THE NIGERIAN PAY AS YOU GO AND CONTRIBUTORY PENSION SCHEME; A COMPARATIVE STUDY

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1 THE NIGERIAN PAY AS YOU GO AND CONTRIBUTORY PENSION SCHEME; A COMPARATIVE STUDY ASSOCIATE PROF NWITE S.C. & EHIOGU CHIZOBA PERPETUA (ESUT/PG/PhD/013/13387) ABSTRACT The Nigerian pay as you go and contributory pension scheme; a comparative study sought to compare the new pension scheme with the past pension schemes, with respect to their principles (core values), with a view to highlighting some areas of departure in the new pension scheme from the past ones. The study employed secondary data through the review of related literature in other to establish the nature and uniqueness of each scheme. The study reveals that new pension scheme differs from the previous ones in terms of funding, type, membership and pension portability etc. The objectives of the new pension scheme are ideally laudable and superior to those of the past schemes. However, the past pension schemes were characterized with financial mismanagement (corruption), which gave way to their ineffectiveness and subsequent abrogation. On that note, a stronger and powerful regulatory body was established, the National Pensions Commission (PENCOM), with the activities of the two principal agents in the new pension scheme: Pension Fund Custodians (PFCs) and Pension Fund Administrators (PFAs) with zero tolerance for any form of financial misappropriation. this means that managing and remitting funds under the new scheme has resulted in reduced delays created by the old pension scheme because each retirement savings account is managed separately, which means no undue bottlenecks will be created when it is time for the benefits to be paid out. Having said this, the new pension scheme will have the expected and needed congenial environment to practically bring to bear its expected benefits. Key words: New pension scheme, old pension scheme, pension reform, corruption, benefits INTRODUCTION The pension schemes in Nigeria had been bedeviled by many problems before the intervention of the pension reform Act The public service operated an unfunded defined pension benefits scheme. The annual budgetary allocation for pension benefits was often overcrowding other social budget due to accumulated debts running in billions of naira. In many cases, inadequate and untimely release of funds resulted in delays and huge pension deficit. The administration of the scheme was weak, inefficient and non-transparent. The system suffered lacked an authentic data base for pensioners, whereas stringent procedures were required to process pension claims where documentation is haphazardly maintained. Similarly, sharp practices in management of pension funds exaggerated the problem of pension liabilities to the extent that pensioners, due to poor condition of their health status, were slumping and/or dying on verification queues (Olurankinse and Adetula, 2010). Retirees and their families were subjected to ridicule and unbearable lives as they could not meet their social needs. Pension Reform Act 2004 was established to put an end to suffering and abject poverty to which many pensioners experienced as a result of the failure of government and its agencies to honour its pension obligations regularly in the 1979 Pension Reform Act. The socio-political economy of any nation informs the perception of its citizens about retirement either to embrace it with adequate pre-arrangement or be gripped with fear and apprehension of uncertainties that would unfold during their retirement period (Komolafe and Ahiuma-Young, 2010). As succinctly observed by Idowu and Olanike (2010:2): Pension is a form of income that workers or their dependents receive after workers retire, become disabled or die. Pension plans benefit people who have had careers in private industry; in a nation s armed forces or in national, state and local governments. Many individuals who benefit are self employed or whose employers do not provide a pension plan establish their own pension plans (World Book Encyclopedia, 1999). Put differently, pension schemes exist to provide post-retirement benefits to employees. HISTORICAL DEVELOPMENT OF PENSION IN NIGERIA Page 107

