards of the time.
The history of public pension in modern Europe started with disability
compensation to soldiers. A good example was the scheme established by the
British parliament in 1592. By the 18th Century all major European
nations maintained some form of pension for their officer corps.
However, these pension schemes were not very popular because of the
perceived bias of the schemes for the military. The primary aim was to keep the
military in total subjugation and commitment to the leaders of the time as
military might guaranteed state power and sovereignty at the particular time in
history.
Military service at the time was seen as gratifying only and essentially
in the service of the crown and family and not necessarily for the good of the State
and her citizens. This is not hard to understand as emperors of the time had
always equated themselves with the state as epitomized by Louis XIV of France
(the Sun King) who proclaimed, “I am the State and the State is me”.
The scathing description of the scheme therefore by the English writer,
Samuel Johnson as “pay given to a state hireling for treason to his country” is
indeed instructive.
In modern times, the United States public pension system, otherwise
known as U.S. Social Security (Old Age, Survivors and Disability Insurance)
(OASDI) is a social security insurance created by the Republican Government of
Franklin Delano Roosevelt in 1937 during the great depression, following the
stock market crashes of the late 1920’s and early 1930’s. Retirement benefits
payment is the largest component of OASDI. The scheme was unfunded though as
payment of retirees were financed by payroll taxes of current workers depending
on workers earning records at and age of retirement.
The first payments were made in 1937 to 53, 236 beneficiaries and by
2004, the beneficiaries had risen to 47.5 million with cash benefit amounting
to $492 billion. The current tax level of 12.4% is equally shared between
employer and employee. Since 1982, the payroll tax receipt, investment and
other income of OASDI consistently exceed benefits payments and other
expenditures.
PENSION IN NIGERIA
Pension schemes were introduced into the public service of Nigeria in
the early years of the 19th Century as evidenced in Pension
Proclamation No. 14 of 1901 of the Northern Nigeria Protectorate and the
Pension Ordinance No. 4 of 1902 of the Colony of Lagos. Until 2004, there were
a myriad of enactments that regulated pension schemes in Nigeria. They include
the Constitution of the Federal Republic of Nigeria, 1999 in Sections 173 and
210, the Pension Act Cap 346 Laws of the Federation 1990, the National
Provident Fund Cap 273 Laws of the Federation 1990 and the Nigeria Social
Insurance Trust Fund Act, 1993 amongst others.
The schemes, which were the products of these enactments, were anything
but harmonized; each operated separately with the result that many people were
not covered by any scheme. Moreover, the schemes were not funded. The NSITF
that was intended to cover the gap for the private sector at least was thought
to provide small benefits. It therefore became obvious that the schemes and
pension administration in Nigeria generally needed reform if they were going to
be meaningful to the workers and constructive to the economy.
TRIGGERS FOR PENSION REFORM IN NIGERIA
As it became evident that the unfunded pay as you go pension system was
unsustainable due to short term budgetary constraints, demographic pressures,
aging and dependency ratios, inefficient public systems, untrustworthy
governments, fragmented public sector system and corruption, the Government of
Nigeria made different efforts at different times to reform and improve pension
administration in Nigeria. Committees set up under the auspices of the
Securities and Exchange Commission, Office of the Secretary to the Federal
Government of Nigeria, National Council on Privatization, the National Insurance
Commission and all other stakeholders unanimously agreed that the system needed
reform.
PENSION REFORM ACT, 2004
The present effort in the Pension Reform Act, 2004 is more particularly
concerned that all employees come under a uniform and workable scheme that will
be meaningful to the people and the economy. The Act provides that:
“There
shall be established for any employment in the Federal Republic of Nigeria, a
contributory pension scheme for payment of retirement benefits of employees to
whom the scheme applies under the Act.”
The Act further provided that the pension scheme shall apply to all
employees in the public service of the federation, Federal Capital Territory
and the private sector.
The objectives of the Scheme are:
(i)
To ensure that every person who worked in either
the public service of the Federation, Federal Capital Territory or the private
sector receives his retirement benefits as and when due;
(ii)
To assist improvident individuals to save for old
age; and
(iii)
To establish a contributory scheme with a uniform
set of rules, regulations and standards for the administration and payment of
retirement pension benefits.
The Act provides for the category of workers to be covered thus:
“The
scheme shall apply to all employees in the Public Service of the Federation,
Federal Capital Territory and the Private Sector:
(a) In
the case of the public sector, who are in employment; and
(b) In
the case of the Private Sector, who are in
employment in an organization in which there are five or more
employees.’’
Other specific features of the Act relevant to our discourse today are:
·
A
contribution of 15% minimum of the total emolument payable on behalf of each
employee. The minimum employer contribution rate is set at 7.5% while the
maximum employee contribution rate is 7.5%. However an employer may decide to
fund the scheme wholly for the employee. In addition, employees can make
voluntary contribution.
·
Opening
an Employee Retirement Savings Account where any funds so contributed will be
credited monthly.
·
Pension
funds/assets are to be privately managed and invested by professional fund
managers.
