A key to any country’s development, lies in its capital formation (domestic or imported), with savings being a pillar of domestic capital formation. Keynesian economics, defined savings as the amount left over when cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.
In most developing countries, such as Nigeria, the rates of productive capital formation through savings are low because of poverty. Workers are so poor as to be often near subsistence. They therefore cannot save. Other factors include lack of ethics stressing frugality; prevailing rules of the game that gives people little incentive or reward for saving and emulation of consumption standards of advanced nations. Unfortunately, the wealthy in these countries, pile up their savings abroad, legally or illegally making them unavailable for domestic economic development.
One important condition for promoting economic development is better utilisation of labour. Nigeria has a large part of her labour force that does almost nothing (unemployed). There are some others who may not be called employed. They can either be termed to be on disguised unemployed or underemployed. These are persons doing jobs far below their academic and professional qualifications.
The Pension Reform Act 2004, which was repealed and replaced with the Pension Reform Act 2014, established a mandatory Contributory Pension Scheme for workers in both the public and private sectors. Section 4 of the Act, provides for a mandatory minimum contribution of ten and eight percent of employee’s monthly emolument by the employer and employee respectively. Each employee is to open a Retirement Savings Account (RSA) into which the contributions are to be paid, with a Pension Fund Administrator (PFA) licensed by the National Pension Commission, established under section 17 of the Act, to regulate and supervise pension schemes in the country. The PFA is to manage and invest the fund in the RSA, from where a contributor will draw benefits on retirement, in line with the provisions of the Act.
Economic growth of a country can be referred to as economics’ capacity to increase the productivity of Service and goods in comparison with previous time period. The success of every government is tied to the growth of the economy of the nation. Therefore, achieving a high and stable economic growth rate is an important issue for every government, since economic growth is key to citizens’ enjoyment of a higher standard of living.
The Contributory Pension Scheme being a mandatory scheme, has compelled employees and employers in the public and private sectors to collectively save a minimum of eighteen percent of an employee’s monthly emolument into the employee RSA, from where employees will be paid retirement benefits. This has increased national savings Pensions fund liabilities have a long maturity period, consequently, they are open to long term investment through long term equity stakes. As at 31 August 2018, the Nigeria’s Net Assets Value of Pension Assets under the Contributory Pension Scheme was N8.3 trillion. This happening against a background of Federal government budgetary pension deficit estimated at N2 trillion as at June 2004, when the Contributory Pension Scheme took off and a non-existing pension industry before the CPS took off, is a huge achievement. Of the N8.3 trillion Net Assets Value, 69.30% was invested in FGN Securities, 8.33% in Ordinary shares, 11.59% in local money market securities, 1.85% in States governments securities, 2.72% in Real Estate properties. The fund was also invested in Supra National Bonds 0.08%, Mutual Funds 0.26%, Specialised Funds (Infrastructure and Private Equity) 0.65% etc.
Investment of pension fund in Federal and States governments’ securities, has assisted these governments to cost-effectively manage their national debts, thereby contributing in the solving of their financial needs and contributing to the stability in the market of government debts. Pension fund has come in as an independent financial intermediary, as the nation’s private business enterprises no longer rely on banks as the sole sources of outside capital for the financing of their businesses. The Fund is getting into real estate, infrastructure and mutual fund. The fund therefore provides a domestic source of borrowing, which doesn’t attract excessive high interest rate. The transfer of resources in favour of long term assets by the fund has significantly impacted on the nation’s GDP growth rate.
The growing size of pension assets is impacting on the financial landscape, with a growing role of institutional investors (Pension Fund Administrators and Life insurance companies). This is indicative that the Contributory Pension Scheme is imp active positively on the economic growth of the nation.
The Pension Reform Act 2014 provides that the Contributory Pension Scheme should be privately managed and to this end, the law made provision for specific institutions that will manage the Scheme. Principal among the Institutions is the National Pension Commission (PenCom), established under section 17 of the Act. The principal objectives of PenCom are to enforce and administer the provisions of the Act; co-ordinate and enforce all other laws on pension and retirement benefits; and regulate, supervise and ensure the effective administration of pension matters and retirement benefits in Nigeria. PenCom with headquarters in Abuja, has regional offices in the five geopolitical zones of the federation.
Section 51 of the Act provides for Closed Pension Fund Administrators (CPFAs). Some pension schemes in the private sector existing prior to the introduction of the CPS in June 2004 were allowed to continue as CPFA, subject to guidelines issued by PenCom. The Companies are required to have operated a fully funded existing pension scheme with assets of at least N500 million. There are currently seven CPFAs, namely Chevron CPFA ltd; Nestle Nigeria Trust ltd; Nigeria Agip CPFA ltd; Progress Trust CPFA ltd; Shell Nigeria. CPFA ltd; Total (E & P) Nigeria CPFA ltd; and UNICON CPFA ltd. Section 54 of the Act also provides for Pension Fund Administrators (PFAs). PFAs are limited liability companies whose sole objectives are management of pension fund; including investment; and payment of benefits. There are twenty-one licensed PFAs, with their headquarters either in Abuja or Lagos, including branch offices in most states capitals. The Act in section 56 further provide for Pension Fund Custodians (PFCs). PFCs are responsible for keeping safe custody of pension assets. There are four in number, namely; Diamond PFC ltd; First PFC Nig. Ltd; UBA Pension Custodian ltd; and Zenith Pension Custodian ltd.
Combined, PenCom, CPFAs, PFAs and PFCs employ thousands of graduates of diverse professions, thereby helping to take off the streets able bodied Nigerians, in particular young graduates who otherwise would have been roaming the streets in search of jobs.
Pension fund has also impacted positively on other sub sectors of the financial sector of the economy. As the fund press for improvements in the architecture of allocative mechanisms, including investment, risk management, better accounting, auditing, brokerage and information disclosure; Insurance supervision and management for Group Life Insurance and annuity, new securities and rating agencies have developed. The fund has developed Equity market, which has shown to enhance overall economic development.
The role of pension fund in the growth of life insurance companies in the country has increased. The monthly pension payment under the Life Annuity Scheme established under section 7(1)( c ) of the Act has averaged N1.7 billion as at March 2017. That figure is much higher now. Moreover, the total premium paid to Insurance Companies for the Group Life under section 4(5) of the Act was N170.57 billion as at March 2017. This has significantly assisted in the growth of the insurance industry.
The Contributory Pension Scheme has grown significantly in the past 14 years and is providing painless access to retirement income to members of the scheme as against the unsustainable pay-as-you-go defined benefits scheme. This is leading to substantial wellbeing of retired members of the scheme.
The Pension Reform Act 2014 expanded coverage of the Contributory Pension Scheme to self employed and persons working in organisations with less than 3 employees. This category of workers constitute a large percentage of the working population in the country. In order to extend coverage of the Contributory Pension Scheme to this important segment of the Nigeria economy, PenCom is fine tuning arrangements to introduce Micro pension with effect from January 2019.
In implementing this initiative, the informal sector has been segmented into three broad categories. The low income earners, the high income earners and the SMEs. Each of these categories is going to be targeted with appropriate pension products and sensitization programmes that meet their peculiarities.
In conclusion, the Contributory Pension Scheme was established for payment of retirement benefits of employees whom the scheme applies under the Pension Reform Act 2014. The scheme being a funded scheme, has accumulated a huge pool of long-term investable fund, which is being invested, leading to national economic development.
Ivor Takor, mniA legal Practitioner is the Executive Director,Centre For Pension Right Advocacy