The evolution of Nigeria’s pension industry is similar to that of most countries in the world. Most of the countries started with the Defined Benefit (DB) scheme, but later changed, either completely, to the Defined Contributory (DC) scheme (common in Switzerland, Poland and Chile), or a combination of the two (as seem in Spain, United States of America and the United Kingdom). Even those that currently offer only the DB scheme are already considering the adoption of the DC scheme.
Prior to the Pension Reform of 2004, Nigeria's pension system was characterised by many challenges, principally, funding, which made payment of retirement benefits by employers very difficult. The experience led to the initiation of a pension reform exercise in the country and the enactment of the Pension Reform Act 2004 into law.
The Pension Reform Act of 2004, adapted from the Chilean Pension Model, gave birth to 26 Pension Fund Administrators (PFA), 7 Closed Pension Fund Administrators (CPFA) and 5 Pension Fund Custodians (PFC), with an expectation of attracting over 50 million potential contributors and making the pension industry, by far, the largest buy-side investor in the country. However, by December 2011, five years after the full take-off of the scheme, total registered contributors were only 4,927,216, with total pension fund assets of ₦2.45 trillion.
In this article, we review the current status of the pension industry, the impact of the Pension Reform Act of 2004 –in the light of its objectives, recent developments in the industry, and the strength of the regulatory functions of the National Pension Commission (PenCom). Also, we will review the growth pattern and composition of the number of Retirement Savings Account (RSA) contributors, portfolio growth and mix, challenges of the industry, as well as its potentials.
Sizeable Proportion Still Out of Coverage
The performance of the pension industry can be evaluated in terms of number of RSA contributors, the composition of the RSA contributors, the cumulative value of pension contributions, the annual additions to contributions, the total asset value of the industry and total portfolio value as well as portfolio growth.
Although, the 2012 trend, in many of these metrics, indicates that there is a substantial improvement in the industry compared to 2006. From the view point of both potential and the set target, the room for improvement is very wide.
As at December 2011, the total registered contributors to the Retirement Savings Account (RSA) were 4,927,216. This represents 8.4% and 428% growth, over the 2010 and 2006 figures of 4,542,250 and 932,435, respectively. The recorded growth notwithstanding, it is instructive to note that the figure is just 9.9% of the estimated over 50 million working population. The notable gap can be explained by the high percentage of Nigeria's working population, operating in the informal sector of the economy and the remaining part of the private sector employers who are yet to join the DC scheme.
The industry statistics, released by PenCom, shows that the total number of registered RSA holders, increased in both the public and private sectors, from inception to date. However, the public sector accounted for more than half of total registered contributors in 2011, accounting for 54.86%. Although, the public sector RSA registration was larger than the private sector, the rate of increase in private sector RSA holders was nonetheless high year-on-year.
The increase in the public sector RSA registrations could be mainly due to the continuous opt-in by State Governments and other Federal Government agencies, as 18 State Governments have enacted their Contributory Pension Scheme (CPS) Bills into law, 16 others were at the Bill stage while two states were yet to commence any action as at December 2011.
On the other hand, the growth in private sector RSA registration could be partly due to the compliance efforts by the commission and a provision in the Public Procurement Act 2007, which stipulates that bidders for Federal Government contracts should provide evidence of compliance with Pension Act of 2004, as part of the requirements. With renewed commitment by the regulators to enforce the provisions of the Acts, pension coverage should be wider in the coming years.
Industry Assets Tilted to Fixed Income Investment
The total value of pension fund assets increased by 20% from ₦2.03 trillion in 2010 to ₦2.45 trillion in 2011. From statements, credited to some industry operators, this is believed to have increased to ₦3.4 trillion by June 2013. The analysis of the industry investment portfolio, for 2011, indicates that more than 75% of the total pension assets are investment in low risk debt securities, of which the Federal Government securities accounted for 55.79%, money market investments accounted for 12.82% while sub-national and corporate bonds accounted for 4.5% and 3.07%, respectively.
Total equities investments for the year were 14.43% while real estate investments, cash and other investments, accounted for the remaining 9.39%. While the portfolio mix complies with the regulation, over- concentration on low yield debt investments may be limiting the growth potential of the retirement fund for young pension contributors with long term investment horizon.
Long-term Funding of the Nation’s Infrastructure
A review of the RSA registration, by age distribution of participants, shows those contributors of age 40 years and below, account for more than half of total registered contributors; an indication of opportunity to invest pension assets in long-term investments.
Contributors, within the age bracket of "30-40" years, accounted for 35.24% of RSA holders in 2011 while contributors of "less than 30 years" accounted for 29.20%. The combined contribution of the two age brackets accounted for 64.44%. Since this implies that a large portion of contributors would not withdraw from the retirement account, until after 10 to 20 years, the pension fund administrators have the liberty to invest the pension assets in relatively long-term investments, with strong growth potential and moderate risk. This is also in line with the current dynamic guidelines on pension fund investment.
Inherent Challenges Still Remain
Notwithstanding the seemingly laudable benefits of the Nigerian DC scheme, it has been characterised by several challenges. While the initial reluctance and scepticism of workers to register with PFAs have reduced, there is a large proportion of the working population, especially, in the informal market of the private sector outside of the scheme. Several years after the take-off, the scheme is still bedevilled by general misconceptions and knowledge gap.
The identified problem of capacity building and technical competence on the part of industry operators is being tackled by the industry regulator, PenCom. In order to promote skill acquisition and enhance competence within the operators, PenCom requires pension managers to recommend a good number of staff for training in industry technicalities and developments. The trainings are usually organised by the regulator and facilitated by industry veterans, both local and foreign. There is also a plan to stipulate minimum acceptable qualifications for occupants of certain positions in the industry.
