The Nigerian Pension Industry

Overcoming Post Reform Challenges

www.pwc.com/ng
 Introduction

Nigeria’s pension reform of 2004 was necessitated by the myriad of problems

Remarkable success that plagued the “pay-as-you-go” schemes in the public sector and the varying
has been recorded since types of pension schemes that existed within the private sector, which resulted in
the introduction of the retirees not getting their benefits. The Pension Reform Act (PRA 2004), the
Contributory Pension subsequent review and enactment of PRA 2014, introduced the Contributory
Pension Scheme (CPS), which made it mandatory for employers and employees
Scheme in 2004 – yet
in both the public and private sectors to contribute towards employee retirement
key challenges continue benefits. The new pension scheme introduced a tripartite system with three key
to persist. autonomous players – The Regulator, The Administrator and The Custodian - to
minimise the possibility of misappropriation of pension funds.
Twelve years on, Nigeria has recorded remarkable success with the CPS having
pension fund assets of over $25 billion, a contributor base of over 6.9 million
workers and no incidence of pension funds being misappropriated. The 6.9
million people covered represents 8.1% of the Nigerian working population
indicating significant headroom for growth within the industry. The anticipated
growth will materialise if three key challenges plaguing the scheme are
overcome.

1. Benefit Adequacy: Will the Nigerian worker on retirement receive

adequate benefits such as to achieve the goals of the pension reforms?
2. Coverage & Compliance: Do all Nigerian workers have access to the CPS
and does it cover the most economically vulnerable groups? Have all who are
meant to comply under the provisions of the PRA 2014 done so?
3. Financial Sustainability: Can Nigeria fulfil its responsibilities in
managing the CPS in the short, medium and long term? Can it fulfil the
financial commitments associated with the transition from the previous pay-
as-you-go scheme to the new contributory pension scheme?

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Nigeria’s lower class will not have sufficient funds in their
RSAs to provide a meaningful income on retirement.

Benefit Adequacy could translate into considerable savings on

One of the major objectives of the Nigerian pension retirement. However, the most vulnerable group i.e.
reforms was to “assist improvident individuals by the lower class which constitute about 90% of the
ensuring that they save in order to cater for their working population, retirement savings would not be
livelihood during old age”. The minimum contribution sufficient to provide them a meaningful income on
rate is set at 18% of pensionable emoluments (basic retirement as they may receive a meagre $25 per
salary, transport and housing allowances). For the month as pension in present values (see table below).
upper class which earn above $65,800 per annum this

Income Working Average Admin AuM Net Monthly

Contributions
Class Band Population Annual Fees Fees AuM + RoI Pension
(%) Salary discounted to present values
Upper Class 1 5% 65,800 149,469 59 51,211 313,560 1,307
2 3% 49,300 111,988 59 38,364 234,899 979
Middle Class
3 2% 23,000 52,246 59 17,886 109,519 456
4 10% 9,900 22,489 59 7,686 47,067 196
Lower Class 5 72% 4,000 9,086 59 3,093 18,939 79
6 8% 1,300 2,953 59 990 6,068 25
PenCom, IMF, CBN, PwC Analysis (Figures in USD)

Key Assumptions (Workings do not take into consideration lump sum payments)

Average working years 25 yrs Rate of Return (average over 25 years) 13.5% Annual AuM Fees 2.25%

Pensionable years 20 yrs Real Rate of Return 4.5% Annual Admin Fees $6

Salary Increment Rate 3% Inflation Rate 9% Contribution Rate 18%

(2015 fig.)

Overcoming the Benefit Adequacy ages to support that fluidity. Many developed countries
Challenge have increased retirement age or seek to introduce a
The PRA 2014 section 82 (1) has made provision for the “pension window” to allow workers choose when to
establishment of a Pension Protection Fund which will retire within an acceptable age band. This enables them
be utilised towards guaranteed minimum pensions and to retire when their personal circumstances best dictates
the payment of compensation to eligible pensioners for while affording employers more years of service from
financial losses arising from investment activities. their highly skilled and most experienced employees.
However, twelve years into the reforms and several There are also contract workers for whom employers do
retirees later, this fund is yet to be set up. PenCom will not make pension contributions and individuals who
need to expedite action on its creation to alleviate cannot take up full time employment due to health
poverty especially amongst lower class retirees. It will reasons or family commitments. PenCom needs to
also need to review the administrative fees charged on consider these scenarios when designing the structure of
RSAs as it is not equitable across income bands. the Pension Protection Fund.

