THE INEVITABILITY OF THE CONTRIBUTORY PENSION SYSTEM: OPPORTUNITIES AND CHALLENGES

1
THE INEVITABILITY OF THE CONTRIBUTORY PENSION
SYSTEM OPPORTUNITIES AND CHALLENGES

• BY
• Comrade Adams Aliu Oshiomole, mni
• Comrade Governor
• Edo State

2
Outline

• Introduction
• The Nigerian Pension System Before 2004
• Rationale for the Contributory Pension Scheme
• Opportunities Under the Contributory Pension
  Scheme
• Challenges
• Conclusion

3
Introduction

• Pension Systems were introduced to provide income
  after retirement
• Payment of retirement benefits has thus become a
  cardinal objective of governments globally
• Retirement benefit systems have witnessed various
  challenges, hence the need for reforms
• Systemic
• Paradigm shift
• Nigeria adopted for a paradigm shift with the
  implementation of the Contributory Pension Scheme
  (CPS) in June 2004

4
The Nigerian Pension System Before 2004

• Public Pension Schemes
• The Pension Ordinance of 1951, with retroactive
  effect from January 1, 1946
• Pension Decrees 102 and 103 (for the Military)
  of 1979, with retroactive effect from April 1974
• The Contributory Pension Scheme of June 2004
• Several circulars and regulations were issued to
  alter their implementations
• Parastatals were allowed to have their Pension
  Schemes in 1997 as specified in a Standard Trust
  Deed and Rules prepared by the Office of the Head
  of Service of the Federation

5
The Nigerian Pension SystemContd

• Parastatal Schemes were administered by Boards of
  Trustees (BOT)
• Each BOT to decide on type of Scheme whether
  Insured or Self-administered Arrangements
• Private Sector Pension Schemes
• First introduced by Nigerian Breweries in 1954
• National Provident Fund (NPF) was the first
  formal Private Sector Pension Scheme in 1961
• The NPF was contributory where both employee and
  employer contributed Four Naira (N4) each on
  monthly basis
• The Nigeria Social Insurance Trust Fund (NSITF)
  was was established by Decree No. 73 of 1993 to
  replace the NPF
• Took over the assets of the NPF and commenced
  operations in July 1994
• All registered members of the NPF became
  automatic members of the NSITF

6
Rationale for the Contributory Pension Scheme

• Coverage under the Old Scheme
• Very limited coverage
• Mandatory for Public Sector but Voluntary for
  Private Sector
• Unfunded and inadequate budget allocations
• Budget far short of promised benefits
• Late releases of funds
• Unsustainable outstanding pension liabilities
• Pension arrears continued to grow
• Proportion of pension to salaries continued to
  increase
• Weak and inefficient administration
• Protracted delays in processing and payment
• Less transparent and cumbersome processes

7
Rationale for the Contributory Pension..Contd

• Supervision and Regulation
• Public Sector Schemes were not supervised
• Disjointed supervision and regulation for Schemes
  run by Parastatals, self-Funding Public Agencies
  and the Private Sector
• Hence pensioners were left at the mercy of the
  various Pension Boards/Offices
• Most workers in the private sector were not
  covered by any form of retirement benefit
  arrangements
• Demographic shifts and aging make defined benefit
  scheme unsustainable
• Support ratio continued to fall making old scheme
  unsustainable
• Most of the Parastatals schemes were bankrupt
• Largely unfunded weak
• Mismanagement

8
Opportunities Created by the Scheme

• Contributory
• Contributions by both employer and employee
• Individual Accounts
• Personalised , Portable, Periodic Account
  Statements
• Private Management
• PFAs and PFCs
• Mobility of labour is facilitated due to
  Individual Capitalized Account
• Contributors have right to
• Select PFA of Choice
• Select mode of benefit withdrawal

9
Opportunities Created by.Contd

• Timely access to Retirement Benefits
• Already N80 billion accrued benefits has been
  paid into the RSAs of about 13,000 FGN employees
  who retired under the new Scheme between July
  2007 and April 2009
• The CPS also provided for a Minimum Pension
  Guarantee (MPG)
• The Contributory Pension Scheme has generated a
  pool of N1.1 trillion investible funds
• The transfer of resources in favor of long-term
  assets could have significant positive impact on
  capital formation and investment and hence GDP
  growth

10
Challenges

• Pension Contribution Ratio need for the
  government to provide some cushion to the
  employee by contributing higher percentage of
  Pension Contributions than the employee
• Accessing Retirement Benefits
• The Act should be clearer on the retirement age
  in both the public and the private sectors
• Inability by voluntary retiree to access their
  retirement benefits if retirement is before 50
  years unless if based on conditions of service
• Funding Requirements of the Minimum Pension
  Guarantee should be made explicit
• The low level of compliance among the States and
  the Private Sector needs to be addressed

11
Challenges Contd

• Widening coverage especially in the informal
  sector
• Capacity building in the new pension industry

12
Conclusion

• Contributory Pension Scheme is inevitable in view
  of the issues associated with the Defined Benefit
  Scheme
• Employers alone cannot shoulder all retirement
  benefit obligations, hence the need for the CPS
  in order to ensure sustainability and adequate
  provision of resources to defray all pension
  liabilities
• PenCom must come up with
• maximum number of years of contribution for
  eligibility for Minimum Pension Guarantee
• Eligibility criteria for the Minimum Pension
  Guarantee
• Uniform retirement age for both public and
  private sectors