Mixed reaction trails pension industry 11% performance

At 11 percent penetration level, the Nigerian pension industry, regulated by the National Pension Commission (PenCom), has attracted mixed reaction from operators, stakeholders, and industry watchers. While many have commended the industry for the milestone, some who feel the industry, having been reformed twice in the last 17 years ought to be the leading light for many African countries.

Prior to 2004 when the first pension reform was introduced, the pension industry for the public sector operated the Defined Benefit Scheme (DBS), an employer-sponsored retirement plan. While the scheme was characterised by issues bothering on non-payment of fund, inadequacy and untimely release of funds resulting in delay and accumulation of arrears of payment as a result of the annual budgetary allocation for pension in the light of resource constraints, the private sector was also faced with similar issue as the Nigeria Social Insurance Trust Fund (NSITF) in practice did not cover so many employers.

But with a pension reform act in 2004, this led to the birth of the Contributory Pension Scheme (CPS). Unlike the DBS, the CPS requires equal amounts be contributed at 7.5 percent each by both the employer and the employee. Ten years later, the PRA 2014 came to replace the former act.

The 2014 PRA requires that 18 percent  be paid into the pension account by both employers and employees – with the employer paying the larger chunk at 10 percent while the employee takes care of the remaining 8 percent. While this particular act has been flouted for years, the federal government recently announced that it will commence payment of the accumulated differentials – that is the additional 2.5 percent of the government’s 10 percent – from 2014 to retirees

In addition to successfully implementing the pension reform acts, the pension industry currently boasts of N12.40 trillion Assets Under Management (AUM) and  over N9.3 million contributors. While this may be regarded as a significant milestone for the industry, the notion may change when put on a level ground with the pension industry from other countries. South Africa has a record of 19 percent, Kenya has 20 percent, and the United Kingdom has a record 77 percent.

Reviewing the performance of the sector 17 years since the initial reform, stakeholders at the third annual PenOp-National Assembly retreat organised by the Pension Operators Association of Nigeria (PenOp) have commended the remarkable growth and achievements in the industry whilst also pointing out that more needs to be done in the industry. 

Highlighting the need for strong political will among state governments, determination for self-regulation among the sector operators, capacity building, technological advancement and assurance of better future to Nigerian workers who contribute to the pension fund amongst other factors, Wale Odutola, PenOp President and the managing director, ARM Pension Managers said that during the past 17 years, Nigeria’s pension industry has come a long way from when the Pension Reform Act was first passed in 2004 whist also noting that the industry has transcended from a largely unfunded pension system to one that is fully funded and professionally managed by mainly private sector, as occasioned by the CPS practice, as it has adopted  international best practices

He added, “There is also a marked progress with respect to the level of professionalism within the industry. The pension industry has raised the bar for professionals locally. The investment, risk and compliance professionals within the industry can favourably compare to their counterparts anywhere in the world. Indeed, the industry has bred a new class of pension professionals across board over the years,”

On the other hand, Odutola noted that Nigeria’s level of pension assets to GDP is only a little over seven percent while in developed markets, it’s typically above 100 percent. He said, “Whilst the level of our pension assets are relatively large in absolute terms, when you look at it in relation to GDP, it is actually low. This further speaks to the fact that we need to increase the level of penetration of the pension scheme in general”.

Commenting on the performance of the industry, the Coalition of Civil Societies and Media Executives for Good Governance in Nigeria (COCMEGG), has lauded the reforms in the operations and administration of the pension industry.

Stating that PenCom has become a benchmark for success and also a reference point in Nigeria, Kenneth Aigbegbele, president of the coalition, highlighted achievement in the industry to include paradigm shift in building strong institution, robust management of pension funds and performance measurement indices, as well as productivity templates spearheaded by Aisha Dahir Umar, the director general.

According to him, the management has given marching orders to Pension Fund Administrators (PFAs) and PFCs and Directorate of Licensed Pension Operators to work within the ambit of established rules and guidelines, within the Act establishing PenCom so as to shore up confidence of investors into the country and grow investments for the interest and the generality of the industry at large.

“This is attributed to the corporate culture of investment monitoring of pension funds, regulation, and the supervision of all pension matters on a daily basis to see that they conform with industry standards so as to build stakeholders, retirees’ confidence for the greater good of the country,” he said

Also commenting on the pension industry performance, Ekerete Ola Gam-Ikon, a consultant in insurance management and strategy noted, “The pension industry is evolving, and we should not rush into comparing ours with markets where pensions have been working over many decades, recognizing that experience plays a vital role. Besides, the financial services sector supports the successful implementation of the pensions law. Ours is trying to adapt towards more credit, which enables deductions for payments as we have in advanced economies.

“We should continue to work on the fundamentals and, where necessary, adapt it to our environment where despite ongoing efforts, the informal sector is gravely affecting predictions and permutations,” Gam-Ikon said.

Moses Ayanda, an insurance analyst and consultant, in a note to Business a.m. asserted that the development of the pension industry in Nigeria is far below the formal standard as he outlined that factors such as information asymmetry despite yearly campaign and verification exercise by the regulator, fear of the unknown as a result of constant change of policy, delay in payment  and accrued right on the back of governmental flaws even after due diligence by retiree.

He added that some PFAs are mostly driven to action by deals that would put money in their pocket rather and as such, abandon the 2004 pension reform act whilst also adding that the scheme in Nigeria is more capitalist driven and profit oriented than it is participant driven.

Is 100% penetration possible?

Of major concern to stakeholders is the question of possibility of all-inclusive penetration. In the view of analysts, this may not be impossible if only affected parties play their own part diligently.

According to Odutola, the large chunk of their work is in the area of conviction and building trust. He added that operators’ starting point in tapping the opportunities in the informal sector should be in analysing the market as he urged operators to channel financial inclusion efforts to the informal sector operators to saturate the market.

Similarly, Gam-Ikon noted that for an all-inclusive pension to be achieved, all stakeholders will need to work deliberately together to establish better understanding of the workings of pensions through education and research. He added that the regulator need not be quick to seek to or use sanctions or threats, for people who are still trying to understand it.

“Besides education, we should consider having it as part of the school curriculum. Indeed, not only for pensions but other elements of financial inclusion. Financial education is vital now,” he said.

Consequently, Ayanda noted that all hands have to be on deck to achieve an all-inclusive pension. On the part of PFAs, he urged them to appreciate more technology and abide by the rules of the Pension Reform Act whilst also urging that government releases payment as at when due and enforce the Act.

He said, “The government, PFA and all parties involved should promote more informal sector participation and orientation. The parties involved should put in place measures or platforms to gain more confidence in their prospects.”