THE INEVITABILITY OF THE CONTRIBUTORY PENSION SYSTEM: OPPORTUNITIES AND CHALLENGES

1. THE INEVITABILITY OF THE CONTRIBUTORY PENSION SYSTEM: OPPORTUNITIES AND CHALLENGES BY Comrade Adams AliuOshiomole, mni Comrade Governor Edo State National Pension Conference on Implementation of CPS

2. Outline • Introduction • The Nigerian Pension System Before 2004 • Rationale for the Contributory Pension Scheme • Opportunities Under the Contributory Pension Scheme • Challenges • Conclusion National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS

5. The Nigerian Pension System…Cont’d • 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 National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS

7. Rationale for the Contributory Pension..Cont’d • 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 National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS

9. Opportunities Created by….Cont’d • 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 National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS

11. Challenges Cont’d • Widening coverage especially in the informal sector • Capacity building in the new pension industry National Pension Conference on Implementation of CPS

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 National Pension Conference on Implementation of CPS