The entire world is currently faced with another world war in a more dangerous dimension than ever. The world is troubled by an invisible enemy that takes no side with any country and the deadliest nuclear weapon ever created by man cannot extinguish this enemy called COVID-19. The virus keeps ravaging the world with an ever-increasing rate of confirmed infected persons and death trend across the globe. At the time of this write up, about 200,000 deaths have been recorded, paralysing global economic activities with a looming worst ever recession in world history. For instance, the IMF April, 2020 World Economic Outlook had projected a global economic contraction of -3.0 percent, advanced economies to contract by -6.1 percent, Sub-Saharan Africa (SSA) to contract by -1.6 percent and Nigeria to contract by a whopping -3.4 percent in 2020. In fact, the US with an unemployment rate of less than 4.0 percent now has about a 26.1 percent unemployment rate and rising applications of unemployment benefits.
Consequently, countries are repositioning policy stances including economic stimulus and health policies to curtail the effect of the pandemic. The Nigerian government is not left out in this path of salvaging the situation and curbing the economic effect with a number of stimuli. However, as good as these stimuli might be, they might as well widen the already deteriorating fiscal position. Hence, this article makes a position for the amendment of the Pension Reform Act 2014 to allow employees withdraw from their retirement savings account. An English writer and poet called John Lyly (1551-1606) once said “all is fair in love and war”.
Absolutely! It is because of this we now have to set aside the law that created Contributory Pension Scheme, Pension Reform Act 2014 (as amended) to pave way for every employee who has a retirement savings account to be able to voluntarily access 25 percent of his/her total contribution. Since the commencement of contributory pension scheme in July 2004, the value of total funds in portfolio of pension fund administrators (PFAs) is in excess of N10 trillion and it is about time the Act that created the Scheme was amended to accommodate voluntary withdrawal of maximum of 25 percent of total contribution by employee within a window of July 2020 and December 2021.
Although, the Act provides clear conditions under which withdrawal could be entertained in order to safeguard the future wellbeing of retiring employees in Nigeria. The Act provides that employee that is yet to reach a retirement age or below 50 years of age cannot withdraw from his/her retirement savings. Also, an employee who is unable to find another employment after four months of disengagement from previous one and other exemptions as prescribed in Section 16 of the Act may have access up to 25 percent of his/her total retirement savings. The conditions for withdrawal must now be set aside and opportunity be given to voluntarily access 25 percent of the fund by any contributor that wishes to have part of his/her savings to combat the COVID-19 effect.
The following provides justifications for amendment of the Pension Reform Act 2014 (as amended) to accommodate the voluntary access to 25 percent of employees’ savings:
Nigeria is currently in a deep recession which magnitude is yet to be determined. However, with the IMF projection, it is about -3.0 percent in 2020 which is double the -1.51 percent contraction experienced in 2016. Immediately the economy is opened up for activities, there is going to be severe job cut, pay cut, worsening inflation level, declining domestic credit, deteriorating exchange rate, impaired credit worthiness of households and companies, rising interest rate, and poor consumer spending. The economy of any nation whether developed or developing is made up of three simple mechanisms: aggregate demand; aggregate supply and money to facilitate supply and demand. Therefore, to attain increasing productivity (i.e. rising GDP), there must be aggregate demand (spending) to create aggregate supply (production). In Nigeria, household consumption constitutes about 60 percent of the GDP (by expenditure). Hence, bailing out the economy will require a strong spending capacity by households. This is the most important factor that will drive demand, and invariably spur real sector production and will ultimately stimulate employment. Giving individuals the opportunity to do voluntary withdrawal up to 25 percent of their pension savings will contribute immensely to lifting the economy out of recession via demand-side. As at today, the market value of pension contribution is N10 trillion. The 25 percent withdrawal will amount to about N2.5 trillion released into the economy within the space of 18 months (assuming withdrawal spans between July, 2020 and December 2021) to create demand.
Another argument in support of voluntary withdrawal from the pension fund scheme is premised on the fact that Nigeria has poor consumer credit/lending history. Unlike the western world and other organized markets where consumers have easy access to credit especially with low interest rates. In Europe and America, the potent strategy often used to come out of recession or reflate their economies is by increasing access to credit which translates to high spending and invariably spur companies for production of goods and services; resulting in improved employment opportunity and growing productivity (i.e. GDP). Nigerian financial system is not as sophisticated as expected. We have a poor consumer credit system and have no choice than to use what we have to get what we want. Since credit opportunity is not available and scarce, it is better to leverage on the pension savings to argument government stimulus. It is better to survive today rather than risk waiting for the future that may never come. Allow the contributors to use part of their savings to train their children, live a decent life and save the remaining for the future. It is a win-win! This would portend less pressure on government, and economic activities would blossom and productivity spikes.