2 Pension scheme was introduced into Nigeria during the Colonial era to provide old age income and security to British citizens working in the country upon retirement. Nigeria s first ever legislative instrument on Pension matters was the Pension Ordinance of 1951, which had retrospective effect from 1st January, The National Provident Fund (NPF) Scheme established in 1961 was the first legislation enacted to address pension matters of Private Organisations. In 1972, following the Udoji Commission Report, Public Pension Scheme was established; the National Providence Fund was consequently subsumed under the Presidency as a parastatal The Nigeria Pension Board (NPB). However, in its operations, NPB was inefficient in many aspects. For instance: i) The workers lacked the needed enlightenment and awareness about the pension system and the workers rights; ii) Amount for contribution was fixed at four naira (N4.00) irrespective of one s pay level; iii) Only employers contributed, thus, the weight of pension responsibility was on the employer; iv) The pension system (management and administration) was remote to the expected beneficiaries (the retirees and expected retirees); v) Pension funds were misappropriated, and the Board was poorly managed. It was followed 18 years later by the Pension Act No.102 of 1979, as well as the Armed Forces Pension Act No. 103 of the same year. The Police and other Government Agencies Pension Scheme were enacted under Pension Act No. 75 of 1987, followed by the Local Government Pension Edict which culminated into the establishment of the Local Government Staff Pension Board of In 1993 the National Social Insurance Trust Fund (NSITF) Scheme was established by Decree No. 73 of 1993 to replace the defunct NPF Scheme with effect from 1st July, 1994 to cater for employees in the private sector of the economy against loss of the employment income. As identified earlier by Orewa and Adewumi (1983), Local government system also established pension schemes for their staff, with a separate board known as the Local Government Pension Board. It was established to take care of the local government staff that would have retired from the system. The new Pension Reform Act 2004 up to year 2004 when the Pension Act was passed by the National Assembly the government operated an unfunded defined Benefits Scheme and the payment of retirement benefits was budgeted annually under the Pay-As-You-Go Benefit Scheme against the backdrop of an estimated N2 trillion deficit, arbitrary increase in salaries and pensions as well as poor administration. The Obasanjo administration initiated a Pension Reform in order to address and eliminate problems associated with the Pension Scheme (Federal Ministry of Information and Communication, 2004). The problems associated with the unfunded defined benefit pension are as follows: First, by 2004, the occupational pension industry in Nigeria found herself in desperate financial straits. Secondly, the coverage ratio of Nigerian workers (workers covered by a formal pension) was a dismal 1.3% which pales in comparison to Cameroon and Mauritius with coverage ratio of 30% and 60% respectively (Legacy, 2005). Thirdly, the covered federal and state civil service workers were owed by an estimated N2 trillion or 25% of the GDP of Nigeria as indicated by the publications of the Federal Ministry of Information and Communication (2004) and Legacy (2005). The reason that was advanced for this heavy debt was that the Federal Government operated an unfunded Defined Benefit Pension Scheme, on a Pay-As-You-Go basis. The regulation of the various pension schemes was fragmented between separate, government agencies. This led to weak and ineffective administration Pension administration in Nigeria. The effect of the above scenarios was to create long line of pensioners waiting to collect their entitlements and bankrupt scheme that did not address the contributor needs. PROBLEMS OF THE NIGERIA PAY AS YOU GO (OLD PENSION SCHEMES) The need for pension reform was necessitated by the myriad of problems that plagued both the Defined Benefit arrangement - Pay-As You-Go- (PAYG) in the public sector and other forms of pension systems like occupational schemes, mixture of funded and DB schemes that operated in the private sector. One of the challenges of the public sector lied in its dependence on budgetary provisions from various tiers of governments for funding. The scheme became largely unsustainable due to lack of adequate and timely budgetary provisions. This was the reason for the soaring gap between pension fund obligations and revenues, which threatened not only economic stability but also crowded out necessary investments in education, health and infrastructure. This was exacerbated by various increases in salaries, which ultimately led to increase pensions and hence undue pressure on government fiscal responsibilities. Pension Administration had been largely weak, inefficient and cumbersome due to poor staffing and equipping. This had more often than not led to poor record keeping at all pension offices throughout the country as a result of which many pensioners had to spend years before their retirement benefits were paid. The exit phase was quite challenging where payment procedure was often very tedious, sometimes