Building confidence in Nigeria's new pension scheme

Nigeria’s pension sector in perspective

By Dr. Demola Sogunle

Two events in the pension sector have dominated the airwaves in recent times, and have the potential to lead to erosion of confidence in the pension system if the issues are not put in proper perspective.

The revelations of malfeasance in the administration of pensions in the public sector coming out of the National Assembly’s probe and the other, no less damaging,  are reports of inability of contributors in the nascent pension scheme to access their funds immediately  they retire. These stories tend to portray the pension industry as one that is plagued by poor corporate governance. Even more worrisome is the escalation of the fears of some contributors in the new system, who are concerned about the safety of their contributions and payment of their pensions after retirement. .

Without mincing words, the pension industry is robust, safe and is poised to help retirees live well after their active life in employment. The aforementioned storied issues are mainly related to pension administration under the Defined Benefit Scheme (“DBS”), which era came to an end when the Pension Reform Act of 2004 was signed. This law changed the entire pension system from one in which employees looked forward to their employers paying their gratuity and a reasonable pension on retirement, to one in which what the employees get when they retire is what they contributed to their pension fund when they were in active employment. Called the Contributory Pension Scheme (CPS), the new scheme to a large extent placed in the hands of the contributor (and of course, their employer), the responsibility for the contribution that is available in the Retirement Savings Account (RSA) upon retirement. Therein lies one of the major differences between the previous system and the new system.

This difference accounts for why, for instance, rather than pensioners queuing up at government offices for verification and collection of their monthly pensions, pensioners in the post-2004 CPS  do not need to queue up to be verified. Their monthly pensions are paid straight into their bank accounts. Another major difference is that while pensioners in the old system travel long distances to be verified, the local office of the Pension Fund Administrator (PFA) manages that level of interface without any stress, thereby removing the need for continuous verification of pensioners. One of the most fundamental differences between the two is the fact that the post-2004 era avails the contributor or pensioner a lot of information, ranging from monthly balances and contributions, the lump sum available upon retirement, to monthly pension. Pensioners in the pre-2004 era depended on pension authorities to tell them what they are entitled to. Information is knowledge; and with this comes power, which has been placed in the hands of contributors and pensioners.

The post-2004 CPS is experiencing the challenges that most systems in transition go through: people caught up in the old era who cannot be absorbed quickly enough in the new scheme are unfortunately suffering from the inadequacies of the previous system, and this tends to rub off negatively on the new system. When you read, or hear of stupendous sums meant for pensioners diverted to other uses, it is symptomatic of the old system. When elderly men and women who should be in the comfort of their homes travel long distances for verification, and some of them suffer health-related problems due to the difficulties experienced in the process, which sadly has led to death in some cases, is also a carryover from the old era. Indeed, it was the myriad inefficiencies in the old scheme that led to the then President Olusegun Obasanjo’s government reforming the pension system, which culminated into the Pension Reform Act 2004.

The CPS has operators (Pension Fund Administrators and Pension Fund Custodians, ‘PFC’), a regulator (PENCOM), subscribers (employees and employers) and beneficiaries (pensioners). There are checks and balances in the system, and the various regulations passed by PENCOM over the years have been geared towards more openness, transparency and empowering contributors and beneficiaries of the scheme to be the major players in the pension industry, unlike in the previous era. That is why, for instance, there is stiff but healthy competition among PFAs for market share, and the competition will become stiffer in the months ahead with the opening of a window that makes it possible for RSA to be transferred from one PFA to another.

Competition in the pension industry is fostering innovation, more transparency, and accountability. At Stanbic IBTC Pension Managers, for instance, we have made available to our RSA holders (incidentally, almost a quarter of all RSAs in Nigeria are resident with Stanbic IBTC Pension Managers) platforms of engagement in the language they are most comfortable with; availed them on a very regular basis the balances in their RSAs; and opening up offices at a steady pace in different communities across the country.

All these are geared towards engaging contributors as well as pensioners so that there are no gaps in the information flow because when gaps exist, rumours and misinformation thrive. It is not possible, not by the longest stretch of imagination, for the sort of malfeasance that took place in the previous era, to be perpetrated in the new scheme. The operators, regulators, subscribers and beneficiaries are too deeply inter-twined and the system is too tightly regulated for funds to be misappropriated on such a grand scale.

There have also been stories about pensioners in the new scheme not being able to access their funds immediately they retire. There have been enlightenment fora, one-on-one engagements, and many more that have been carried out by PENCOM and some PFAs geared towards preparing contributors on how to access their funds when they eventually retire. More needs to be done.

If contributors start processing their pension papers at least six months to the date that they will retire, they will certainly start accessing their pensions the very next month after retirement. On the contrary, when contributors wait till they retire before commencing the paperwork, it will take some time before all the paperwork is concluded; and by then anxiety would have set in. When the lump sum and pension cannot be accessed a month after retiring from work because the requisite paperwork is still ‘work-in-progress’ at the time, some contributors may have the erroneous impression that the PFA is withholding the funds.

It is important that these headline-grabbing stories emanating from the probe of the administration of pensions are published and analysed in their proper context by the media. These reports are manifestations of gross inadequacies and inefficiencies of a bygone era, which we hopefully will put behind us, sooner rather than later, because the new pension system is very robust and will deliver on the objectives underpinning the Pension Reform Act 2004.

Dr. Demola Sogunle is the CEO, Stanbic IBTC Pension Managers Ltd, a subsidiary of Stanbic IBTC Bank PLC, with head offices at The Wealth House, 1678 Olakunle Bakare Close, Off Sanusi Fafunwa, Victoria Island, Lagos.

Useful links:

Nigeria’s pension sector in perspective
http://www.vanguardngr.com/2012/04/nigerias-pension-sector-in-perspective/

KPMG’s most revealing report on Nigeria’s pension scam (2)
http://businessdayonline.com/NG/index.php/news/76-hot-topic/36845-kpmgs-most-revealing-report-on-nigerias-pension-scam-2