An argument may arise that a release of 25 percent of the pension fund that translates to N2.5 trillion may fuel inflation. This is far from reality considering the fact that the maximum attrition to the fund is N2.5 trillion and not every contributor will be willing to withdraw from their retirement savings account. Despite having an estimated population of 200 million people, 70 million of whom are actively involved in the labour force, only 8.41 million (12 percent) Nigerians currently make contributions into the Contributory Pension Scheme. It is equally important to note that N2.5 trillion is just about a quarter of Nigeria 2020 budget, which obviously has become unattainable. The deficit expected by government spending may be cushioned by an increase in household spending coming from voluntary release of the 25 percent of the pension fund. Besides, inflation in Nigeria is supply driven than demand coupled with deficit financing effects. Hence, the government can reposition to resolve the supply constraints.
For information purpose, the breakdown and statistics of the investment vehicles warehousing the Pension Fund is presented thus:
| Funds Allocation | Proportion
(percent) |
Average earnings in 2019 (percent) | Inflation rate (percent) |
| FGN Bond & Treasury Bill (TB component is 20 percent) | 70 | 11.5 | 12 |
| Money Market/Fixed Deposit | 11 | 10 | 12 |
| Stock | 6 | (14.60) -ve | 12 |
| Corporate Bond | 5 | 12 | 12 |
| Real Estate | 3 | 6 | 12 |
| Cash in Banks | 2 | 0 | 12 |
| State Government Bond | 1.5 | 12 | 12 |
| Others | 1.5 | 5 | 12 |
| Total | 100 |
Source: Adapted from National Pension Commission (PenCom) 2nd Quarter 2019 Report
From the table, we can begin to ask some salient questions. What is the actual worth of the pension fund portfolio in real money terms (after adjusting for inflation)? Is there any risk premium for assets outside the risk-free FGN Bond/Treasury Bill? What is the worth of the portfolio in real exchange terms (after adjusting for Naira devaluation)? The precise answer is that the total portfolio has suffered major devaluation resulting from inflation and naira devaluation over the years. Not too long ago in 2015, the Naira depreciated from N195/$ to N360/$ and recently an exchange rate adjustment was made moving the rate from N306/$ at the official window to N360/ $ and N360/$ to N380/$ at the Investors and Exporters Window. With the uncertainty surrounding oil price and COVID-19, there seems to be a gloomy future as regards foreign exchange earnings.
We have been reading so much about different palliatives to people at the very bottom of the pyramid, these coming from State Governments, Federal Government and organised private sector. Also, the federal government through CBN has come out with few stimuli for the industrial sectors but nobody is talking about palliative to the Nigerian employees who have been in active employment contributing to national productivity and tax system on a monthly basis. Government may claim that the stimuli to industries would be to the employees’ benefit, but that assertion is more of a hypothesis than reality. Nigerian labour force need not be left in the cold rather a much more direct and quicker soft landing is needed and an easy way out is to allow voluntary withdrawal of 25 percent of their retirement savings.
Alternatively, the law may be amended to allow the use of 25 percent of employees’ retirement savings as collateral for loans of the same amount at a concessionary rate not more than 5 percent; since the loan will be cash backed. This option will be well embraced by employees who have good earning capacity but urgently need liquidity to cushion the effect of COVID-19. Also, an incentive system to repay the loan within a time frame may be inbuilt in the loan structure and agreement.
The economist cliché that a country must spend to come out of recession is a valid economics assertion. Total spending drives the economy, which invariably creates its own production. But both spending and production are facilitated by availability of finance. This is a crucial time, and implementation of this must be within a short window of 18 months and thereafter the window is shut down. While the government incurs huge costs for palliative for the downtrodden, the working class simply leverage on their assets at no cost to the government.
The revenue from oil is gone and promises of raking revenue from taxation are threatened. When economic activities are sluggish, tax revenue is greatly impaired. Where is the money? Who is spending? Let people pay themselves as they go without any condition and lock the remaining 75 percent (to grow or impaired) for future use.
It is my hope that the executive arm of government will quickly sponsor a Bill for consideration of this proposal by the national assembly.
Olusegun Vincent
Dr Vincent writes from the School of Management & Social Sciences, Pan-Atlantic University, Lagos