·
Regulation
of Pension Fund Administrators/Custodians under uniform law and regulations and
establishment of the National Pension Commission to regulate, supervise and
administer the Scheme.
·
An
employee will not be able to make any withdrawal from his account before
attaining the age of 50 years, except in the cases of mental or physical
disability, and employment terms and contract.
·
The accumulated
amounts can either be used to buy an
annuity or be invested with an asset management company under a phased
withdrawal arrangement.
The objectives of the new scheme can be broadly categorized into Social
and Economic objectives with the understanding that the social objective should
override the economic objective. Concerns about the safety and security of the
funds should take precedence in investment decisions for it is only when
workers retirement benefits are due and there are enough pension funds/assets
in the scheme to match them that pension benefits can be secured.
SECURITY OF PENSION BENEFITS
Security of pension benefits was one of the major reasons the old
inefficient and unfunded pay as you pension scheme was scrapped and replaced
with the Contributory Pension Scheme. The Pension liability of the Federal
Government ran into billions of naira and many private sector Schemes where
they exist at all were poorly managed and at times the funds brazenly looted
and there were no consequences because there was no regulator as we now have in
the mould of PENCOM.
Can my pension benefits be secured through my life time? Pertinent
question.
If pension benefits will be secured through a man’s life time, I dare
suggest that the place to start addressing that security is the Pension Reform
Act 2004 which is a radical departure from the old unsustainable scheme. The
employee also has a lot to do to ensure that his pension benefits are secured
through his life time. The following issues will be key to securing pension
benefits for a life time.
Contributory Scheme
The fact that the new scheme is contributory at a prescribed ratio
should help address the issue of lack of funding in the past. The Government
will no longer have to make inadequate budgetary provisions and the private
sector employers can no longer dip their hands into the pension fund/assets of their
employees as they are no longer in control of the funds which is now held by
the Pension Fund Custodian and invested by the Pension Fund Administrator.
Retirement Savings
Account
The Act requires every employee to open a RSA with any PFA of choice into
which retirement benefits will be credited. That way an employee can monitor the
remittances of the employer, monitor the account itself and he can demand
regular/periodic statement of account from his PFA. He can even discipline his
PFA as he has the power to change his PFA at least once in a year.
Accessing Retirement
Benefits
The statutory age at which one can access his pension has been put at fifty
(50) years so even if one retires earlier, he will not be able to access the
retirement benefits in his RSA. He will not be entitled to make any withdrawal
from the retirement savings account before attaining the age of fifty (50)
years.
There is equally the provisions for programmed withdrawal which will
help in ensuring that the retirement benefits are stretched over the employee’s
lifetime as he can only withdraw a lump sum from his RSA provided that the
amount left after that lump sum withdrawal shall be sufficient to procure an
annuity or fund programmed withdrawals that will produce an amount not less
than 50% of his annual remuneration as at the date of his retirement.
Minimum Pension
Guarantee
The PRA 2004 makes provision for a minimum pension guarantee by
providing that all RSA holders who have contributed for a number of years to a
licensed PFA shall be entitled to a guaranteed minimum pension as may be
specified from time to time by PENCOM.
If government will shoulder the fiscal responsibility for the MPG as is done
in other jurisdictions such as Chile and the U.K then the MPG will further
secure a retiree’s pension benefits through his life time.
Compliance
Since
the passage of the reform Act, compliance with its provisions have been a major
challenge especially in the private sector. The public sector does not have
such a challenge as participation is compulsory for all public employees. In
the private sector, organizations with at least five employees are required to
implement the Contributory Pension Scheme. However, compliance by the private
sector has remained a challenge due to lack of comprehensive database of
employers of labour in the country, which limits the extent of enforcement by
the regulator. Similarly, employers themselves are not willing to comply with
the provisions of the Act as they erroneously believe that it is an additional
cost to their Organizations.
If
all the business organizations covered by the Act comply with its provisions,
then it will go a long way in securing pension benefits. It is further
suggested that the coverage of the Act be expanded to include all employees
whether they are employed in an organization with only one employee or
otherwise. Why restrict it to organizations with 5 employees or more?
The
extension of the coverage will help address the difficulties faced with the informal
sector. Because the informal sector in Nigeria lacks a coherent structure and
has an unwieldy composition, its integration into the new scheme is very
herculean and difficult but if some issues like coverage, contribution rate,
mode of collection and enforcement are addressed then the informal sector can
be brought in and more Nigerians covered thereby securing their pension
benefits for life.
The National Pension Commission, The Pension Fund
Administrator and the Pension Fund Custodian
The
reform Act created the National Pension Commission and charged it with the
responsibility for matters relating to the regulation, supervision and
effective administration of the Scheme and for matters connected therewith. PENCOM
has wide and varied powers to administer the scheme, license and revoke the
licenses of erring PFAs and PFCs and in addition to set guidelines and prescribe
regulations from time to time as may be necessary for effective administration
of the Scheme.
