Contributory Pension Scheme – No looking back!

A few years ago the screaming headlines from the front cover of Nigerian Newspapers read something like “Billions of Naira of Pension Assets Lying Idle” attributed to a leading political figure at that time. Clearly a gross misrepresentation of the realities of the Nigerian Contributory Pension Scheme (CPS), reflecting the low level of understanding that most Nigerians had regarding the Scheme, and probably still do till now. Over the years the CPS as originally crafted in 2004 has come under some criticism with moves from different employer groups to try to be excluded from the Act – some of those moves have succeeded; some failed, and others are still a work-in-progress. While we all agree that there is no perfect system, and that there are aspects of the CPS that can be improved, it is important to first be clear about why the system exists in the first place so you can take a firm stand and then start to examine some of its weaknesses and come up with creative solutions rather than seeking to exit the system completely or change some of its fundamentals.

So, let’s start from the beginning and highlight some of the flaws of our previous pension schemes that this CPS has addressed quite well since its inception. Firstly, our previous pension schemes were exposed to significant default risks owing to the unsustainable nature of Defined Benefit Pay as you Go schemes that are completely dependent on the Government’s ability to earn revenue on an on-going basis to meet promised benefits whose actual value it cannot not pre-determine, and for which no cash is set aside as savings. In simpler terms, Government promised its workers that when they retire they would earn for example 90% of their last salaries as pensions for life and earn another say 200% of their annual remuneration as gratuity. The government never actually set aside a sinking fund for this purpose, and was solely dependent on budgetary appropriations on an ad-hoc annual basis to meet these liabilities. To imagine that even in the years when oil prices were at their highest and Government revenues were soaring, we struggled to meet these liabilities, what our fate would be in these days of falling oil prices and constrained Government Revenue. Thank God for the CPS!

The other big problem with the old pension scheme that many will like to return to was mismanagement, created simply when you consolidate the investment, governance, and custody of pension funds in the hands of one set of ill-equipped people with a negative incentive to manage the funds properly. Fund Management is best left in the hands of well-regulated private sector driven professionals with limits, guidelines and benchmarks for asset allocation, a robust risk management framework and very importantly a separation of roles that ensures better supervision. With due respect, the public servants who constituted the Board of Trustees of many of these Pension Schemes and their many bankers, stockbrokers, fund managers and insurance underwriters did not operate under this world class Governance structures that we now have in the Contributory Pension Scheme. Imagine what would have happened if the pension assets that are now safely custodied with Pension Fund Custodians, managed by pension Fund administrators and overseen by the National Pension Commission were out there between 2008 and 2010 when our financial markets and banking systems suffered a great blow. Again: thank God for the CPS!

Finally, just the same way everyone thinks they are great soccer coaches – most people think that they will do better at managing their investments themselves than the professionals. The CPS’ safeguards regarding withdrawals at retirement and ensuring sustenance in old age protects us from our own potential financial imprudence. To all those asking for 100% of their monies at withdrawal. I remind them that they could have ended up in one Ponzi Scheme or the other (MMM and others) and again I must say: Thank God for the CPS!

These three examples are among many other inherent safeguards that our CPS offers, and would make die-hard advocates of this Scheme never want to look back like the Biblical Lot’s wife, so that we do not enter into perilous ruin. Does this make the Scheme perfect – no! and I must say that the many agitations and complaints from different quarters is useful, because it provides the operators and regulators of the CPS with a unique opportunity to get some valuable feedback that they can turn into creative ideas to improve the scheme.

So, if we need to revisit issues of the adequacy of the replacement rate that RSAs offer at retirement, whether by a periodic revaluation and adjustment of benefits during retirement, or an increase in the basis for calculating accrued rights then perhaps we should. Or if there are concerns about accessing the RSA funds to take care of genuine needs for housing and other life needs that contributors have, then perhaps we should (as is already been proposed in the 2014 Act). These are practical and innovative things that we can and must do, but to say we want to start “opting out” of the scheme or proposing changes that will rock the foundation of these inherent safeguards is not an option we should consider.

 

Omagbitse Barrow FCA