Outline

1. Contributory pension scheme as instrument for liability controls for the states: issues and prospectsbyM. K. AhmadDirector GenralNational Pension CommissionAbuja Interaction with Nigerian Governors Forum

2. Outline • Rationale for the Reform • Objectives of the Reform • Nature of the Scheme • Safeguards of the Scheme • Implementation by State Governments • Pension Liabilities • Opportunities for Economic Growth • Challenges • Next Steps Interaction with Nigerian Governors Forum

3. Rationale for the Reform • Most public sector schemes were unfunded • Unsustainable pension liabilities • Weak and inefficient administration of schemes in both public and private sectors • Demographic shifts and ageing make defined benefits schemes unsustainable • Many workers in the private sector were not covered by any form of retirement benefits arrangement • Existence of diversified arrangements which were largely unregulated in the private sector Interaction with Nigerian Governors Forum

4. Objectives of the Pension Reform • Ensure that every worker receives his retirement benefits as and when due • Empower the worker • Assist workers to save in order to cater for their livelihood during old age • Establish uniform rules, regulations and standards for administration of pension matters • Establish strong regulatory & supervisory framework

5. Nature of the Scheme • Mandatory Defined Contribution Scheme • Coverage • Covers the public service of the Federation and Federal Capital Territory and employers of 5 or more employees in the private sector • Contributory • Both employer & employee to each contribute 7.5% of employee’s monthly emoluments (basic salary, transport and housing allowances) • Contributors are allowed to make additional voluntary contributions • Based on Individual Retirement Savings Accounts (RSAs) • Personalized & portable • RSAs are privately managed by PFAs and PFCs • Life insurance cover Interaction with Nigerian Governors Forum

6. Nature of the Scheme … cont’d • Coverage and exemptions • Scheme not mandatory on informal sector • Policy being drafted for informal sector voluntary buy-in into the scheme • Lump sum withdrawal at exit • Monthly/Quarterly pension payments • Option of Programmed Withdrawal or Annuity purchase • Right to change to another PFA in case of Programmed Withdrawal • Right to switch to Annuity from Programmed Withdrawal • Benefits to be paid to beneficiaries of deceased contributor (including life insurance benefits) Interaction with Nigerian Governors Forum

7. Safeguards of the Scheme • Access to RSA allowed only on retirement • Separation of the functions of pension operators • Pension Fund Custodian Guarantee • Pension funds held by custodians in the name of the Contributors • Pension assets cannot: • be used to meet the claim of creditors of pension operators • be seized or subject to execution of judgment debt or stopped from transfer to another Custodian • be sold, or granted as loan or used as collateral • Government contribution shall be a charge on Consolidated Revenue Fund of the Federation • Scheme is strictly regulated and supervised

8. Comparing the old and the new schemes

9. Comparing the old and the new schemes

10. Comparing the old and the new schemes

11. Implementation by State Governments • Adoption of the scheme for all states and local governments by the National Council of States in its meeting of August 2006 • Model State Pension Law was developed for the state governments to adopt and modify based on their peculiarities • PenCom reviews draft state Pension Laws and offer support in their implementation • Registration of contributors • About 2.6 million Nigerians have opened RSAs • 68% are from the Public Sector, of which • 48% are FGN employees • 20% are state & local government employees • 32% are from the Private Sector Interaction with Nigerian Governors Forum

12. Implementation by State Governments … cont’d • 21 state governments are at various levels of implementation • Six States comprising Kano, Ondo, Bauchi, Delta, Kogi, and Jigwawa have responded to our request for up-dates Interaction with Nigerian Governors Forum

13. Implementation: Role of Employee & Employer • Employee: • PFA Selection • Movement of RSA once a year • Appointment of next of kin • Demand for customer support from PFA • Lodgment of complaints with PenCom • Demand payment of employer and employee contributions into RSA • Employer (State Government): • Provision of Legal framework • Preparation of contribution schedule to PFCs • Deduction of both employee and employer contributions • Remittance of contributions to PFCs • Computation and payment of accrued pension rights of employees • Computation and payment of pension arrears

