Almost five years after the Nigerian Pensions Reform Bill was passed into law, has the country seen significant benefits from the creation of a pension system? Dorothee Gnaedinger investigates
The Nigerian pensions industry is back in the spotlight. After years of warranted bad press – endemic corruption, retirees denied their pensions and bedevilled pension administration – five years on from the Pension Reform Bill, many are keen to know how the regulation of pension funds is faring in Nigeria.
Signed into law on 25 June 2004, the Pensions Act 2004 launched a contributory pension scheme in Nigeria. The National Pensions Commission (PenCom) was established as the regulatory body to enact the framework and rules for efficient management of pension funds. The pension system prior to 2004 existed largely of selected employer-funded schemes. Pensions were managed through diverse arrangements without common regulations and guidelines, which made it extremely difficult to create an industry framework.
National Pensions Commission acting head of research and corporate strategy department Dr. Umar Farouk Aminu declared: “In the last four years we were able to establish an industry and implemented a structure to enable the smooth-running of the industry. We licensed: 26 pension fund administrators (PFAs), seven closed pensions administrators (CPFAs), and five pension fund custodians (PFCs).”
Olayinka Ajomale, executive director of the Centre on Ageing, Development and Rights of Older Persons, stated that since the 2004 Act “we have experienced big improvements in the pensions industry. In the past four years about 3.4 million workers have been registered from both the public and the private sector.” This is about 2.42% of a 140 million Nigerian population.
Indeed, improvements may have been made in Nigeria’s pension sector, but Exclusive Analysis, a strategic intelligence company based in London, has claimed less than a quarter of Nigeria’s 65 million adults work in the formal economy. Based on these figures, it translates that only about 12 million Nigerians come within the ambit of the pension fund rules as they currently stand. Of this 12 million, it is believed only about 50% to 60% have registered for the pension scheme.
Ajomale voiced concerns: “The pension scheme is working on the grand scale. But there is great apprehension among Nigerians about joining a pension scheme. Now with the global crisis, people are beginning to ask questions about what will happen to their fund.”
Nigeria and the current market situation
Nigeria’s exposure to the current financial turmoil is largely twofold: firstly, falling oil prices are having the obvious effect on its economy and, secondly, no banking system is proving immune from the international downturn.
Nigeria depends on oil for the majority of its foreign exchange revenues and it is likely to suffer significant revenue falls if oil prices maintain their downward trend.
Due to the financial crunch the Nigerian market experienced a loss of 50%. Market-capitalisation dropped from NGN13trn in December 2007 to under NGN7trn by December 2008 (£1 = NGN220.25).
Deputy head of Exclusive Analysis’s Africa division OB Sisay explained: “Nigerian banks and the International Monetary Fund (IMF) say they are relatively less exposed to international credit markets, but they nevertheless rely on credit lines and foreign currency placements from foreign banks. As these foreign banks have faced pressures on their balance sheet and cash balances, they have increasingly demanded foreign currency back from their Nigerian counterparts and reduced credit lines. The Central Bank of Nigeria has demonstrated its willingness to plug the resulting foreign currency gap by dramatically increasing the amount of foreign exchange it sells to Nigerian banks.”
Nonetheless, Aminu believes that the pension industry has not been significantly affected by the current market situation: “Under our investment regulation, the maximum investment into the capital market is 25%. When the market was going down, pension fund administrators (PFAs) started to slow down investment in the capital market. Looking at the total investment as of the end of the third quarter of 2008, the percentage-holding in the capital market by the PFAs on contributor-funds has gone down from 25% to 12%. They are now investing into fixed instruments: fixed income, the money market and government securities.”
Ajomale analysed the impact of the current market turmoil from a different perspective: “In my opinion it will affect employees’ contributions – there are drastic calls for job losses, hence employees and employers are not likely to submit their contributions.”
This loss of employee contributions would bring further implications for Nigeria’s economic growth. Pension fund investment, particularly in developing countries, is a valuable source for national development, increasing capital investment and labour productivity.
The dark underbelly of industry investment however is the increased likelihood of corruption in Nigeria. The country has the reputation of being one of the most corrupt nations in the world. Subsequently, the regulation of pension fund investment into the industry is under serious scrutiny. In order to provide security, clear pricing structure, and more transparency, PenCom set guidelines so that investments of pension fund assets can only be made through two markets: the flow of a stock exchange recognised by the Securities and Exchange Commission and the money market platform, recognised by the Central Bank of Nigeria and by the Money Market Association of Nigeria.
Additionally, companies need to issue corporate debt instruments, in order to receive pension fund investments. According to Aminu, less than 3% of the total pension fund assets have been invested into corporate instruments, even though 35% are allowed by the regulations. He believes this could be due to the fact that these instruments are not available in the Nigerian market and the requirement that such instruments must be listed on the stock exchange.
Exclusive Analysis warns that the lack of a strong federal and state government regulatory body to ensure the remittance of contributions by employers risks making them non-compliant with the 2004 Pensions Reform Act. Certain entitlements such as worker gratuity may be withheld or end up in private accounts and the personal use of business leaders and corrupt government officials.
While PenCom is playing a key role in streamlining pension administration there is no unified federal pension scheme. The participation and implementation of the law is down to the individual states and local governments. So far, ten states have passed their bills into law and started implementing the contributory pension scheme in their states; 21 state governments have presented bills to their respective Houses of Assembly towards enacting their pension laws; while five states are yet to commence action. Nigeria is a Federal Republic, consisting of 36 states, which in turn are divided into 800 local government areas. Aminu explained further: “If you try to impose the Pensions Act 2004 on all states, then the Federal Government may have to shoulder all the financial commitments due to the change, which hitherto would have been the responsibility of the states.” Nevertheless, those who do not offer a contributory scheme offer an employer sponsored scheme.”
Future industry developments
Despite the numerous challenges the five-year-old industry is facing, the general consensus to develop the industry is very strong.
The outlook for the future includes the review of the Pensions Act 2004, developing a corporate strategy plan for the Commission, working on the concept of a minimum pension guarantee, and the reduction of fund taxation.
Aminu stresses the importance of establishing a database of eligible employers, in order to be able to enforce the implementation of pension contribution. Over 80% of the businesses in the country are not registered, do not keep proper accounting and are not committed to paying their worker’s pension contributions.
“We have already started to tackle that problem. We are also working with the Nigerian Accounting Standards Board to develop accounting standards for the pension industry,” said Aminu.
From his experience at grassroots, Ajomale’s major concern is the lack of information getting to the people. “There is the need to make the majority of Nigerians believe that the scheme is now different to what it used to be in the past. Both the regulatory bodies and the operators should be keen to make the majority of Nigerians to see the advantages of contributing to such a fund.”
According to PenCom, campaigns are now on TV, radio and on wallpapers. The frequently asked questions have been translated into the three major Nigerian languages (Igbo, Hausa and Yoruba) and into Pidgin-English.
Sisay foresees a lot of potential in the Nigerian pensions industry: “Nigeria’s 140 million population is projected to grow to over 200 million by 2020. More than half of this projected increase will be the young and this will provide a strong demographic base for the country’s growing pension system. The likely shift of the new educated youth from agriculture into the service and commercial sectors of the economy will also provide a strong demographic base for the country’s pension systems.”
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