4 December 2012

Nigeria: We Started a Pension Industry That Never Existed - PenCom DG


The Director General of the National Pensions Commission (PenCom), Muhammad K. Ahmad, ends his tenure this month, after eight years as pioneer DG of the new contributory pension scheme that came to replace the old system that was enmeshed in corruption. In this interview, he speaks about the challenges and prospects and the way forward for the pension sector in the country. Excerpts.

After eight years of the contributory pension scheme administration in Nigeria, what are the prospects and challenges?

We started an industry that never existed. There are three issues that we needed to focus on. One, we had a pension reform that intended to establish a scheme that is fully founded and to be privately managed in a more efficient manner. It was a scheme that was also to replace the old scheme, particularly at the federal government level. The reform also provided that it should be managed by regulated entities. Beyond that, they should be regulated and supervised by a government agency called the National Pension Commission.

Today, we have the National Pension Commission. Some of us have been associated with the scheme from the beginning. By the end of December, we will be exiting and new people would take over from us.

We have a regulatory and supervising institution that is charged with regulating and supervising pension activities, whether at the state or federal level or in the private sector. Pension assets have been accumulated over a period of time.

We have also been able to license and regulate operators, like asset managers and custodians. In a nutshell, these are the things that we have been able to do.

There are challenges. For instance, have we been able to explain to Nigerians what this reform is all about? That is public education and enlightenment. With the support of the media we have been able to make a modest achievement. But we are far from what we had wanted to have. Public education and enlightenment is something that must continue to ensure that at least people understand what we are doing.

The next issue is compliance, especially private sector compliance. Do they get their employees registered, and are they contributing? For the formal sector of the Nigerian economy, majority are complying. Either they have gotten their staff registered and are paying regularly or at least their staff are registered and the payments are not regular. But the bulk of employers are in the informal sector. Now how do you capture that group? Historically, in an economy like Nigeria, managing the informal sector is the most challenging, whether you are looking at tax issue or compliance issue. The reason is that you don't have a structure as per what the informal sector is all about. Businesses are not properly registered.

The old scheme is being probed and people are scared that the new scheme may go the old way, what have you put in place to make sure that the new scheme doesn't go the old way?

At the federal level, prior to 2004, we have what we called the defined benefit, Pay As You Go. In other word, the federal government never set aside money for the payment of pension. On an annual basis it has an estimate. X number of people would be retiring, let's pay pension. Funds are not being made available, that is one reason. The second reason is that it is a defined benefit based on final salary. Come rain come shine, the employee has agreed that when I retire I am going to get 80 percent of my salary for the rest of my life. The pension departments were established to pay pensioners. What happened and what is still happening is what brought about the Senate public hearing on pension matters. The federal government disbursed money to the pension departments, they opened bank accounts and kept the money in fixed deposit accounts. People who were retired were not put in the payroll, even those on the payroll, their names were on and off. The administration was not transparent and it was cumbersome.

Those in charge of pension administration took advantage of the internal weakness of the offices. At the end of the day you have the government making payments and somebody in between getting the benefit.

On the other hand, the new contributory pension scheme ensures that it is fully funded. In other word, funds must be set aside on a monthly basis. You don't need to wait for budgetary allocation. An employee must open a retirement saving account where his collection is paid into. It is an account owned by an individual and can be traced. If somebody touches that account, there are appropriate sanctions that can be taken. The money is privately managed by licensed institutions who are regulated by the National Pension Commission with specific rules and regulations.

How much has the scheme taken care of in terms of social security?

The people retiring under the new scheme started retiring in July 2007. As at September this year, 54,000 contributors have retired and close to about N150 billion have been paid as lump sum to those in the public and private sectors. However, there is also another challenge. Section 29 of the Pension Reform Act provides that Federal Government should be setting aside 5 percent of its bill into a pension fund account to be managed by the Central Bank of Nigeria for the purpose of redeeming liabilities for those who are retiring under the new scheme.