the pensioners had to wait for days and years, to collect their entitlements. Similarly, the reimbursement process for the split of pension and gratuity payments between Federal and State services and other agencies was very clumsy, untidy and sometimes fraught with bribery and corruption. There were undocumented cases where the reimbursing agency holds the recipient to ransom. The private sector schemes were characterized by very low compliance ratio due to lack of effective regulation and supervision of the system. Most of these schemes were akin to Provident Fund Schemes, which did not provide for periodic benefits. Even at this, many private sector employees were not covered by any form of pension scheme. COMPLAINTS OF THE NIGERIA WORKERS Page 108

3 Prior to Pension Reform Act 2004, pension schemes in Nigeria had been bedeviled by many problems. The public service operated an unfunded defined pension benefits scheme. The Nigerian workers complained of so many issues among the following; i. The issue of inadequate and untimely release of funds resulted in delays and huge pension deficit. The administration of the scheme was weak, inefficient and non-transparent. ii. There was no authentic data base for pensioners. iii. Cumbersome and stringent procedures in the pension claims and payment. Similarly, iv. The issue of fraudulent and sharp practices in management of pension funds exaggerated the problem of pension. v. Long and unending queue resulting to pensioners slumping and/or dying on verification process (Olurankinse and Adetula, 2010). Retirees and their families were subjected to ridicule and unbearable hardships. vi. The old scheme did not cover many employees in the private sector. Broadly speaking, pension schemes in Nigeria were largely unregulated and unsupervised. Therefore, no standard rules and regulations in its operation. vii. The failures of pension schemes in Nigeria have been attributed to poor pension fund administration, outright corruption and embezzlement of pension fund as well as inadequate build-up of funds and poor supervision. viii. The nature of our society has not done enough to help persons see retirement in a positive manner because lack of provision of social security, nonpayment of pension benefits to beneficiaries as and when due, backlogs of unsettled pension liabilities, lack of data base of pensioners in Nigeria, lack of accountability and transparency, corruption, improper and/or outright absence of documentation that characterized the old defined pension benefits made the old system unmanageably unsustainable ix. Some of them falsify documents to stay put in service until they are forced out through compulsory retirement. Retirement, therefore, is seen by them as a curse rather than a blessing (Sababa and Usman, 2005). REASONS FOR THE INTRODUCTION OF CONTRIBUTORY PENSION SCHEME The new contributory pension scheme was introduced to stem the deficits of the unsustainable old defined pension scheme. The old pension only covers public service and a few private organizations. There is disparity between public and private sector organizations and even among various cadres in the same organization. The old pension was crowding out other social expenditures in budget. Much is spent on it to the detriment of demand from other social responsibilities. The old pension scheme was characterized by weak administration, inadequate budget allocations, untimely release of the insufficient allocations which culminated in huge arrears of pension benefits and particularly perpetuated irregular payment of pensioners their legitimate pension rights (Odia and Okoye, 2012). In the old pension system, pensioners were not paid their pension benefits promptly and regularly due to corruption, mismanagement of pension funds and financial constraints. The new pension scheme was introduce to ensure that retirement benefits are paid as and when due to avoid subjecting retirees to untold suffering. The new scheme was set up to address the issue of distortions from changes in life expectancy. In reality retirees outlive their life expectancy buy far, thereby putting pressure on the budgetary provisions and the scheme is too generous to be sustainable Ibo (2006) reported that some companies are not only reluctant to adopt the scheme but have gone ahead to instigate their ignorant employees as a way of dissuading them against the scheme. Also, some companies are dragging their feet to transferring the pension rights of their employees to PFAs. Some have been accused of surcharging the pension dues of their employees as a strategy to reduce their own financial commitment instead of encouraging them of the beauty and benefits of the scheme. Despite these developments, it is interesting to note