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Some concerns for the Nigerian contributory pension scheme 24 Aug 2020

The federal government enunciated a momentous economic reform in 2004 with an act of parliament that created the contributory pension scheme (CPS) in Nigeria. The CPS is a system whereby employers and employees jointly contribute to the retirement savings accounts (RSAs) of the employees. The system was adopted in the country as a preferred alternative to the then-existing defined benefit scheme (DBS), under which the government had amassed huge, unfunded pension liabilities. The DBS was also fatally inefficient; it was not uncommon for retirees under the scheme to slump and die while physically waiting in long queues to be paid their pension.
    
In contrast to the DBS, the CPS has created a funded and liquid pension system that has continued to grow its savings assets. As at June 2020, the total pension assets had grown to N10.79 trillion. The CPS has also succeeded in growing the nominal value of the savings of contributors. As such, retirees under the scheme, RSA holders and their beneficiaries have been accessing their pension benefits as due to them.

Remarkably, the CPS has avoided many of the challenges that undermine sustainable implementation of public policy in Nigeria. The pension industry regulatory framework, which has the National Pension Commission (PenCom) as the industry regulator, is transparent, even-handed, disciplined and intolerant of regulatory infractions. By design, the pension assets are operationally ringfenced. Whereas the Pension Fund Administrators (PFAs) act as the investment managers, the pension assets reside with the Pension Fund Custodians (PFCs). This institutional separation of responsibilities has worked seamlessly. It has also ensured that, when City Trust Pension – one of the PFAs – was distressed, the RSAs it held were transferred to another PFA with their values preserved.

Customer service under the CPS has also been top-notch. The PFAs have functioned essentially as financial technology (fintech) firms by predicating their services on robust IT infrastructures. Contributors have access to pension services round the clock.

The savers, custodians and managers of the pension funds are happy with the system that has continued to deliver value to its stakeholders. The government is very much benefiting from the system as well. The pension assets have continued to support the government’s deficit financing. According to the June 2020 report by PenCom, N7.2 trillion of the total pension assets was invested in government securities.

Instead of the perfect storm that thwarts public policies in Nigeria, the CPS has provided peace of mind. But it is important to examine the undercurrents that may upset the quiet. The most immediate concern for the continued growth of the pension assets is the prevailing economic slump in Nigeria. After the 2016-17 recession and the anaemic economic growth that followed it, the Covid-19 pandemic is set to plunge the economy into a historic, deep recession from Q3 2020.

The continued growth of the pension assets in the last few years had masked the poor performance of the labour market. While unemployment was rising, pension assets were also rising in value. However, there are signs that this may not continue much longer. As their revenues have fallen sharply due to the oil price slump, many federal agencies and state governments are failing to remit the pension contributions of their workers. As new contributors reduce to trickles, yields on the investment of the existing assets may become the major source of future growth in the industry.

A related concern should be the demographic lop-sidedness of the RSA holders, relative to the total workforce. Youth unemployment has been outpacing the overall jobless rate in the country, which according to the 2019 projection of Nigeria Employers' Consultative Association, could rise to 33.5 per cent in 2020. The still-raging Covid-19 pandemic suggests the country’s unemployment rate could worsen. This trend, coupled with the fact that only about 12 per cent of the Nigerian workforce is currently enrolled in the pension scheme, indicates that Nigerians facing unsecure retirement are a rising majority.

Also of concern is that the average rate of returns (ARR) on the pension assets may become stuck below the inflation rate. Financial Nigeria projects the ARR for the industry to trend below 10 per cent in 2020, even as the inflation rate has been trending upward to reach 12.56 per cent in June.  The negative inflation-adjusted average rate of return is eroding the real value of retirement savings. To compound the monetary quagmire, the value of the naira has also been facing sustained downward volatility. Since March, the local currency has depreciated by 26 per cent in the parallel market. The weakening naira exchange rate could mean that some savers may not be able to afford certain retirement lifestyles they are saving towards.

Still, it is concerning that the good idea of harmonising the biometric data of savers with the national identity database being managed by the National Identity Management Commission (NIMC) may deliver bad outcomes. NIMC has been perennially inept at discharging its responsibility of providing a single identity system for Nigerians. The first test of the data collaboration came with the Covid-19 pandemic. PenCom had to suspend its directive since 2018 that pension savers should provide their National Identity Numbers (NINs) and Bank Verification Numbers (BVNs) to their PFAs. The lockdown due to Covid-19 made the persisting difficulty faced by retirees in obtaining the NINs more amplified. But the RSA holders would be subjected to harrowing experiences in trying to meet the NIN requirement once again soon after the lockdown has been lifted.

Finally, the governance of the pension industry is less than desirable now, as PenCom has not had a substantive Director General since April 2017. This is not to mean that the acting DG, Aisha Dahir-Umar, is not leading the agency competently. However, the uncertainty of her tenure would be less assuring for the market.

The foregoing indicates the need for further safeguards for the CPS. One, it is imperative that Mrs. Dahir-Umar is confirmed as the substantive DG or a new person should be appointed into that position. Two, the economy needs to return to appreciable growth at the earliest time to support job creation and the growth in the number of contributors in the CPS.

Three, the current zero-sum economic management by the Central Bank of Nigeria (CBN) that creates a win-lose situation across investment and savings asset classes needs to end. Recent CBN policies have tendentiously discouraged savings while promoting some investments. Moreover, the reserve bank needs to deliver on its primary mandate of price stability.

Finally, the economic multiplier effects of investing 66 per cent of the pension assets in poorly governed and corruption-ridden public capital investments has been quite weak. The efficiency level of such projects, in terms of their contributions to economic growth and job creation, is key to harnessing the benefits of the country’s funded and safe pension system.