Pension N6.5trn fund Assets under major threat, says PenCom, PenOp
By NGOZI Onyeakusi ——
Pension funds which currently stood at N6.5 trillion is faced with a major threat of depletion due to the multiple Bills sponsored by some persons and bodies at the National Assembly if becomes law.
These were the words of the pension regulator, The National Pension Commission (PenCom) and the umbrella body of pension operators, Pension Fund Operators Association of Nigeria (PenOp) over the weekend in Abeokuta, Ogun State.
According to them, the current pension administration established by the Pension Reform Act 2004 as repealed by PRA 2014 may take a downward turn if the Bills numbering over seven becomes law
PenCom and PENOP have condemned the bills describing them as spurious and against the interest of the country’s financial system.
PENOP Chairman, Longe Eguarekhide said prominent among the Bills, include one sponsored by Honourable Oluwole Oke on May 16, 2017 seeking to amend the Pension Reform Act 2014 to exclude members of the Nigeria Police, the Nigerian Security and Civil Defence Corps, Nigeria Customs Service, Nigeria Prison Service, Nigeria immigration Service and the Economic and Financial Crimes Commission from the application of the Contributory Pension Scheme (CPS) and other related matters.
He said the Bill passed its second reading and has been referred to the relevant Committee of the House of Representatives for further action.
He stated that an additional cause for concern regarding the legislature arose on May 10, 2017, when yet other private member’s Bill sponsored by Senator Aliyu Wamako (Constituency – Sokoto North) sought to pass a Law for “An Act to Further Amend the PRA 2004 to Provide for Definite Percentage a Retiree Can Withdraw from his RSA and for Other Matters Related Thereto”.
He noted that this permits retirees to withdraw a definite rate of 75 per cent of the value of their RSA upon retirement, leaving only 25 per cent to be spread over their expected years of retirement as periodic pension payments.
He explained that the proposal is based on a misunderstanding of the concept of pension payment under the CPS.
Longe stressed that It is pedestrian to assume that lump sum should be fixed, rather, what should be implemented is a minimum replacement ratio as monthly pensions.
He said: “Accordingly, the retiree should keep an amount that can procure an amount of monthly pensions as replacement of salary over an expected life span. Whatever remains over that amount may be taken as lump sum. The current replacement ratio under the CPS is 50 per cent of last pay by virtue of the PRA 2014 and regulations issued by the Commission. One of the objectives of the CPS is to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.
“The proposed amendment would mean leaving only 25 per cent to be spread over the lifespan of the retiree, which may be longer than 20 years, thus giving meagre monthly pensions below the current replacement ratio of a minimum of 50 per cent of last pay. It is doubtful if the 25 per cent balance in a retiree’s RSA, after deduction of 75 per cent lump sum, would, if spread through the retiree’s expected life span, be adequate to reasonably cater for his livelihood during old age. Accordingly, the proposed amendment would only result in the depletion of the RSA without regard for the retiree’s continued subsistence, thereby impoverishing retirees.”
On the proposed exit Bill for the paramilitary, he said it is similar in context to that of the Armed Forces and Intelligence agencies.
He stressed that it seeks to fully exempt the stated organisations from the CPS and return them to be 100 per cent underwritten in relation to pension arrangements by the Federal Government of Nigeria.
In other words, return them to the erstwhile Defined Benefit (DB) arrangement, he noted.
“The arguments advanced by the promoters of the Bill include National Security; Occupational Hazard; Delays in the payment of entitlements; Low Monthly Pensions and Preference for the old pension system. It is important to note, however, that the reasons that informed the decisions of both the federal Government and the 6th National Assembly to respectively decline the request and the Bill for exemption of the police and other paramilitary agencies from the CPS in 2011, despite the above arguments are still valid. Indeed, the argument against exemption is today further reinforced by many other economic, fiscal, social and public policy reasons, such as exemption of the personnel of the Police and other paramilitary agencies means additional financial burden on the Federal Government by way of unsustainable pension obligations.
