EL-RUFAI ON FRIDAY
Pension Reforms: To Be, Or Not Or Be?
nelrufai@yahoo.com
A few years ago, it was common sight to see aged
pensioners struggling – and often dying - in the process of
obtaining what was rightfully theirs: their pensions. Due to the
chaotic and punitive conditions suffered by these senior citizens
who more often than not travelled great distances to Abuja to
receive their dues, many simply gave up the ghost – some literally
died while standing in queues.
Those that persevered were subjected to sleeping on the streets
under harsh weather conditions and begging passersby for what to
eat. To reward our parents and grandparents who had devoted their
lives to serving Nigeria in such cavalier manner speaks volumes
about our essence as individuals and collective humanity as a
people.
Any discourse about the issue of pension reforms in Nigeria must
begin with critical questions: What systems were in place for
pension administration and how effective where they? What happened
to the funds that were expected to be set aside for these pensioners
over the years? Was there not a less cumbersome means of pension
funds administration? What are the gains and losses of a decade of
pension reforms, and what more do we need to do as a country to
widen and deepen the social security system?
Pension, which is essentially setting aside monies for use in old
age when one can no longer work and earn much income, was first
started in the 1880s in present day Germany when Otto von Bismarck
introduced social insurance programs that became the model for other
countries and the basis of the modern welfare state. Bismarck
introduced old age pensions, accident insurance, medical care and
unemployment insurance. Bismarck appreciated that society has a
responsibility to put in place a safety net for the old, the
vulnerable and disadvantaged. Decades later, John F. Kennedy
concurred with Bismarck’s vision when he observed that “if a free
society cannot help the many who are poor, it cannot save the few
who are rich.”
The first attempt at pension legislation in Nigeria was enacting the
Pension Ordinance of 1951 which allowed the Governor-General to
grant pensions and gratuities applicable to public sector employees,
in accordance with the regulations, which were reviewed from time to
time with the approval of the Secretary of State for Colonial
Affairs in the UK government.
In 1961, the National Provident Fund (NPF) now the Nigerian Social
Insurance Trust Fund (NSITF) was established by an Act of
Parliament. It was established in line with the International Labour
Organization’s (ILO) Social Security (Minimum Standards) Convention
102 of 1952 and sought to cater to employees in the private sector
of the Nigerian economy.
Subsequently there were; the existing civil service pension scheme
covered by the Basic Pension Decree 102 of 1979, the Local
Government Pension Scheme which was established in 1977 and the
Armed Forces Pension Scheme created through Decree 103 of 1979 by
the Murtala-Obasanjo administration. There was also the Pensions
Rights of Judges Decree No.5 of 1985 as amended by Decrees Nos. 51
of 1988,29 and 62 of 1991. The Police and other Agencies Pension
Scheme Decree No. 75 of 1993 which took retroactive effect from 1990
represented another landmark development in the history of the
Nigerian pension system and sought to cover the largest public
sector organization in Nigeria – the Police with its nearly 400,000
officers and men.
There was one fundamental flaw with all these schemes – they
mandated in the laws pension entitlements, called “defined benefits’
in pension’s parlance, without setting aside any cash to pay for the
future liabilities. The assumption of successive governments in
Nigeria (and indeed in many countries) is that there will always be
tax (and oil) revenues to pay for future pension entitlements. This
held true until the mid-1980s when profligate spending accompanied
by collapsing oil prices and resultant debt burdens brought our
economy to its knees. Pension payments became erratic and current
arrears built up, and unfunded future liabilities escalated.
When the BPE was tasked with the responsibility of privatizing
public enterprises in 1999, we realized that the unfunded pension
liabilities in NITEL, then estimated at N43 billion and NEPA at N75
billion would make difficult if not impossible to privatize the
companies. Who would buy a company with such hidden, future
liabilities, in addition to over-staffing, attitudinal and other
problems? Drawing on a seminal paper by a Nigerian lawyer Jude
Uzonwanne of Levin & Srinivasan LLP, New York, the BPE presented a
memorandum to the government in year 2000 warning that unfunded
pension liabilities in public enterprises alone amounted to nearly
N500 billion, while the rest of the public sector had another N1
trillion of the same.
The Obasanjo administration realized that a ‘defined contribution’
system needed to be put in place to replace the unfunded,
defined-benefits “pay-as-you-go” pension scheme prevalent in
Nigeria. A steering committee on pension reforms under the
chairmanship of Fola Adeola worked at resolving the problem first in
public enterprises, then nationally, with many outside stakeholders
and select BPE staff. Many people like M K Ahmed, Dr. Musa Ibrahim,
Chinelo Anohu and Aisha Umar that ended up being foundation staff of
the future Pensions Commission played active in the committee and
the aftermath.
The Fola Adeola team did extensive and commendable work and
attempted to reform the pension structure in the country due to the
gross inefficiency and poor administration of the previously
launched schemes, culminating in the enactment of the Pension Reform
Act 2004 (PRA 2004). In line with this, National Pension Commission
(PenCom) was established to regulate and supervise all pension
matters in the country.