The
reform Act conscious of past failures removed the management of the funds from
the erstwhile managers, creating the PFAs and PFCs to manage and hold the funds
respectively. This dichotomy has the advantage of further protecting pension
benefits as the one who holds the funds in trust cannot manage and the one who
manages cannot hold the funds. With good
faith the PFAs and PFCs can act as checks on each other to protect pension
funds and assets.
The
Act further imposed the duty to keep proper books and accounts, the duty to
protect pension funds, the duty to report fraud, the duty of loyalty on the
PFAs and PFCs to further protect the funds and ensure retirement benefits.
Investment of Pension
Funds and Assets
One of the most important ways to ensure that pension benefits are
secured is to protect the funds and assets subject of the Scheme and make sure
they are not frittered away by either fraudulent and incompetent fund
administrators or as a result of bad investment decisions. Since one of the
major policy considerations behind the reform Act is the desire to provide for
the worker in old age or during ill health and to secure his financial
wellbeing, any mismanagement of the funds may mean a failure of the scheme.
To prevent this possible outcome, the Act provides for relatively safe
and less volatile areas of the Nigerian economy where the funds may be invested
with the objective of safety and maintenance of fair returns on investments to
the beneficiaries.
Pension funds and assets are therefore to be properly invested in
authorized investment such as bonds, bills and other securities issued or
guaranteed by the Federal Government and the CBN, bonds, debentures, redeemable
preference shares and other debt instruments issued by corporate entities and
registered on the Stock Exchange, ordinary shares of public limited companies
listed on a Stock Exchange, Bank deposits and bank securities, Real estate
investment amongst others with the obligation to keep the pension funds and assets safe.
The Act further requires the PFAs to establish Risk Management Committees
and Investment Strategy Committees, which Committees shall also ensure that the
PFAs comply with the provisions of the Act. In addition they are to employ a
Compliance officer who shall be responsible for ensuring compliance with the
provisions of the Act and the internal rules and regulations made by the PFAs.
Corruption and Fraud
Whatever we do, if corruption is not addressed, most things in our
country will fail and pension benefits may not be an exception as we have seen
with the National Provident Fund and the National Insurance Trust Fund. The
effect of corruption on pension fund is being currently dramatized before the
nation with the ongoing police pension probe at the National Assembly. At the
last count, over Fourteen Billion Naira had been looted from the police pension
fund. And this happened right in the office of the Head of the Civil Service of
the Federation.
Corruption has become so pervasive in Nigeria that the apex court, the
Supreme Court of Nigeria, had this to say about it in the year 2002:
“corruption
is not a disease which afflicts public officers alone but society as a whole.
If it is therefore to be eradicated effectively, the solution to it must be
pervasive to cover every segment of the society”.
“corrupt
practices and abuse of power can, if not checked, threaten the peace, order and
good government of the federation or any part thereof”.
The question of fraud should also be addressed, PENCOM has the
responsibility to regulate and monitor the PFCs and PFAs who hold the funds and
place investments respectively and it must discharge this responsibility efficiently
and effectively to forestall the ever present possibility of embezzlement of
the funds. In this regard, we must learn from the experiences of even more
developed countries in safeguarding pension funds/assets.
PENCOM and indeed all stakeholders therefore ought to heed the warning
of one Ugo Okoroafor who wrote in the Champion newspaper in 2006 thus:
“…
as a warning though, it should be noted that the experiences of even more
developed countries in safeguarding pension assets give cause for concern. Just
as examples, Robert Maxwell, who introduced scientific printing in Britain and
in the process set up a vast media empire that included the famous Mirror Group
Newspapers, embezzled the pension assets of his workers worth hundreds of
millions of British pounds sterling. He did this right under the nose of
British regulators…”. Okoroafor
wrote further, “the ongoing Enron saga
is also another example. In this case, hundreds of millions of pension dollars
were invested in Enron’s derivative projects which evaporated into thin air
when the company went burst”.
CONCLUSION
We circle back to the question with which we began this discourse, “Can
my Pension Benefits be Secured through my Lifetime?”.
To this question and to many of life’s pertinent questions, there may be
no clear cut answer because many factors and variables may and do affect the
outcome of many of man’s ventures but if we will do what is right, if our laws
will be strictly enforced and if we will cut corruption and the monumental
waste of public funds by say 50%, then the odds that our pension benefits will
enure and be secured through one’s life time will considerably be much higher.
The Pension Reform Act 2004, which we believe is wise and good law
barring a few proposals for amendment seeks to ensure and guarantee secured
pension benefits but this is only possible if all stakeholders resolve to make
it work. PENCOM, the PFAs/PFCs and the retiree/beneficiaries must do what is
required of them and the retiree/beneficiary must seek to understand how it
works, monitor his PFA, seek PENCOM regulations and also understand a bit of
the Market, sharpen his financial literacy skills and where possible consult
and seek opinion of experts for after all it is his money and his future that
is at stake.
Stephen O. Obajaja Esq. is a Partner at the Lagos
Law Firm of Fountain Court Partners.
STEPHEN O. OBAJAJA
Fountain Court Partners
Block 36B, LSPDC Estate
Ogudu Road
Ojota – Lagos.
08052066172.