“For instance, in the last 10 years, the number of FGN employees that retired under the CPS from the six agencies sought to be exempted are 50,730. The total accrued benefits of these personnel amounted to N208.22 billion, which had been redeemed by the Federal Government, paid into their respective Retirement Savings Accounts (RSAs) and consolidated with their monthly pension contributions to fund their retirement benefits. These retirees are currently receiving their retirement benefits promptly as and when due. Exempting them from the CPS would imply that Government would shoulder the huge financial obligation of payment of their pensions as well as that of future retirees through budgetary provisions, with no guarantee of availability of funding and; or timeliness of payment.
“The Federal Government is already overburdened with the payment of pensions as illustrated by the 2016 Appropriation Act, which made a provision under the Service Wide Vote for the sum of N200.17 billion as total pension and gratuities allocation. This allocation is still insufficient to fund the pension liabilities of the Federal Government. For instance, the 2016 Pension Transitional Arrangement Directorate (PTAD)’s Budget proposal indicated a total annual pension liability of the sum of N388.32 billion. Out of that amount, the sum of N255.89 billion constituted unfunded liability, which was inherited by PTAD mostly due to outstanding payments for 33 per cent pension arrears to pensioners under the DBS. Indeed, the Federal Government pension liability burden under the DBS is much higher than the PTAD proposals in view of the provisioning of about N74.53 billion for the Military Pension Board, N7.64 billion for the State Security Service and N3.71 billion for the National Intelligence Agency.
Consequently, it would be fiscally imprudent to increase the number of this category of retirees under that Scheme. It would also render the retirees financially vulnerable and insecur.
“In addition, it is evident that the Defined Benefit pension system is not sustainable as exempting the Military, Department of State Security and the Nigeria Intelligence Agency has resulted in very high allocation of resources to fund their retirement benefits. As is evident in the various Appropriation Acts since their exemptions, their combined allocations were 49.4%, 49.1 per cent, 45.1 per cent, 41.99 per cent and 43.1 per cent of total allocations for pensions in the 2013, 2014, 2015 and 2016 Appropriation Acts as well as in the 2017 Appropriation Bill respectively. The figures will be staggering and clearly unsustainable if the personnel of the Police and other Paramilitary Agencies were to be exempted in view of the fact that the number of Police personnel is significantly higher than the number of the personnel of the three exempted Agencies combined.
“Exemption of the personnel of the Police and other Paramilitary Agencies indicates by implication, the dismantling of the institutions, systems and processes that Government had put in place in the last few years towards the implementation of the pension reform programme, including the culture of national savings as well as the efforts to eradicate the structures that encouraged corruption during the pre-pension reform era. This is contrary to the policy thrust of the current administration of diversification of the economy and fight against corruption. An immediate negative impact of the exemption of the Police and other Paramilitary Agencies is to unsettle the Government’s fiscal policy and financial system stability. It is imperative to note that as at date, about 70% of the N6.4 trillion pension assets are invested in Federal Government securities. Exempting some government agencies would lead to divestment from FGN securities before maturity, which would have ripple negative effects on not only the finances of Government, but on the entire financial system.
“Another immediate negative impact of exempting these Agencies is the erosion of the pool of long term investible funds accumulated under the CPS, which is suitable for economic development of any nation as illustrated in other jurisdictions including developed economies. This would thereby undermine the process of the attainment of development initiatives in the infrastructure, housing and real sectors of the economy, which are largely hinged on the utilization of a portion of the pool of pension fund assets.
“Exemption of some agencies of Government would also result in loss of confidence in the pension reform and other reform initiatives of Government. The growing culture of national savings built within the last decade would be destroyed. It is pertinent to note that due to the successful implementation of the pension reform, the discipline with which the industry players have been discharging their responsibilities and the resultant impact on the Nigerian economy, foreign investors have invested heavily in some major PFAs”, he added.