Tuesday, June 19, 2012

PENSION REFORM: CAN MY PENSION BENEFITS BE SECURED THROUGH MY LIFE TIME




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.




No comments:

Post a Comment