Nigeria’s contributory pension scheme has not been The industry also has to do more in encouraging
thoroughly subjected to a “means test”. There is a need voluntary contributions possibly through the
to determine, based on mortality rates, if there would be introduction of innovative products and services
a sizeable pool of elderly retirees requiring a guaranteed centered around value added services. PenCom also
minimum pension after exhausting their pension needs to review its voluntary contributions regulations
savings. as several Nigerians have more than one source of
legitimate income.
The workforce of the future will also be more fluid and
will require more options for pensions and retirement

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8.1% of Nigeria’s working population has been covered by the
contributory pension scheme in twelve years.
Coverage & Compliance Several key CPS coverage and compliance challenges
Coverage to date has been impressive considering the have been identified across Nigeria’s formal and
general distrust towards the pension industry and informal sectors as follows:
Nigeria’s large population. However, Ghana has been
able to achieve 10% coverage in eight years and Formal Sector - Private: Several private sector
Columbia though its reforms are 23 years old, has been employers have contravened the provisions of the PRA
able to achieve 91% coverage of the formal sector and 2014 with some going as far as deducting employees’
26% of the informal sector. The National Pension contributions and not remitting same to Pension Fund
Commission (PenCom) needs to expedite action on Administrators (PFAs). It remains difficult to
several key coverage and compliance initiatives to differentiate between a micro, small or medium scale
achieve this level of coverage in the next 11 years. enterprise for compliance purposes.

% Coverage in Select Countries Key CPS

Country Reforms
100% 89% 91% (Date)
68% 65% Chile 1981
50% 44%
31% 26% 31% Brazil 1989
8% 10%
0% 0% Columbia 1993
0%
Chile Brazil Columbia Mexico Nigeria Ghana Mexico 1997
Formal Sector Informal Sector Nigeria 2004

BBVA Resarch, PwC Analysis Ghana 2008

Retirement Savings Accounts (RSA) Trends in Nigeria

9,000 80%

7,000 60% Growth in the number of

contributors to the CPS in
5,000 40% Nigeria has also slowed to an
average 8.7% over the past five
3,000 20% years, from an average of 30%
over the 2007-2010 period
1,000 0% owing to slower growth in the
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 labour force in recent years.
RSA ('000) Y/Y growth
PwC Analysis

PenCom has tried to overcome this challenge by working CPS even though it will be much cheaper to fund and as a
with other Government agencies to make the PenCom result, a significant number of public sector workers who
Certificate of Compliance with the provisions of the PRA could have benefited from the CPS are being deprived of
2014, a prerequisite for obtaining Government contracts. this privilege.
However, this has created another challenge of unfunded
and duplicated accounts whereby some contractors remit Informal Sector: Nigeria’s informal sector has not been
contributions to staff RSAs in order to comply but only covered by the CPS and it employs about 59.7 million
when contracts are being sought. people which is approximately 70% of the country’s
working population. As this category of workers constitute
Formal Sector –Public: Although it is now mandatory the larger percentage of the working population in
for State and Local governments to implement a CPS for Nigeria, there is no doubt that to achieve PenCom’s
their employees, only 8 states to date have been able to corporate objective of extending CPS coverage to at least
comply. Amidst the continued difficulty in meeting 20 million Nigerians by 2018, coverage will need to be
salaries and retirement benefits obligations, there is a extended to the informal sector.
perception of diminishing political will to implement the

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PenCom needs to expedite action on several key coverage
and compliance initiatives.
Overcoming the Coverage & Compliance
Challenge • The Introduction of a Micro-Pension
To overcome coverage and compliance challenges, the Scheme: A micro pension scheme is a voluntary,
industry would need to expedite action on the defined contribution individual account plan for the
following; informal sector (or low income earners) and has
been successfully implemented in many countries
• Enforcing Sanctions for Non Compliance: around the world. Though PenCom is currently in
PenCom has taken a step in the right direction by the process of developing appropriate structures
engaging recovery agents to recover unremitted and guidelines for a micro pension scheme in
contributed pensions and has recovered $37.5 Nigeria, it would need to learn from the challenges
million to date. It has also engaged the Economic countries such as Kenya, India, Bangladesh etc.
and Financial Crimes Commission in its bid to faced in scheme implementation especially those
prosecute employers who contravene the provisions relating to the multiplicity of the sector. These need
of the Pension Reform Act. However, it is important to be properly understood and considered to come
to ensure that the process for sanctioning such up with appropriate guidelines and the required
financial crimes is done expediently and the communication framework to facilitate contributor
applicable sanctions fully enforced so as to serve as enrollment. It would also affect the contribution
deterrent to erring employers. aggregation methods and the technology platforms
to be deployed.
• Alternative Pension Schemes?: It is obvious
that “one size does not fit all” and it would be • Implementing Appropriate Technology
unrealistic to insist that all states conform instantly Platforms: The introduction of biometric
to the provisions of the PRA 2014. PenCom should technologies to capture contributor details will
review its guidelines to make it easier for states to address the duplicity of Retirement Savings
comply with the provisions of the Act. For example, Accounts as contributors with multiple RSAs will be
state employees could be permitted to open RSAs easily identified. It will also make it easier to
immediately and begin contributions with the introduce the transfer window which will enable
employers making their contributions at a later contributors move Retirement Savings Accounts
date. The statutory monthly administrative fee (RSA) between PFAs and ultimately drive the
could be reduced to reflect the proportion being improvement of customer service.
contributed.

