The conspiracy against pension reforms

BY GRACE ABAYOMI

In 2004, Nigeria embarked on one of the most successful reforms in its history with the enactment of the Pension Reform Act (PRA 2004). Before then, employers used to have riotous schemes that did not inspire confidence in the employees. In the private sector, there were schemes that were less than beneficial and were often implemented in ways that gave too much room for discretion and short-changed would-be beneficiaries. The public service operated the Defined Benefit Scheme (BDS) under which retirees were entitled to life pension based on years of service and hierarchy. However, economic challenges and fiscal crises caused arrears of pension payments to government retirees to pile up. Pensions were budgeted for annually but were only paid if there was funding and this was usually the least on the priority list. Pensioners were dying in penury and frustration while waiting for their entitlements. This was the situation when the President Olusegun Obasanjo administration introduced the pension reform in 2004.

With the reform came the Contributory Pension Scheme (CPS), which has been regarded by most Nigerians as an outstanding success story in Nigeria. Under CPS, it is mandatory for employers and employers in public service and private sector with a certain number of employees to make a minimum contribution towards the retirement benefits of these employees. There is also the contribution by the employees themselves, which is akin to compulsory savings towards retirement. The funds are invested by the Pension Fund Administrators (PFAs) and kept in custody by Pension Fund Custodians (PFCs). As a result, value is added to the savings over the years through returns on investment. These fundamental changes have created a new economy. From a negative position of huge unfunded pension liability, pension assets in Nigeria had grown to N13.88 trillion as at the end of March 2022. The total number of pension contributors is close to 10 million and still growing.

Unfortunately, it is not everybody that is excited by the success story if we have to judge by developments in recent years. For instance, the Nigeria Police Force (NPF) has been making efforts to exit CPS. At first, the NPF compared itself to the military which was granted an exemption by law. Although this comparison is unnecessary since the armed forces are generally treated as separate from civil forces, the legal aspect is that excising the police is against the Pension Reform Act (as amended). The police are part and parcel of the CPS as provided for by the law. When police agitation reached its height under former President Goodluck Jonathan in 2013, the police were allowed to set up their own PFA as a compromise, supposedly to take care of their peculiarities.

Still, the police are not content. They want to exit the scheme completely and run a totally different pension scheme for whatever reason, without an amendment to the law or presidential approval. According to unrefuted reports, the determination of the police to exit has gone to the illegal extent that the Deputy Inspectors Generals of Police (DIGs) and Assistant Inspectors General of Police (AIG) have been enrolled on the Integrated Payroll and Personnel Information System (IPPIS) to collect full salaries for life under a defined scheme that was not intended for them. This they did without any permission of anyone, not the president, not the regulatory authority and certainly not in conformity with the Pensions Reform Act. To make matters worse, some are still collecting pension from the police PFA. That is a classic case of double payment. They are enjoying pension both from contributory scheme and the defined benefit, which is unlawful and unconstitutional.

Some of the statistics should be of concern to us. Of the N577 billion budgeted for pensions in 2022 by the Federal Government of Nigeria (FGN), military pensions and gratuities account for N237 billion. That is close to half of the entire pensions budget. Police pensions and gratuities for certain exempted groups amount to N8 billion of the FGN budget for pensions for the year under discussion. However, if the police authorities succeed in pulling the NPF out of the contributory pension scheme altogether, that alone would have consumed the entire FGN budget for pensions in 2022. The military is just about 25 percent of the size of the police, so FGN is going to be saddled with a pensions and gratuities budget that will pass N1 trillion. With its current fiscal challenges, FGN will have no other option than to owe pensions. Meanwhile, the contribution of police funds to the pensions sector will shrink and this will no doubt affect the growth and prospects of the pension industry in particular and the Nigerian economy in general.

There will always be consequences of exiting the police personnel from the contributory pension scheme. If it were to happen, then more government agencies and officials would borrow a leaf from the police and continue to seek exemption from the contributory pension scheme. Recently, the Office of the Head of Service and Permanent Secretaries secured presidential approval to exit the scheme and be placed on full salaries for life via IPPIS. There are reports that the accountants-general and auditors-general are also agitating to join the exempted groups. Gradually, the success of CPS will be undermined and the scheme decimated. When senior government officials are being exempted, it is only logical that the others below them will begin to develop ideas and start agitating to be exempted as well. We may end up returning to the old scheme of defined pensions where government carries all the burden. Not only are we going to end up ruining the contributory scheme that is working well for us, we will return to the era of pensioners queuing up for arrears and suffering untold hardship jostling to be paid anything at all.

In fairness, maybe there are reasonable grounds for senior government officials to want to be exempted from the contributory pension scheme. They probably had looked at the fact of having to contribute 8 percent of their salaries as a disadvantage. However, they can treat that as savings (because that is what it is) especially since the employer is obligated to contribute a minimum of 10 percent. Also, since the funds in the Retirement Savings Account (RSA) will be invested on their behalf by the PFAs, it will yield significant returns by the time of disengagement from service. This arrangement is definitely a win for the contributor at all levels. The fact that the CPS is a fully funded scheme with assets under the management of the PFAs also means they are available upon retirement. This is unlike the defined scheme where the government may not have the funds readily available to pay the beneficiaries when they retire. More so, pensioners will be getting a bulk sum upon retirement and they can do something substantial with it to ease into their new lives. If they also invest it well, they will be reaping the benefits for life.

Perhaps, it is relevant to mention that the core argument of those seeking exemption is that they will secure a guaranteed full monthly salaries in retirement under the defined scheme than what they may take from the PFAs under the contributory scheme. However, this is an erroneous argument because there are other ways of getting more benefits under the Pension Reform Act than taking actions that can ruin the contributory scheme. For instance, what the Pension Act prescribes is merely a minimum contribution rate, which can be enhanced by the employer. Thus, rather than shoulder a burden of unsustainable pension liability, government can decide to do one or two things that are clearly permissible under the Pension Reform Act. Government can increase the rate of its monthly contribution above the current minimum 10 percent. Government can also have a gratuity package that will be a lump sum paid to the retirees on exit from service, in addition to the contributions remitted to their employees’ RSAs. Indeed, when government decides to do both or any of these two benefits improvements under the CPS, the pension system would still be less costly and less volatile for government than returning to the defined benefit scheme through the back door.

There is an African adage that says if the gods cannot improve your fortune, they shouldn’t worsen your situation. If the government cannot make the Contribution Pension Scheme much bigger, far better and more beneficial, then it should at least not seek to ruin it. It should leave it as it is. The surreptitious attempts to exempt groups, when there are other ways of incentivising them to remain the scheme, is a looming danger for the pension industry and it must be discouraged by Nigerians. It is sad to note that rather than maintaining and sustaining what we have, we are now engaging in actions that would decimate it and pave the way for the unravelling of a reform that is clearly one of the most important in our history. We need to have a rethink.

Mrs Abayomi, an economist, lives in Akure, Ondo state.