In retrospect, it is widely attested that an active pension ecosystem effectively congregating players – a regulator, administrators, custodians, public and private sector employers and working-class persons across several age groups – is well established in Nigeria. The maturity of this industry relative to more advanced economies of the world like the US or the Organisation for Economic Co-operation and Development nonetheless, the pension industry globally has displayed great resilience, navigating the turbulence and whirlwinds: macroeconomic shocks, economic downturns, recession and more recently a global pandemic in 2020, which instigated a fold-down of companies, job losses and a sharp drop in macroeconomic numbers and indices. In spite of periods of passive economic activities, the pension industry has, over time, consistently helped in mobilising the much-needed funds, notably from the middle-income segment of the economy for propelling growth.
According to the National Pension Commission, at the end of 2020, the same year the COVID-19 pandemic severely raged resulting in two-quarters of negative economic growth, pension assets in Nigeria grew to N12.3 trillion. This amount represents 8% of Nigeria’s nominal Gross Domestic Product. There were only a handful of industries that put up a similarly stellar performance for the financial year.
More recently, PenCom also noted that Retirement Savings Account registrations from inception hit 9,383,204 as of June 30, 2021. This was marked by growth from 9,300,058 recorded in the first quarter of 2021. Overall, the cumulative pension contributions from inception to the end of the second quarter of 2021 amounted to N7.10 trillion.
While these numbers look impressive at a cursory glance, they nevertheless do not paint the true picture of the capacity of the sector. This is because only 11% of the total working-class population are active on Nigeria’s contributory pension scheme. This is a low penetration rate in comparison to 19% in South Africa and 77% in the United Kingdom. We could only imagine the huge funds that could be mobilised for investment and by effect, growth if coverage could extend to just half of the working-class population in Nigeria. It also portends that there is a huge prospect in this industry with a foreseeable ability to lead the quest for sustained economic growth in Nigeria, delivering from the two major policy instruments available to the government – the fiscal and monetary policy. I am certain that the pension industry if well nurtured is poised to rank as one of the next three big industries to lead growth and development in the Nigerian economy in the next two decades alongside manufacturing and agriculture.
From 2004 when the first Pension Act was promulgated, there are now 22 total Pension Fund Administrators, six Closed Pension Fund Administrators and four Pension Fund Custodians in Nigeria.
With the Pension Reform Act of 2014, which repealed the provisions of the 2004 Act, clearly distilled the roles of each player including the reception of contributions, custody, investment and regulation, there is now a well detailed go-to rule of engagement in the industry. The goals have always hovered around the safe custody of pension assets, inclusiveness of contributors, compliance with best practices, risk management and economic growth.
However, there is a need for a buoyant pension system that is tuned with the ever dynamic macroeconomic environment. The case for a more flexible system in line with the demands of the immediate financial market and economic environment is sought.
Foremost among the challenges bedevilling the industry has been low coverage and compliance by employers, including state governments, who also are part of the scheme as detailed by Section 2 of the Public Reform Act 2014 which stipulates that the Pensions Reform Act applies to any employment in the public service of the federation, the public service of the Federal Capital Territory, the public service of the states, the public service of the local governments and the private sector. For private sector employees, Section 2(2) of it shall apply to employees who are in the employment of an organisation in which there are 15 or more employees.
The allowance for the funds’ mobilisation in the contributory pension scheme is well stated in Section 4 of the Act: a total of 18% of the monthly emolument is to be paid into the Retirement Savings Account of an employee with ‘a minimum of 10% borne by the employer and a minimum of 8% by the employee’.
It is sad to note that compliance with these provisions and guidelines by the public and private sectors has been low. At the end of 2020, only Lagos State, Ondo State and the FCT were in full compliance with their state laws pertaining to pensions. A host of other states have found comfort in operating a morbid “pay as you go” system. This is also aside from the millions of informal sector employees shut out of the scheme within the private sector.
Limitations in awareness, knowledge and education of the workings of the pension system especially by employees and beneficiaries are still at the lowest ebb. Ideally, the regulators, custodians and administrators are to lead a worthy charge for sensitisation across both the formal and informal sectors.
While strict enforcement of the pension reform Act as a means to exponentially increase the funds mobilised has been consistently advanced by economic analysts, the mode of enforcement and penalty for erring companies and players is critical. At the very least, regulators should immediately consider a synchronisation of pension funds enforcement with the country’s national identity management system and the review of enforcement at the point of annual financial returns by companies and industries alike.
As with the mobilisation of contributions from employers and employees, the Pension Reform Act grants allowance for the investment of such funds to enable owners – employees and custodians – to earn returns on them.
A prominent question to ask is “what drives the allocation and investment of pension funds by custodians and administrators?” I have discovered that over several climes, risk, return and cost of funds take prominence among the key considerations in the investment of pension funds. Others include diversification, risk management, hedge against inflation, and liquidity.
According to Q2:2021 figures released by National Pension Commission, the four largest instruments where total pension assets of N12.66 trillion were invested are Federal Government securities (66%), local money market securities (13.72%), corporate debt securities (7.51%) and domestic ordinary shares (6.66%) in that order. The First Bank of Nigeria bonds took a large chunk of percentage investment in Federal Government securities while bank placements were the greatest share of the local money market securities.
Peter Imouokhome is an economist and development expert; can be reached on peter.imouokhome@outlook.com
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