The most significant challenge is the lack of confidence in the scheme by potential contributors, arising from failures of previous policies on pension management. In addition, there is the fear of continuity and sustainability of the scheme by successive governments, since change in governments sometimes leads to the jettisoning of previous programmes.
Another challenge is the mismanagement and misappropriation of amounts, earmarked for employees’ pensions, especially, in the public sector. Recently, there have been revelations of multi-billion Naira pension fund scandals at the Pensions Unit of the Office of the Head of Civil Service of the Federation and the Nigeria Police pensions.
The scheme also entails the transfer of investment risks of retirement funds to the employees, whereby the employee determines who manages his/her retirement savings account and therefore assumes full responsibilities for the risks involved. However, due to the low literacy level of 72% (lower 96% in Chile), in addition to low level of investment knowledge, contributors are either reluctant to contribute to the scheme, due to lack of trust or investment knowledge, or just simply because they are unaware of the benefits of such initiative.
Recently, the paid up capital requirement for licensed PFAs was increased, from a minimum of ₦150 million to ₦1 billion, unimpaired by losses. The increase in capital base was expected to lead to healthier fund managers, through increased capital or mergers and acquisitions; thus, promoting competition and stability in the industry. In addition, PFAs with funds, under management of ₦100 million and above, were issued new requirements on the set up of administrative structures and for appointments to the Board and Top management positions of all PFAs.
Upon the conclusion of the exercise, 20 out of the 23 operating PFAs, successfully, scaled that recapitalisation hurdle, including First Guarantee Pension Limited, which had been under regulatory intervention. Also, due to the fact that some PFAs already had capital base in excess of ₦1 billion, before the directive of recapitalisation, the PFAs did not see material inflow by way of new share capital. Over all, after the recapitalisation exercise, 20 Pension Fund Administrators (PFA), seven Closed Pension Fund Administrators (CPFA) and four Pension Fund Custodians (PFC) are currently licensed to operate in the industry.
Analysis of Registered Contributors
An analysis of the total registered contributors, in 2011, shows that the top three PFAs account for 42.26% of contributors, while the top five PFAs account for 59.96%. A total of 10, out of the 20 operating PFAs, account for 84.3% of total registered contributors. Further breakdown shows that one of the PFAs has close to 1 million, out of 4.93 million contributors (20%), while two PFAs have, between 500,000 to 1,000,000. Eight PFAs have, between 100,000 and 499,999 contributors, while the remaining have less than 100,000 registered contributors, each. In terms of total contributions, the top five PFAs accounted for 68.57% of total contributions while the top 10 PFAs accounted for 92.13%.
From the analysis, it can be inferred that a very small percentage of the PFAs, account for a very large portion of the RSA registration and contributions to date. The total RSA holders of 4,927,216, represents just 9.9% of the estimated over 50 million working population, which means that other fringe players have a very huge untapped market to explore without having to struggle for market share of the existing RSA registration. This would be achieved through the use of regulations and attractive policies by PenCom and a more robust and proactive marketing efforts by the PFAs.
Walking the Talk
Another important regulatory effort would be for the regulators to walk the talk, by making it a very serious offence for employers to deduct pension contributions from the workers' salaries without remitting such deductions to their Retirement Savings Account (RSA) under the management of Pension Fund Administrators (PFAs).
Defaulters should be made to pay a 2% fine of the unremitted amount in favour of the RSA holder (employee), after two weeks of delay, and 1% in favour of PenCom, after each month of delay. Furthermore, PenCom should enforce its circular, entitled, 'Regime of Sanctions and Penalties for Non-Compliance with Pension Reform Act of 2004' which provided that employers are to remit employees' contributions, not later than seven working days, from the day salary is paid.
The need for more robust regulation and enforcement might have led to the reform of the Defined Contribution pension scheme, with the aim of replacing the Pension Act of 2004 with a new law. A Bill for an Act to repeal the Pension Reform Act of 2004 and replace it with a new Act of 2013 has passed the second reading at the National Assembly. The Bill seeks to address the loopholes in the current Act, such as non-remittance of pension contributions to the PFAs, by Ministries, Departments and Agencies (MDAs), delay in payment and sometimes non-payment of gratuities to pension retirees, underpayment of retirement benefits, corruption, misappropriation and embezzlement of the pension funds. Furthermore, the bill, when enacted into law, would harmonise the management of pension by avoiding the Pensions Department in the office of the Head of Civil Service of the Federation, being run as a parallel system to the National Pension Commission.
The proposed law also provides an enhanced coverage, especially, the informal sector participation in the DC pension scheme. This is done by providing that the mandatory coverage in the private sector should be lowered, from the current requirements minimum of five employees for an organisation to join the scheme, to minimum of three employees. It also seeks the utilisation of pension funds for national development and takes up total contribution to 20% (ratio 12:8 for employers and employees, respectively), from its current 15% (7.5% each by employers and employees).
Bright Outlook for the Industry
While the PenCom is not planning for another increase in the capital base of PFAs anytime soon, there are strong indications for further consolidation among the PFAs, as operators seek streamlined costs and bigger market share, by embracing mergers and acquisitions. It is also expected that RSA registration will continue to grow as more State Governments implement the DC pension scheme and more private sector employers join the scheme in compliance with regulation, as well as, the increased marketing drives of the PFAs.
In conclusion, the industry is expected to continue to leverage on the stable macroeconomic policies in relation to pension investments, robust economic growth and partnership with other regulatory agencies, upon which the industry had thrived in the past.