• Saturday, February 24, 2024
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BusinessDay

Challenges of Nigerian pension industry and possible solutions (2)

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The lack of frequent review of fees/charging structure (including the stipulated fees by PENCOM representing the maximum amounts) chargeable by operators and possible non-disclosure of hidden charges, interests and commissions accruable to pension assets might also be the cause of above dissatisfaction.

Possible solutions

The fees/charging structure needs to be constantly reviewed by PENCOM in order to eliminate any hidden charges in order to increase the RSA balances.

There is also a need for sensitization of potential benefits to workers in making AVC having considered the expected living standard in retirement. PENCOM should engage independent financial advisers (such the actuaries) in the sensitization programme.

Pension protection fund

PENCOM had been mandated to establish and maintain a fund to be known as the Pension Protection Fund (PPF) for the benefits of eligible pensioners approved or recognized under section 82(1) of PRA 2014. The PPF requires funding by the government, PENCOM and pension operators but the specific ratio of funding had not yet been fully worked out for the operators (section 82(2) of the PRA 2014).

Indeed, the funding of GMP is the responsibility of the government in other jurisdictions (such as in the UK and Chile, just to mention a few) to ensure that pensioners will not have less than a certain amount to live on. In Chile the cost of funding the GMP is expressed in terms of the nation’s Gross Domestic Product (GDP). This metric is more appropriate than a percentage of total monthly wage bill of employees in the Public Service of the Federation (section 82(1)(a) of PRA 2014) since private sector employees in CPS who retiree may also qualify for GMP.

On the other hand, the adequacy of the PPF will be tested if the GMP is fully implemented to take effect retrospectively, thereby allowing all those who have retired since the contributory pension scheme was established in 2004 to qualify for the GMP provided the level of pension in payment is below the GMP to be set by PENCOM.

As employees of organizations with less than three employees as well as self-employees shall be entitled to join the CPS (section 2(3) of PRA 2014), the number of future retirees qualifying for GMP is likely to increase exponentially over time. Thus, there will be a corresponding increase in future GMP liability which is also likely to put a strain on PPF, having considered the funding methodology in section 82(2) of PRA 2014 in the light of present economic situation in Nigeria.

Possible solutions

There is likely to be an accrued GMP liability already in existence prior to initial funds being set aside in the PPF leading to an immediate shortfall in PPF. Thus, a periodic actuarial valuation of the fund would be required to ascertain the right level of contribution/levy to be imposed in order to meet the future GMP liabilities.

The assessment of the cost of guarantees becomes an issue for capital adequacy and financial management of the PPF and the test of capital adequacy will be carried out on regular basis in line with generally accepted actuarial practice (GAAP).

The number of retirees qualifying for GMP will be reduced if many employees are encouraged to make AVC and this will reduce the strain on PPF.

Investment guidelines

Section 86 PRA 2014 makes provision for permissible investment instruments including real estate development investments and specialist investment funds (e.g. include infrastructure development),  subject to guidelines issued by PENCOM. The dearth of investment outlets is a major problem facing the pension operators, as it will be difficult to determine an optimal investment mix consistent with risk profile as required by section 78(3)(b) of PRA 2014.

Thus, PENCOM should expedite actions on the proposed amendment to the guidelines on investment of pension assets in order to facilitate the investment of parts of the over N4.5 Trillion pension funds in a bankable infrastructure projects in the country. Expediting actions on the institution of this guideline by PENCOM would, however, ensure adequate protection and safety of pension funds at all times.

Empirical evidence shows that Pension Fund Administrators have continued to invest bulk of pension funds in Federal Government securities and money market instruments relative to equities, leading to having investment portfolios that are too risk averse.

In other words, most PFAs are adopting low risk investment strategies without taking into account the individual members’ risk profiles and therefore, in the long term, are likely to result in lower emerging pensions than might have been expected of life-style investment strategies for investment portfolios with different risk profiles. Furthermore, it has been argued that the over concentration of pension funds in debt instruments might be limiting the growth potential of the retirement fund for young pension contributors with long term investment horizon.

The dearth in wide range of investible instruments currently being experienced in the pension industry will hamper diversification within PFAs investment portfolios with the aim to maximize their investment returns, leading to an increase in total pension assets. However, the growth in total pension assets in recent times was as a result of new entrants into the CPS which will lead to consistent guarantee of pension income from older entrants. Furthermore, the yield on investment in real terms has been wiped off by the rising inflation and the devaluation of the national currency.

Possible solutions

An actuarial advice might be needed by the Investment Strategy Committee, which is to be established by every PFA under section 78 of PRA 2014, in carrying out its functions. Actuaries should typically have a part to play in strategic investment decision-making, bringing to bear skills in asset-liability modelling and stochastic modelling of investment portfolios. In addition, actuaries can also provide PENCOM with an independent assessment of the appropriateness of PFAs investment strategies.

There is also the need to research, structure, develop and invest in alternative asset classes that have the potential to beat inflation sustainably and this has made a case for the use of pension fund to finance infrastructure developmental projects.

Public education and enlightenment

Actuarial involvement in CPS

The traditional thinking has been that members in DC schemes bear all the risks and rewards and receive whatever outcomes are produced at retirement. These DC schemes may have the legal ability to adjust member liabilities including contribution rates automatically, as asset values move up or down, therefore limiting the need to immunize asset/liability movements. It is normally assumed that such schemes have limited or no actuarial involvement.

On the other hand, a DC system such as CPS operating in Nigeria that forces compulsory contribution rates (section 4(1) of PRA 2014) and entails significant tax concessions (section 10 of PRA 2014) should not, under reasonable circumstances, be left to require members to bear all risks over many decades of membership.

Pius Atere