that some foreign private companies operating in Nigeria were already practicing this type of pension scheme long before it was officially adopted by the Federal Government. Such companies included Asea Brown Boveri (ABB), PZ Industries, PLC (Ibo, 2006). The above scenario necessitated the administration of former President Olusegun Obasanjo to constitute a committee of core professionals, headed by Mr Fola Adeola, to study the problems associated with pension administration in the country and make appropriate recommendations. The report of this Committee formed the basis of the Pension Reform Act 2004 to address and/or eliminate the problems. The main thrust of the Act is to ensure that every person who worked in either the public service of the federation, federal capital territory or private sector receives his or her retirement benefits as and when due; assist individuals by ensuring that they save to cater for their livelihood during old age and thereby reducing old age poverty; ensure that pensioners are not subjected to untold suffering due to inefficient and cumbersome process of pension payment; establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the public service of the federation, federal capital territory and the private sector; and stem the growth of outstanding pension liabilities. The 2004 Pension Reform Act created the National Pension Commission as the sole regulatory agency on all pension matters to supervise the activities of the licensed private pension operators. AREAS IN THE PENSION THAT WERE ADDRESSED BY CONTRIBUTORY PENSION SCHEME THAT WERE NOT COVERED BY THE PAY AS YOU GO 1. The act will cover all Federal, and civil service workers in Nigeria, all private sector employees employing more than 5 people are also mandated to register their employees under the scheme. 2. Individual Retirement Savings Account: This established private Retirement Saving Account Page 109

4 ( RSA ) in the names of individual contributor not the employer, these are principle s accounts where pension contribution will be made 3. Contributory: The act provide for contribution by the employee and a matching contribution by his/her employer to ensure a minimum contribution of 15% into the Retirement Saving Account (RSA) 4. Fully Funded: The act mandates that the employer must take good his portions of the employees contributions every month into the RSA. Hence pension contribution cannot be carried forward but must be settled in the month they all due. The funding element increases their security of the Pension on behalf of the contributors. 5. Privately Managed: The act stipulates that only professional fund managers, licensed and approved by the National Pension Commission ( PENCOM ) are allowed to mange pension funds as Pension Fund Administration ( PFA ). The Act stipulates strict conditions and guidelines to be complied with to become PFAs. 6. Separation of Custody of Assets: The Act separates the functions of physical custody of pension assets from that of management of the RSA. The assets of the Pension Scheme are held in custody, in trust, for the benefit of the individual contributors by Pension Fund Custodians ( PEC ). The Act stipulates strict conditions and guidelines to be complied with to become PFCs. 7. Strictly supervised and regulated: The Act stipulate uniform rules guidelines for the supervision and regulation of the pension sector in Nigeria through one single regulator, backed up by an Act. Hence all previous laws in Nigeria have been rescinded. Where there are conflicts in the interpretation of pension laws in Nigeria the pension Reform Act 2004 will take precedence. A COMPARATIVE STUDY OF THE OLD PENSION SCHEME AND CONTRIBUTORY PENSION SCHEME The new pension scheme is known as a contributory pension scheme and it was established by the pension Reform Act in It is a method that ensures that workers retirement contributions are remitted regularly by employers; both in the private and public sectors. In the past, only a few institutions operated the contributory pension scheme, and a good many private sector operators did not institute any sort of retirement scheme for their staff. The major success of a contributory pension scheme is regularizing the process of remitting funds to retirees. Also, under the new pension scheme, retiree benefits may or may not be remitted, depending on the liquidity of the business. However, in a funded contributory pension scheme, this risk is eliminated, and it can be ascertained early on in the employee s work life. Usually, defaulting employers can be compelled to fund the Retirement Savings Accounts of the affected staff. In a funded contributory pension scheme, workers are guaranteed retirement benefits which consist of the contributions made