A key to any country’s development lies in its capital formation (domestic or imported), with savings being a pillar of the domestic capital formation. Keynesian economics define savings as the amount left over when cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.
In most developing countries such as Nigeria, the rates of productive capital formation through savings are low because of poverty and low income. Workers are so poor as to be often near subsistence. They therefore cannot save, even if they will like to do so.
Other factors include lack of ethics stressing frugality; prevailing rules of the game that gives people little incentive or reward for saving and emulation of consumption standards of advanced nations. Unfortunately, the wealthy in these countries pile up their savings abroad, legally or illegally making them unavailable for domestic economic development.
One important condition for promoting economic development is better utilisation of labour. Nigeria has a large part of her labour force that does almost nothing (unemployed). There are some others who may not be called employed. They can either be termed to be on disguised unemployed or underemployed. These are persons doing jobs far below their academic and professional qualifications.
The Pension Reform Act 2004, which was repealed and replaced with the Pension Reform Act 2014, established a mandatory Contributory Pension Scheme (CPS) for workers in both the public and private sectors. Section 4 of Pension Reform Act 2014, provides for a mandatory minimum contribution of ten and eight percent of employee’s monthly emolument by the employer and employee respectively. Each employee is to open a Retirement Savings Account (RSA) into which the contributions are to be paid, with a Pension Fund Administrator (PFA) licensed by the National Pension Commission, established under section 17 of the Act, to regulate and supervise pension schemes in the country. The PFA is to manage and invest the fund in the RSA from where a contributor will draw benefits on retirement in line with the provisions of the Act.
Economic growth of a country can be referred to as economic capacity to increase the productivity of services and goods in comparison with previous time period. The success of every government is tied to the growth of the economy of the nation. Therefore, achieving a high and stable economic growth rate is an important issue for every government, since economic growth is key to citizens’ enjoyment of a higher standard of living.
The CPS, being a mandatory scheme, has compelled employees and employers in the public and private sectors to collectively save a minimum of eighteen percent into employees’ RSA, from where they (employees) will be paid retirement benefits. This has increased national savings pensions fund liabilities to have long maturity period, consequently, they are open to long term investment through long term equity stakes.
Nigeria’s Net Assets Value of Pension Assets under the CPS is 14.19 trillion naira. This is against a background of federal government budgetary pension deficit estimated at N2 trillion as at June 2004 when the Contributory Pension Scheme took off and a non-existing pension industry before the CPS took off, is a huge achievement.
Of the 14.19 trillion Net Assets Value, 64.17% was invested in FGN Securities, 6.75% in ordinary shares, 16.50% in local money market securities, 0.70% in states government securities, 1.22% in Real Estate, 0.52% in Mutual Funds, 7.49% Corporate Debt Securities, 0.52% Infrastructure Funds, 0.27% Private Equity, 0.63% Cash and Other Assets.
Investment of pension fund in federal and state governments’ securities has assisted these governments to cost-effectively manage their national debts, thereby contributing in the solving of their financial needs and contributing to the stability in the market of government debts.
Pension fund has come in as an independent financial intermediary, as the nation’s private business enterprises no longer rely on banks as the sole sources of outside capital for the financing of their businesses.
The Fund is getting into real estate, infrastructure and mutual fund. The fund therefore provides a domestic source of borrowing, which doesn’t attract excessive high interest rate. The transfer of resources in favour of long term assets by the fund has significantly impacted on the nation’s GDP growth rate.
The growing size of pension assets is impacting on the financial landscape, with a growing role of institutional investors (Pension Fund Administrators and Life insurance companies). This is indicative that the CPS is impacting positively on the economic growth of the nation.
The Pension Reform Act 2014 provides that the CPS should be privately managed. To this end, the law made provision for specific institutions that will manage the scheme. Principal among the institutions is the National Pension Commission (PenCom), established under section 17 of the Act. The principal objectives of PenCom are to enforce and administer the provisions of the Act; co-ordinate and enforce all other laws on pension and retirement benefits; and regulate, supervise and ensure the effective administration of pension matters and retirement benefits in Nigeria. PenCom with headquarters in Abuja, has regional offices in five geopolitical zones of the federation.
Section 51 of the Act provides for Closed Pension Fund Administrators (CPFAs). Some pension schemes in the private sector existing prior to the introduction of the CPS in June 2004 were allowed to continue as CPFA, subject to guidelines issued by PenCom. The companies are required to have operated a fully funded existing pension scheme with assets worth at least N500 million. There are currently six CPFAs.
Section 54 of the Act also provides for PFAs. PFAs are limited liability companies whose sole objectives are management of pension fund, including investment; and payment of benefits. There are twenty two licensed PFAs, with their headquarters either in Abuja or Lagos, including branch offices in most state capitals. The Act, in section 56, further provides for Pension Fund Custodians (PFCs). There are four PFCs that are responsible for keeping safe custody of pension assets. In all, there are 32 licensed Pension Operators in the pension industry today.
Combined, PenCom and Pension Operators employ thousands of graduates of diverse professions, thereby helping to take off the streets able-bodied Nigerians, in particular young graduates, who otherwise would have been roaming the streets in search of jobs.
Pension fund has also impacted positively on other sub-sectors of the financial sector of the economy. As the fund press for improvements in the architecture of allocative mechanisms, including investment, risk management, better accounting, auditing, brokerage and information disclosure; insurance supervision and management for group life insurance and annuity, new securities and rating agencies have developed. The fund has developed equity market, which is enhancing overall economic development.
The role of pension fund in the growth of life insurance companies in the country has increased. This has significantly assisted in the growth of the insurance industry.
The CPS has grown significantly in the past 17 years and is providing painless access to retirement income to members of the scheme as against the unsustainable pay-as-you-go defined benefits scheme. This is leading to substantial wellbeing of retired members of the scheme.
The Pension Reform Act 2014 expanded coverage of the CPS to the self-employed and persons working in organisations with less than 3 employees. This category of workers constitutes a large percentage of the working population in the informal sector of the country. In order to extend coverage of the CPS to this important segment of the Nigeria economy, PenCom has introduced the Micro Pension Plan (MPP) with effect from January 2019. In implementing this initiative, the informal sector has been segmented into three broad categories. The low income earners, the high income earners and the SMEs.
Each of these categories is targeted with appropriate pension products that meet their peculiarities.
In conclusion, the CPS was established for payment of retirement benefits of employees whom the scheme applies under the Pension Reform Act 2014. The scheme, being a funded scheme, has accumulated a huge pool of long-term investable fund, which is being invested, leading to national economic development.
The remarkable achievements of the CPS not withstanding, the scheme still has its challenges, ranging from low coverage and lack of political will, especially on the part of state governments. Only twenty four states have enacted laws on the CPS, and out of these, only four states are fully implementing the scheme. Both the federal and state governments are very insensitive to the plight of pensioners.
The way forward is for both the federal and state governments to key into the scheme by fully complying with the provisions of the Pension Reform Act 2014; enhanced service delivery by pension operators and increased public awareness.