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PFAs position to take advantage of PenCom’s informal sector push

Pension-fund

Pension Fund Administrators (PFA’s) in the country are working out ways to expand the scope of their micro pension contribution packages to include informal sector workers, as the National Pension Commission (PenCom) prepares to unveil a framework under which millions of informal sector employees can be captured in the new Pension Reform Act.

Chinelo Anohu-Amazu, director-general, PenCom had said during a sensitisation workshop in Kaduna late last year that the Commission was working on coming out with a framework to access the informal sector workers.

Anohu-Amazu said “it is important for us here in the Commission that more informal sector employees come under the scheme, so that they can benefit from a secured savings partner that guarantees protection of their future, particularly in retirement.”

Feelers around the industry reveal that PFA’s are in a race to set up schemes which will enable them benefit from the anticipated overflow of informal sector patronage.

This is expected to push much more business their way, as the country’s informal sector is several times larger than the formal, although the wages are significantly lower.

Aiico Pensions for instance, says it is presently looking for ways to expand the scope of its micro pension contribution package to include the informal sector workers. 

The efforts however, will have to align with the new strategy that PenCom is coming up with.   “There is a need for a framework to leverage on. But don’t forget these workers are not entirely like the everyday worker; like white collar workers,” Tony Odutola, Operations Manager in Aiico Pension, said, in an interview with Business Day on Tuesday.

Taiwo Oyedele, head of Tax and Regulatory Services at Pricewaterhouse Coopers, PwC, said, “What is required is a more flexible guideline which recognises the peculiarities of the sector. Sensitisation of the workers on the benefits of participating and inculcating the saving habit; encouraging voluntary participation; providing incentives to participants; partnering with trade associations, NGOs and religious bodies, would increase willingness to participate.”

Nigeria had 6.74 million contributors to its pension scheme, with pension assets of N6 trillion as at the end of 2015, out of a labour force of over 74 million people.

Effectively, this means less than 10 percent of employed Nigerians have retirement savings, leaving over 90 percent exposed to social insecurity as they age.

The informal sector leads the way in job creation, accounting for 90.2 percent (428,690) of total jobs, according to the most recent unemployment/underemployment report by the National Bureau of Statistics (NBS).

The formal sector by contrast, accounted for only 8.8 percent (41,672) of new jobs. The public sector was a very distant third with 1.01 percent (4,818).

Despite these impressive strides, millions of Nigerian workers in the informal sector are not captured by the Pension Reform Act 2014.

The informal sector describes jobs which are not seen as normal income sources, and on which taxes are not paid.   They are usually characterised by small number of employees, less than 10, and they often operate outside a regulatory framework.

In Nigeria, there are millions of people working in this sector. The agriculture sector which, according to the NBS report, employs over 70 percent of the working population has the largest pool of informal workers.

“It is difficult to effectively extend benefits to workers in the informal sector without a binding legal framework,” Lateef Fatola, Head of Operations at Investment, One Pension Managers, told BusinessDay.

The Pension Reform Act of 2014 which has been described by many analysts as a step in the right direction, has some key objectives that should benefit informal workers.   For instance, it exempts pension beneficiaries from taxation to a large extent. Only returns which are withdrawn within five years  are taxable. 

“The PRA does not specifically exempt workers in the informal sector as the term “employer” is defined to include organisations and businesses that employ three or more persons. Therefore, both formal and informal employers are captured in this definition,” Oyedele said.

However, the sector is characterised by the absence of formal structures and processes, low and irregular income workers, except those on fixed salaries; jobs which are highly mobile and flexible, and the lack of permanent work address for workers in many cases, amongst others.

“There are many people in the informal sector who don’t believe in banking, because they are always asking themselves how much do I even have?” Odutola indicated.

Analysts say the effect of not acting urgently to improve informal workers contributions to the Nigerian pension scheme will compound the high level of old age poverty and economic strain on children of elderly dependents. The number of people who are not under the scheme however, also goes beyond the informal sector.

Many states are yet to join the scheme, while a large number of private sector employers in the formal sector are not compliant.

Analysts say it is possible for private Pension Fund Administrators (PFAs) to include informal workers, even without the existing legal frameworks. 

“This can happen by sensitisation of the workers about the associated benefits. The law permits voluntary contributions. It is therefore important that they are educated in the ways to contribute voluntarily to the scheme in preparation for old age,”Oyedele affirmed.

FRANK ELEANYA