over time and the investment income and appreciation accruing to their RSAs. Managing and remitting funds under the new scheme has resulted in reduced delays because each retirement savings account is managed separately, which means no undue bottlenecks will be created when it is time for the benefits to be paid out. The new pension scheme differs from the previous ones in several ways. Odia and Okoye(2012), highlighted some of the differences are shown in Table 1. CHARACTERISTICS OLD SCHEME NEW SCHEME a. Funding a. Type b. Membership c. Pension portability d. Gratuity Mostly unfunded and pay as you go Largely defined benefit Voluntary in private sector Not portable Provided to the qualified Contributory and fully funded Defined benefit Mandatory for all employees in public and private sector except pensioners and those with 3 years to retire. Personalized and very profitable Provision for lump sum withdrawal. c. Contribution Non-contributory only employers pay-up retirement dues. No option, all pension Contributory both employer & employee contribute certain percentages to the pension fund. Page 110

5 matters handled by one board: Freedom to choose PFA NPB, NTF and later NSITF, at different times. d. Management Largely state and management Private and individual choice union e. participation RSA holders had no say, no knowledge. Remote to employee-contributors: no access. f. Investment Pension was Straight jacketed No interest paid to retirees. g. h. supervision All functions lumped into one organization: NPB, NPTF and NSITF at various times in history. i. Risk management High payment risk associated with liquidity, ill-health or death of employer. j. Minimum service year Dismissal from service Initially 15 years for NPB, 10 years for NPTF and reviewed to 5 years for NSITF. k. Window movement Contributors had no choice, no alternative, no change Employee-contributors have access and can monitor their RSAs. RSA holders have a say where their savings are invested (by the PFAs). Deposits in RSAs are invested to generate interest for the retiree holders. The Act separates the functions of a Supervisory body PENCOM, Administrators (PFAs) and Fund Custodians (PFCs) No payment risk associated with liquidity, ill-health or death of the employer. Month of employment for all benefit subject to age and employee has minimum of 6month to withdraw from his RSA when dismissed from service. Employee-contributor can easily transfer RSA from one PFA to another RESEARCH FINDINGS The Contributory Pension Scheme (CPS), introduced following the enactment into law of the Pension Reform Act 2004, is more user-friendly: The new system allows contributors access to their account balance through the internet and other technology driven platforms. Worker s participation. An employee contributes to his retirement fund and is also at liberty to decides who manages it, Prompt and regular payment of benefits since funding is made monthly and credited to individual RSA immediately. Efficient customer service and good investment returns are at the heart of the scheme, and the Pension Fund Administrators (PFAs) have had to put systems in place, as well as personnel and services that will ensure that contributors can gain easy access to their accounts, maximize returns to be earned on their retirement benefits over time, and receive their retirement benefits with ease. The most significant of the new contributory pension scheme for the Nigerian workers, is the absence of queues. It also means that they do not have to travel long distances to get their pension payments or even to present themselves for periodic pay parades since pension payments are made directly to retirees accounts, through banks of their choice on a monthly basis. In addition, PFAs are required to have offices across the nation to enable clients have easy access to them. The new scheme enhances labour mobility, as workers can move freely from one employer to another without their retirement benefits being negatively impacted. The Pension Reform Act 2004 has instilled a savings culture among Nigerians which has created a pool of long term investible funds for the development of the financial markets and the economy as a whole. The life insurance cover for employees also improve staff welfare, and promotes workers commitment and loyalty while providing adequate cover for a worker s family should he or she die in service. There is availability of fund for investment particularly to the capital market. Contribution which is already in hundreds of billions of naira can be put to long term investments in the economy Fund withdrawals before the prescribed retirement age of 50 years are protected by the PRA There are various instances, where this can occur; a programmed withdrawal for life, the purchase of an annuity for life, and a lump sum Page 111