Some of the highlights of the PRA 2004 are that the scheme would be
contributory and fully funded, mandatory for organizations in the
private sector with five staff and above, portable, provide full
pension rights in the event of dismissal and the contents of
Retirement Savings Account (RSAs) cannot be deducted by employers
for any outstanding financial obligations among others.
How the contributory pension scheme works is that the employee
contributes 7.5% of their income while the employer provides a
minimum of 7.5% of the employee’s income into the RSA of the
employee. For a country like Nigeria with huge income disparities
and numerous low income earners, the total amount to be accumulated
by an employee who worked for about 30 years on the current minimum
wage of N18,000 monthly would roughly amount to N972,000.00 - less
than a million naira for a lifetime of employment unless the
contributions are invested in safe, but high yield investments that
would increase faster than the rate of inflation and exchange rate
deterioration.
The initiative, while laudable on paper and a major improvement over
the old, unfunded system, has still not translated to alleviating
the plight and hardship of current pensioners in the country, many
of whom are not covered by the scheme. A lot more work has to go
into the structure and manner in which pensions are administered in
order to achieve the desired aims. It is time to look at the nearly
ten years of experience of administering the PRA and enact
amendments to improve the operations of the sector, and abolish the
transitional arrangements that have led to the theft of billions of
Naira under the office of the Head of Civil Service of the
Federation.
As at 2012, 23.9% of the labor force was unemployed according to the
National Bureau of Statistics (NBS). This invariably implies that a
whopping 76.1% of the labor force is gainfully employed. According
to the CIA World Fact Book, the total labor force in the country was
52.5m in 2011. Using 2011 statistics to calculate even though the
numbers must have risen giving the teeming population of graduates
churned out daily from our institutions of higher learning, the
probable number of employees in the country is nothing less than
about 39.9m at present.
However, of the total employed population across the country, only a
paltry 13.2% (5.28 m) of workers had been registered under the
scheme as at September, 2012 since its inception in 2004 according
to the immediate past CEO of the commission. The statistics are
bleak for the pace of work carried out in the whole of 8 years, and
more needs to be done!
In addition to the snail pace at which the scheme is being executed,
a major issue with the pension administration in Nigeria is
execution at the state level. At the end of 2012, very few state
workers were beneficiaries from the scheme; mainly because the
states are allowed to enact their own laws and the PRA 2004 is not
binding on them. So far, about 21 states have adopted the
contributory pension scheme while 14 others have initiated the
process of enacting versions of contributory pension schemes in
their states. Lagos state is the only state according to Pencom that
has fully funded its pension obligation to its workers. Katsina used
to be another until recently when arrears have accumulated without
any justifiable cause.
Another noteworthy area is private and informal sector participation
in the scheme which has been particularly poor. Many reasons come to
the fore here. How do you enforce an act when there is no data on
the number of private companies or informal businesses contributing
to the GDP of the nation? Majority of small businesses evade the
scheme because of the cost to them and minimal penalties for
evasion. Pencom has barely been able to cover the urban areas much
less the rural areas. The implication of this is that the scheme is
highly imbalanced; focusing mainly on employees of the Public Sector
and urban dwellers while neglecting the private and informal sectors
as well as the rural areas.
To worsen matters, the Pension Reform Task Team (PRTT) set up
sometime in 2010 to bring some sanity to the system and ensure that
pensioners received their pensions as and when due, rather than
perform their tasks, only succeeded in embezzling the funds at their
disposal. While claiming to have uncovered misappropriated funds,
the committee itself depleted pensioners’ funds worth billions of
naira on frivolities and corruption.
Pension funds, the world over, are designed not just to provide
respite to employees in their post-retirement years but are meant to
boost economies by improving their financial markets, accumulate
re-investable savings and contribute to the GDP. Funds accumulated
from pension deductions ideally, would be channeled into creating
employment opportunities and financing infrastructural projects such
as electricity, transportation, housing e.t.c. As at September 2012,
the accumulated pension funds had amounted to some N2.94 trillion
quite impressively. Whether this will translate to visible
infrastructural development in the next few years is an entirely
different matter.
It is imperative that the government critically analyzes the pension
structure and make amends where necessary so that the scheme does
not die a natural death. Pensions could be a very important aspect
of the economy if done right with multiplier effects across many
sectors. A contributory pension scheme where pensioners die in the
course of claiming entitlements is definitely not a step in the
right direction. It will certainly hamper on employees’ productivity
while still active. One where those at the helms of affairs are
embezzling retirees’ hard earned funds, is without doubt a disgrace
to the nation as a whole.
The pension schemes adopted must take into cognizance our
peculiarities as a nation and those in our economy. It should not be
implemented in the typical fashion of other economic policies which
are just cut and paste models of those obtainable in the more
advanced nations. It should be tailored to the needs of the
beneficiaries. The structure, direction and sustainability of the
scheme must be clearly articulated so that it does not end up as
another haphazardly implemented project. Most importantly, it should
achieve its purpose which is securing the future of employees in the
most convenient manner.
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