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The ill-advised proposals to tinker with the pension system 16 Oct 2017

In 2010, a bill was introduced at the House of Representatives, seeking to exempt the Nigerian Armed Forces (Army, Navy, Air Force) and intelligence agencies from the Contributory Pension Scheme (CPS). The private members’ bill was sponsored by Honourable Oluwole Oke, representing the Obokon/Oriade Federal Constituency of Osun State. Despite objections from different quarters, an enabling legislation was enacted in 2011 which withdrew the Armed Forces as well as Security Service Agencies (SSA) personnel from the CPS.

    
Given the near-collapse of the old Defined Benefit Scheme (DBS), due to highly inefficient operations and huge unfunded pension liabilities of the government, the Pension Reform Act 2004, now repealed by the PRA 2014, was enacted and provided the legal and operational framework for the CPS. Although the new pension administration has guaranteed timely payment of benefits to retirees, supporters of the Oke bill argued that it provided for a disparity in the lump-sum paid on retirement and low monthly pensions of retirees. They also contended that for national security reasons, there was a need to protect the personal information of security personnel from the generally administered CPS platforms.

After the withdrawal of Armed Forces and SSA personnel from the CPS, similar efforts were made to remove the Nigeria Police Force from the pension scheme for the same reasons. However, a political compromise was made, leading to the creation of a special Pension Fund Administrator (PFA) for the police. The police PFA, like every other operator of the new pension system, was licenced and regulated by the National Pension Commission (PenCom).

However, Oke sponsored another bill in May of this year calling for the removal of six paramilitary agencies from the CPS. The agencies are the Nigerian Security and Civil Defence Corps, Nigeria Customs Service, Nigeria Prison Service, Nigeria Immigration Service, Economic and Financial Crimes Commission, and, still, the Nigeria Police. The bill has now passed its second reading and is currently before the Pensions Committee of the House of Representatives, which completed its public hearing on September 28.

The promoters of the new bill also want the government to be fully responsible for the retirement plan of the paramilitary. In other words, the lawmakers want to return some of the country’s most critical law enforcement institutions to the outmoded, dysfunctional DBS.

To put things in perspective, this old system was marred by weak and poor administration. One of the risks associated with the system was inadequate funding because it was subject to budgetary allocations. At the time the scheme was abrogated in 2004, over N2 trillion unfunded pension liabilities had been accumulated. Whereas, under the efficiently-administered CPS, pension assets have grown steadily to N6.6 trillion as of June 2017. The 21 licenced PFAs have between them a total of 7.59 million contributors and growing. Federal government employees account for 1.89 million of the contributors to the Retirement Savings Accounts (RSAs), state employees 1.53 million, while the private sector account for 4.15 million. Between April and June 2017 alone, the PFAs registered 97,713 new RSAs.

After operating for 13 years, the evidence is that the CPS is working, and perhaps unrivalled by any other government initiative this millennium. PenCom is rigorous with exercising its regulatory oversight. Nigerian PFAs are competitive and have consistently mirrored their larger global colleagues in delivering healthy returns for their beneficiaries. Moreover, the pension assets have significantly improved liquidity in the Nigerian financial markets.

Without equivocation, the withdrawal of certain segments of the workforce from the CPS will unwittingly weaken the scheme. The resultant slum in liquidity in the pension system will hurt the government, whose deficit financing has been provided in large part by pension savings.

The idea of pension is to enhance the financial security of individuals after retirement. Oke’s bill, as well as another obnoxious bill being sponsored by Senator Aliyu Wamako, now seeks to undermine this. The Pensions Operators Association of Nigeria (PenOp) has denounced their proposals, saying they will be detrimental to retirees’ welfare. Oke’s bill proposes a 75% lump-sum withdrawal from the RSAs of retirees on retirement. The law currently provides for 25% lump-sum withdrawal. PenOp has argued if Oke’s proposal is implemented, the 25% balance in a retiree’s RSA would not provide adequate coverage for the retirees’ monthly pensions.  

To be sure, PenCom's preeminent priority is the safety of pension assets. To register for RSAs, PFAs are mandated to capture the fingerprints of contributors. The system is being upgraded for biometric data capture of the 10 fingers. With such scrupulous identification system and the stringent operational and investment guidelines PenCom has put in place, operators say it is almost impossible to carry out fraud under the CPS or take excessive risk with retirement savings. This should allay the concerns of supporters of the Oke bill who identify the potential risk of breaching the system and exposing the identity of security personnel as a reason they are seeking to dismantle those government institutions from the CPS.

However, additional layers of security can be put in place by the PFAs, in conjunction with the concerned government agencies, to have a fool-proof system that guarantees the protection of personal data on the RSAs of paramilitary personnel. Alternatively, closed PFAs can be set up for these government organisations, but under the CPS, à la the police PFA.

Cheta Nwanze is Head of Research at SBM Intelligence.