The National Pension Commission encourages employees to come and register so that we can calculate their liabilities and advise the government one year in advance. For those who are retiring in 2013, we have already captured and advised the government on how much will be required. Until recently, employees don't want to do that. It is one year after they have retired that they will come and knock at your door and say give us our money. It was not until August that the President approved that we needed additional fund. We got about N34 billion to pay arrears. After September, all federal government employees that retired have been paid their benefits. For October, the benefits are been paid in November and those for November have also been paid.

A pensioner lamented that after his lump sum was paid, what he takes home every month is very little to take care of his family. Another one compliant that he retired at the same level with his colleague but his colleague who was in the old scheme earns better pensions than him. He also raised another issue about increase in salary, saying whenever there is an increase in salary it affects the take home of old pensioners but it is not the case with the new scheme. There is also this issue that says after 20 years you must have finished you funds, after that what happens to the pensioner?

Let me take the three issues one after the other. There are two different schemes. The defined benefit Pay As You Go Scheme is the final salary scheme. In other words, when you retire you get 80 percent as your pension for the rest of our life. I can tell you it is one of the most generous in the world. Except for Saudi Arabia that has a 100 percent, Netherlands has about 105 percent, most African countries have under 40 percent. Most merging economies have under 40 percent. 40 percent is the ILO convention. There are two things, you either have your money now or you assume that somebody is going to give you money.

Pension benefit is lower in the new scheme than in the old scheme, because the new scheme is about sustainability. The old scheme was terminated in June 2004. You may be a Permanent Secretary today, but perhaps you are a Director in 2004, and therefore your pension will be low. Somebody who was a Director in 2004 may even earn more than you do.

The cohorts of those who would be retiring in the next ten years, perhaps from 2007, their pension will be low, but those who have time to save, I can tell you that by the end of the day, they are going to accumulate more money than those under the old scheme because they have longer time to save.

On the limited time after 18 years or so, there is a snag inside. The mortality table we are using today in Nigeria is the one that the British used in 1955. As a country we don't have a mortality table. The mortality rate in this country is still very low. The average you get after retirement is 18 years. From 60, 63 you are not expected to live beyond that. But with this new scheme you have an option. If you don't want Programmed Withdrawal, you can take a Life Annuity. Life Annuity is saying come rain come shine, I am going to give you X amount of money for the rest of your life. With the Programmed Withdrawal I may guarantee you 20 to 25 years. If you take a Programme Withdrawal, if you die after five years, the money goes to your estate. If you take an Annuity, if you die your estate does not get anything, except if there is a flexible annuity. For now we have a fixed annuity.

The other issue about increment in salary is very simple. Section 173 to subsection 3 of the Nigerian constitution provides that those who work for the federal government, if there is any increase in salary, our pension should increase, at least once in every five years. It is a constitutional requirement. As the Commission we have worked out the financial implications for all those that have retired under the new scheme. But by the time the work was submitted to the Budget Office, the 2013 budget has been finalized and sent to the National Assembly, but they have the figure, hopefully, they will be implemented. It is a constitutional requirements and nobody will take it away. When? I don't know.

How are the assets invested, where and at what ratio?

As at today, there are basically three instruments where pension assets are invested. Federal Government Bonds, which takes about 60 percent. It came down from about 80 percent to 60 percent. Interbank placement or money market instruments and then the Equity Market. For money market I think it has dropped to about 14 percent and for equity it is about 12 percent.

The reason why you have substantial portion of the asset being invested in Federal Government Bond is because they are sovereign risk and they offer the highest yield. We have other classes of assets.

We also introduced infrastructure funds and infrastructure bonds. The idea is to see how to channel pension assets into long term funds for the development of the Nigerian economy. Today no infrastructure fund or infrastructure bonds have been issued.

