• Sunday, March 03, 2024
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Challenges of Nigerian pension industry and possible solutions (1)

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Nigerian pensioners have high expectations on the new government to ensure an effective implementation of pension regulations existing in the country. These expectations arise from the need to have sustainable standard of living in retirement and their benefits paid as and when due. The different pension regimes operating in Nigeria – Defined Benefit (DB) and Contributory Pension (CPS) Schemes – give rise to varying set of problems that limit the capacity of key stakeholders within the Nigerian pension industry to meet pensioners’ expectations.

The key stakeholders in the pension industry can be grouped into four categories, namely, the regulator, National Pension Commission; pension operators (Pension Fund Administrators and Pension Fund Custodians); contributors (employers including the government and employees); and beneficiaries (pensioners). This paper highlights the key challenges facing the stakeholders in the pension industry and the possible solutions from an actuarial perspective.

In broad terms, the challenges arising from different areas of pension management include but not limited to the following: transitional pension management, guaranteed minimum pension, additional voluntary contributions, pension protection fund, investment guidelines, public education and enlightenment, pension database, risk management and human capacity development.

Transitional pension management

The problems that beleaguered pensioners from Pay-As-You-Go (PAYG) defined benefit (DB) scheme in Nigeria (which have always been to the fore) include, inter alia: delayed or non-payment of pension entitlements; misappropriation of existing pension funds (existence of ghost pensioners); low standard of living or high poverty incidence among pensioners due to pension increases not in line with salary inflation in the economy or no pension increase at all.

PENCOM has mandated Pension Transitional Arrangements Directorate (section 42 of PRA 2014) to regularly verify the pensioners registered on its database with a view to determining their ‘Alive Status’. That is, to conduct, at least annually, continuous verification of already verified pensioners. Too frequent verification of pensioners leading to pensioners dying during verification exercises; inadequate, incomplete, misleading pension information being provided to pensioners.

Inadequate enforcement of pension regulation – over 10 years of existence of CPS, not all state governments had enacted their pension laws to establish CPS which is a sign of regulatory weakness. The actuarial valuations required by PENCOM at the point to disengage the old DB scheme in order to implement the CPS have not been carried out even for those government public service schemes that have already established their CPS.

Possible solutions

The establishment of PTAD and various penalties for pension funds mismanagement introduced by PRA 2014 would address some of the lingering challenges of pensioners in the public service pension administration in the country.

However, below are other ways to address the problems described above:

Create pensioners’ biometric database that is suitable for future actuarial valuation, demographic and financial projections, which would also eliminate ghost pensioners.

Adopt a pragmatic approach to pensioners’ biometric verification process (a system of self-verification by pensioners capable of automatically updating the pensioners’ database) having conducted an initial face-to-face verification in order to minimize the frequency of subsequent face-to-face verification exercise.

An automation of pension/gratuity calculation and payment system to ensure that pension increases are implemented on a timely basis relative to increase in workers’ salaries and also allowing pensioners to receive their pensions/gratuities as at when due. The Integrated Personnel and Payroll Information System (IPPIS) for the federal public service should be emulated at the state and local government levels.

A periodic actuarial valuation of the old DB pension scheme as required by law needs to be carried out in order to ascertain the value of the pensioners’ liabilities at a given date as the scheme runs off. This will enable a realistic annual pension budget estimate to be made for the government(s) which will reduce the insufficient funds being allocated for pension payment. This would help in the administration of PTAD in minimizing the delays and arrears in pension payment.

PTAD should set up a realistic pension stabilization fund (to be invested) with the primary aim to stabilize the pension/gratuity payment system which is always in arrears. This will ensure that money is readily available to pay the arrears of pension liability.

In summary, the relevance of professional actuaries and information technology experts cannot be ignored in the implementation of the above suggested solutions.

Guaranteed minimum pension

The guaranteed minimum pension (GMP), which will be specified from time to time by PENCOM, is a provision for protecting all Retirement Savings Account (RSA) holders who have contributed to a licensed Pension Fund Administrator (PFA) for a number of years but have not accumulated enough to have a decent standard of living in retirement (Section 84(1) of PRA 2014). Thus, it is an income support from the government, which can be considered as a variant of social security policy that ensures redistribution of resources, to act as a safety net for  pensioners.

The modalities for implementing GMP are yet to be finalized by PENCOM for more than 10 years after the CPS was established in Nigeria. The above could be attributed to the computational complexities involved in determining the GMP that require actuarial techniques which might not have been considered important on the grounds that such pension funds (DC schemes) are seen as pure investment accumulation vehicles.

Possible solutions

The assessment of the level of GMP to be paid and the cost of guarantees requires stochastic modelling techniques. This is clearly a task which should be under the control of an actuary and as such PENCOM should obtain the relevant actuarial services. There should be regular revision of the level of GMP in the future.

Additional voluntary contributions

There is lack of valuation of an individual member’s DC plan (individual projections of likely pension benefit at retirement) by PFAs with a clear objective to measure sustainable retirement income (using metrics such as replacement ratio which represents a sensible estimate of the standard of living in retirement) before allowing an individual to make his/her choice of AVC.

The concept of replacement ratio provides an effective connection between the accumulation and de-accumulation phases of a DC plan member’s life cycle.

With the exception of tax benefit, there is also no incentive for additional savings (AVC) towards retirement, particularly where there is a minimum guaranteed pension to be funded by the government. Thus, there are relatively small RSA balances of some retirees pending the implementation of GMP. This results in a growing sense of disenchantment with the token monthly pension benefit being received by pensioners under the new CPS relative to the huge gains (from investment returns and dividends) the Pension Fund Administrators are currently making.

The above arises from the expectation that all returns on invested funds belong to contributors (employees) except for the minimal fees/charges expected for the pension operators.

Pius Atere