14. Implementation: RSA Opening • RSA Opening • Every employee is required by law to open an RSA • It is ILLEGAL for employers to coerce employees to open RSAs with specified PFA(s) • Registration procedure with selected PFA • Completion of registration form • Personal Data • Thump Print issues • Employment Records • PenCom to issue PIN to employees through PFA • Inform employer of PFA • PFA gives letter to employer with details of where money will be paid

15. Pension Liabilities • Pension liabilities are debt obligations of the employer • There are two forms of pension liabilities: • Accrued pension benefits earned by employees for past service • Outstanding pension arrears • For FGN employees, the former liabilities were determined actuarially in accordance with the existing contract of service while the latter liabilities were determined through pensioner verification • Retirement bonds will be issued to each employee acknowledging his/her accrued benefits • Bonds will be redeemed into individual RSAs upon retirement • FGN has been setting aside 5% of its total wage bill to redeem the bonds • A total of N86 billion has been paid by FGN to its existing pensioners as pension arrears Interaction with Nigerian Governors Forum

16. Pension Liability Controls • Employer is responsible only for making specific contributions on behalf of qualified participants • The employer does not guarantee any certain amount in retirement • Pension contributions to be charged on the States’ statutory allocation? • Thus, the Scheme will stem further growth of pension liabilities and provides a platform for addressing them • It will also impose fiscal discipline in the budgetary process because pension obligations would be accurately determined • Assets are available at exit for payment of pension benefits as and when due, thus, no accumulation of pension arrears Interaction with Nigerian Governors Forum

17. Opportunities/Prospects of the Scheme • Pension Fund Assets: • Generate long term savings (compulsory savings, tax incentives & desire for increased retirement benefits) • Promote bond and equity markets • Raise productive capital formation that positively impacts on GDP growth • Provide cheaper source of finance, lead to reduced interest rate and promote the growth of the real sector • Creation of domestic institutional investors (PFAs/CPFAs), with long term focus, would moderate stock market and price volatility • Triggers Positive Qualitative factors • Privatisation • Modernisation of capital market infrastructure (trading, settlement systems) • More efficient avenue for financing Government(s) long term borrowing needs – infrastructural bonds • Growth in FDI as counterpart funding to infrastructural finance deficits Interaction with Nigerian Governors Forum

18. Opportunities/Prospects of the Scheme • Development of annuity and Bond markets • Development of life insurance business • Development of other institutional operators: • Enhance skills of Rating Agencies • Development of Mortgage Industry • Development of the capital market • Enhancement of asset management competence • Improvement of corporate finance skills Interaction with Nigerian Governors Forum

19. Challenges • Misconceptions and apprehensions about the scheme • General knowledge gap, especially on pension administration • Coverage would have to be expanded – how to cover the informal sector that has over 40% of total labour force • Capacity building in the industry to address the general knowledge gap, especially on pension administration • Encouraging State and Local Governments to adopt the Contributory Pension Scheme • Inadequate investment outlets to absorb growth of savings • Inflation should be lower in order to ensure positive real return on savings and other investment Interaction with Nigerian Governors Forum

20. Intensive sensitisation campaigns to create awareness to stakeholders on their rights and obligations Secure full compliance of the private sector and encourage the participation of the informal sector Strengthen Inter-Agency co-operation with CBN, SEC, NSE, NAICOM, e.t.c To avoid regulatory overlap and policy inconsistencies To facilitate reduction in capital market transaction costs Encourage other State Governments to implement the contributory pension scheme Encourage unlisted good companies to seek NSE quotation Next Steps

21. Thank You! National Pension Commission Plot 174, Adetokunbo Ademola Crescent Wuse II, Abuja – Nigeria 09 – 4138736 – 40 info@pencom.gov.ng www.pencom.gov.ng