We also have Private Equity. We provided an allocation of 5 percent. We have not made any progress. There are various alternative classes of instruments that have been created but unfortunately, we don't have institutions that issue such instruments.

Of recent the states are coming to the capital market to raise bonds, but we have requirements. For pension assets to be invested in state bonds, the state must be in compliance with the contributory pension scheme and that has assisted us in getting quite a few of them to come on board and to join the new scheme.

As at today, we have about N3 trillion pension assets that have been contributed. The growth rate per annum is about 25 to 30 percent annual growth of pension asset. Hopefully in the next five years you can estimate what that means. It is a gradual process and it has been consistent so far. The private sector has been contributing significantly to that.

Some people don't know how their contributions are invested; can you throw more light on the issue of minimum pension guarantee?

As at today, what the contributors have is what is called the Retirement Savings Account statement on a quarterly basis. You can have a hard copy, some PFAs can give you access to their website so that you can see your balance 24 hours 7 days. That gives you an idea how much has been contributed by you, by your employer and what returns are earned over a period of time.

What is your response to the current debate that pension asset should be used to develop infrastructure in the country?

That is what pension assets should do because pension assets are long term assets and they should finance long term projects. Because they finance long term liabilities, they are available. However, there must be clearly defined rules and regulations.

How far have you gone with your offshore investment?

We believe the ICRC needs to play a greater role. MDAs should be able to work with the ICRC to come out with clearly identified long term projects that long term funds can be invested in. That is the starting point. Concessionaires should also come out with a real starter process. Should we continue to finance infrastructure from the budget when we have private sector? I don't think so. There is this debate that make the bride beautiful before you offer it to the groom, is that the argument? If an activity can be financed by the private sector, give it to the private sector to finance. Why don't we have all the enabling environment for them to finance that. As a country we need to agree on that. If we do that then we don't need to borrow to finance infrastructure.

What would you like to be remembered for and what were your major challenges?

As Nigerians, we came to implement a reform, a social reform, arising from a very controversial legislative process, where various interest groups feel they don't need it and therefore the thing cannot work. And in an environment where you have a lot of policy summersault, things are introduced and changed at will. Without being immodest, we have been able to achieve what we have today by engaging all these stakeholders by making sure that we carried people along. We explained to NLC, TUC etc that what we are discussing is about human being. It is unfair and immoral for somebody to work for you and leave that organization without being paid.

We hope and pray that we have been able to establish a process. What we are trying to do is to build an institution not around an individual but an institution that will survive each individual that participated in building that institution. It is extremely difficult because in our society today, disengaging an individual from an institution is very difficult. If we are building an institution that would survive us in the next one thousand years, then we must divorce ourselves from it. This is what we are trying to do. Whoever is taking over from us should be able to build on that.

The other point is that I am a regulator and the law clearly identified my responsibilities. You are an operator and the law says you are in charge of investment. I will not come to you and say place money with First Bank. If I do that it is illegal and criminal. If you allowed yourself to be used by me simply because I am your regulator and can influence you, then you have committed an illegality.

If I had allowed myself to be used then it could have become like a drug, like cocaine, because if I asked a PFAs to invest in First Bank, there could have been a reason. If today somebody gives N1 million and I take, tomorrow if he did not come I am going to look for that person. Gradually, as regulator I am undermining my responsibility. And if I allow myself to be used to that level, my independence and integrity is in question and if he gives you N1 million I don't know how much he is going to take. I will not be in a position to take appropriate action against them. So, corporate governance, transparency is an issue that we must continuously pursue. We must have it at the back of our minds that we are dealing with other people's money and not our money. The worst thing you can do to a worker is that he has contributed for thirty years and then you come and tell him that he cannot get his money back. It is worse than even bank savings because your bank savings is your extra money, but this one is from your salary that you were compelled to save.

I can tell you that since we joined as management from 2004 till date, we have never had interference from the President because we report to the president and no other government official has given us a directive to do any action. We have maintained that independence and thank God for that.

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