6 withdrawal. These requirements ensure that retirement benefits are only available to workers during their old age, except for situations of disability and ill-health. It also ensures that adequate funds are available on a continuous basis to meet recurrent expenditure of retirees throughout their lives. The Act also enables employees who have been out of employment by way of termination or redundancy and have not secured alternative employment after 6 months, to access a portion of their retirement savings. It reduces government spending and administrative cost. Private sector participation in the management of the scheme. This has introduced profit making into pension administration and services as a check and balances against inflation effect on contributions. There is uniformity in the retirement benefits of public and private workers as well as in different cadres of any organization. There is now a central regulator (PENCOM) who oversees all pension matters nationwide IMPLICATION OF THE FINDINGS The new scheme has introduced a nation-wide mass savings culture, which has accumulated assets that can be invested in financial markets thereby promoting liquidity in the financial markets which is a road map to the success of any economy. Pension fund activities are capable of inducing financial market development through their substituting roles with other financial institutions (commercial and investment banks). Globally, pension funds are noted to be competing intermediaries for household savings and corporate financing. CONCLUSION The new contributory pension scheme is a welcomed development because there is a community agreement among the public and private establishment that pensioners are promptly enrolled for pension benefits immediately on retirement, and they commence to receive pension benefits after six months waiting period. Pensioners agreed that the scheme has ensured prompt and regular payment of pension benefits to retirees. The National Pension Commission, as the only regulatory and supervisory agency on pension matters, issues guidelines and regulatory policy instruments in the pension industry to monitor the activities of the licensed independent pension funds administrators and pension funds custodians. This ensures availability of funds for prompt and regular payment of pension benefits. RECOMMENDATIONS a. Many contributory workers and retirees do not know or understand the provisions of the Act. Some retirees, out of ignorance, give personal interpretation of the provisions, and often make demands that are out of context of the Act. Therefore, the researcher recommends an increase awareness campaign and publicity on the objectives, benefits and efficiency of the new pension scheme by the contributory workers and pensioners is key. b. There is urgent need for employers of labour to organize interactive forum with their employees, pension funds administrators, and the National Pension Commission officials. c. Review of the Act is recommended to keep its provisions in touch with the issues of economic and social changes and development in our national life. d. There is need to checkmate the activities of the two agencies (Pension Fund Administration and Pension Fund Custodian) by National Pension Commission ( PENCOM ) from time to time REFERENCES 1. Ahmed, M. R. (2005) Pension Reform Act: Standing the Taste of Time A Position Paper at Stakeholders Forum, Lagos. 2. Federal Government of Nigeria (2004) The Nigeria Pension Reform Act, Official Gazette No. 2. Abuja (Accessed 25/06/2013). 4. Ibo, L. (2006) New Pension Act: A Revolution in Pension Administration. A paper presented at PENCOM Enlightenment Seminar, Abuja. 5. Ibrahim, M. (2005) Pension Reform Act: Enforcing Compliance. A Paper presented at the Stakeholders Forum, Lagos. 6. Idowu, K.O. and Olanike, K.F. (2011). Pension and Pension Reform in Nigeria. (Retrieved 19/3/2011). 7. Komolafe, F and Ahiuma-Young, V. (2010). Military Withdrawal from Pension Reform: Who Benefits. (Accessed 27/02/2011) Page 112

7 8. National Pension Commission (2004); Pension Reform, Odia, J. O and Okoye, A.E (2012); pension reform in Nigeria: a comparison between the old and the new scheme. Afro Asian journal of social sciences, Volume 3, n0 3.1 quarter ISSN : Olurankinse, F. and Adetula, G.A. (2010). Functional Analysis of Pension Scheme Reforms in Nigeria from 1946 to /12/2010). 11. Sababa, L.K. and Usman, F.I. (2005). The Psychological Effects of Poor Planning on Retired Civil 12. Servants: Implication for Guidance and Counselling. International Journal of Social and Policy Issues, Vol. 3, No Schwarz, A. M. (1999) World Bank Discussion Paper. World Bank, Washington, D.C. Page 113