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Government will need to consider the introduction of a non-
contributory pension pillar to cater to vulnerable retirees.
Financial Sustainability Administrator for the domiciliation and management of
Financial sustainability addresses the capacity to accrued rights funds. The purpose of these redemption
continually generate enough income to cover pension funds is to ease the burden of paying accrued pay-as-
administrative costs. The key consideration is the you-go pension liabilities at once, into RSAs of
capacity to fund pension obligations made to employees who are still in service, as the bonds are only
participants of the old pay-as-you-go scheme while redeemed when an employee retires.
sustaining the new contributory pension scheme. This is
known as “transitioning costs” However due to the inability of most state governments
to honor their pension obligations and the large number
One of the major challenges plaguing both the Federal of vulnerable low income earners, it will be necessary to
and State Governments is the obligation to pay the create an additional non-contributory pillar of pension
accrued pension rights of participants under the old for poverty prevention. The industry today earns over
scheme in addition to making employer contributions $500 million in asset management fees annually which
under the new scheme. This has placed considerable is growing exponentially. There may be the ability or
strain on the finances of the Federal Government while capacity to apportion part of this fee income into a fund
the State Governments have been in a quagmire on how to support this non-contributory pillar. This should be
best to transition within their current economic in addition to or supplement the Pension Protection
realities. Fund.

Overcoming the Sustainability Challenge Nigeria should learn from other countries such as
The PRA 2014 makes provision in section 39(1) for the Colombia which has a “Pension Solidarity Fund (FSP)”
establishment of the Federal Government Retirement in addition to the “Minimum Pension Guarantee Fund”
Benefit Bond Redemption Fund which shall be utilised that subsidises the contributions of specific workers.
in the payment of the pension liabilities of the Federal Both funds are financed with money from the
Government arising from voluntary and mandatory contributions of high-income workers. Indonesia also
retirements as well as death of employees in service. has a social security system “Jamsostek” which not only
Federal Government employees still in active service as covers informal sector workers but also subsidises their
at the 2004 reforms and who had more than 3 years contributions through formal sector contributions. A
active service were to be issued retirement benefit bonds variant of these systems could be adopted for poor and
to the value of their accrued rights under the pay-as- vulnerable workers.
you-go system. State Governments were also required to
open Retirement Benefit Bond Redemption Funds with
the Central Bank of Nigeria or a Pension Fund

Overcoming Post Reform Challenges

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Conclusion

The contributory pension scheme was introduced to Pension Fund Custodians would need to improve upon
ensure that Nigerian workers on retirement have a internal procedures in order to process contributions
steady income source to depend on when they could no efficiently and promptly pay retirees upon receipt of
longer work and earn a living. The pension reforms prerequisite advice from Pension Fund Administrators.
introduced a tripartite system with three key players to
ensure that the entities involved in regulating,
administrating and holding custody of pension funds PenCom should expedite action on the introduction of
were separate and the fraud which had been prevalent the proposed micro-pension scheme and on the creation
pre-reforms was eliminated. of the Pension Protection Fund. It should further review
some of its guidelines to make compliance easier at the
Remarkable success has been achieved to date, however, state level as well as enforce sanctions for non-
Nigeria should not rest on its oars - coverage needs to be compliance.
extended, compliance enforced, vulnerable retirees need
a minimum level of economic security and sufficient In order to take advantage of the security that the
funds need to be set aside for accrued pension liabilities. contributory pension system provides, the Nigerian
worker would need to:
State Governments yet to implement contributory
pension laws need to do so as it is cheaper to sustain • Open a retirement savings account (if not already
than defined benefit schemes. The long term savings done)
also greatly outweigh the initial implementation costs
• Report non-remittance of pension contributions by
and state employees have the benefit of owning a
employer to PenCom
retirement savings account.
• Demand better returns on investment and service
Pension Fund Administrators would need to assist
delivery from Pension Fund Administrator
contributors to the scheme in making the best
retirement decisions by offering personalised pension • Make voluntary contributions
advisory services which would eventually increase
voluntary contributions. This can be achieved by putting Only then would the major objective of the Pension
in place the appropriate customer service delivery Reforms be realised and Nigerians begin to appreciate
processes and technology platforms while training staff the significance of the reforms.
to become trusted advisors to contributors.

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 Contacts
Dr Bert Odiaka Mary Iwelumo
Partner & Leader, Advisory Services Partner & Leader, Government and Public Sector
PwC Nigeria PwC Nigeria
[email protected] [email protected]

Dr Andrew S Nevin (PhD) Taiwo Oyedele

Partner & Chief Economist Partner & Leader, Tax and Regulatory Services
PwC Nigeria PwC Nigeria
[email protected] [email protected]

Tony Oputa Tobi Olanipekun

Partner & Leader, Financial Services Manager, Pension Desk
PwC Nigeria PwC Nigeria
[email protected] [email protected]

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