Proposed amendments to Pension Reform Act may threaten Nigerian’s savings culture
Nigeria’s Pension Reform Act 2014 (Amendment) Bill, 2022 is currently in the final stages of legislative proceedings.
Specifically, it has passed a second reading at the National Assembly and for next steps, the bill has been referred to the Committee on Establishment and Public matters to solicit public feedback ahead of implementation.
Consequently, a public hearing was held on February 22, 2022, by the House of Representatives Committee on Pension. This hearing was primarily focused on the dual objectives of the proposed amendments
- Firstly, the proposed amendments seek to exempt the Nigerian Police Force from Contributory Pension Scheme requirements of the Pension Reform Act, i.e., like the exemptions for the Nigerian Army.
- Secondly, the sponsors of the bill seek to enshrine into law, requirements enabling pension account holders to withdraw up to 75% of their account balances and punish undue delays for pension disbursements as criminal offences.
Unsurprisingly, the reactions have been mixed across the Nigerian pension stakeholder spectrum
- Proponents for the amendments argued that the exemption of the police and 75% withdrawals requirements are both in the immediate interest of account holders.
- Opposing views from PenCom, Centre for Pensions Right Advocacy (CPRA) strongly rejected the amendments as not beneficial for economic progress.
For those opposed to the new requirements, below is an outline of key concerns.
1. Why does the Police want to be exempted from CPS?
The proponents of exempting the Police from the current Contributory Pension Scheme, want more than just being exempt, rather the Inspector General of Police argued that police officers should get the same pension packages as the Nigerian Army to boost officers morale.
- “……exempting the police from the obnoxious contributory pension scheme could just be the magic to motivate officers and men of the force to go the extra mile and save the country”
Additionally, Hon. Francis Ejiroghene Waive argued that the police retirement benefits potentially needed to be increased by between 500% to 686%, simply to match their counterparts in other military agencies to boost morale.
”………For example, the highest retirement benefit of a Deputy Superintendent of Police under this obnoxious pension scheme is N2.5 million and that of Assistant Superintendent of Police is N1.5 million while their equivalent in Army (captain) and DSS are paid N12.8 million and N10.3 million respectively “……
2. What are the implications of providing the Police with an enhanced retirement package?
Admittedly every employee seeks to derive maximum benefits from his employers when an opportunity presents itself. However, during requests for a better package, several factors need to be considered including the financial cost of the requests, as well as prevailing Macroeconomic realities.
Financial Cost
Nigeria’s Pension Commission (PenCom) provided an estimate that the Federal Government would require N1.8 trillion to cover a defined benefit scheme for the 300 thousand police officers a broad estimate of additional N6million per person.
Notably, this estimate N1.8 trillion (or average of N6 million per police staff) is likely to be exceeded, especially when compared to the statement from Hon Francis Ejiroghene Waive that there is a gap of N9 to N10million per person between the Nigerian Police versus the Nigerian Army retirement package.
Macro-economic realities
The above request to provide members of the Nigerian Police with enhanced retirement packages costing over N1.8 trillion is in stark contrast with the realities on ground.
- Specifically, the Federal Government’s recently approved 2022 budget already has a deficit of over N6.2 trillion.
- This simply means that the Nigerian government needs to borrow N6.2 trillion to execute on critical infrastructure projects
- Furthermore, ongoing revenue challenges for the Federal Government means it is continually unable to execute on key initiatives as Debt Servicing continues to be a huge drain on resources.
Therefore, due to current realities, requests for non-capital expenditure of this magnitude is simply unaffordable. Especially at a time when it is critical to provide the Federal Government with fiscal capacity to fund capital expenditure which induces economic growth.
This amendment risks creating a pyrrhic victory for its supporters, whereby the FG picks up a huge liability which it simply won’t be able to meet whilst the Nigerian Pensions savings Industry gets decimated by the exemption of the Police
3. Are there alternatives to outright exemption of the Police Force?
Analysts have suggested that a comprise to this issue of the Police being dissatisfied with their retirement balances is to ensure that the Police force is paid a more competitive salary for their services AND simultaneously improve customer service experience and mitigate data protection concerns.
This alternative is notable because adjustments to the Police Officers’ monthly salary provides higher disposable income and allows officers to save a more reasonable amount which ultimately enhances the balances in their retirement savings account.
Furthermore, this approach ensures that the accountability of contributing to retirement remains with the individual police staff. This protects the Federal Government from the risks of having huge unfunded retirement obligations.
Finally, this alternative avoids a return to the 2004 Pre- Pensions reform scenario which was bedevilled with unlimited instances of retirees waiting endlessly for a retirement check that was not forthcoming largely driven by over N2 trillion of pension liabilities.
- Research analyst, Demiola Oju stated that Nigeria doesn’t need additional financial responsibility. she said “over the last few years, the contractual debt service load has increased. What the government doesn’t need right now is another future contractual obligation on monies it doesn’t have, especially because it has a structure in place to deal with this under the Contributory Pension Scheme.”
- Damilola stated further that, withdrawing funds from the Nigerian Police PFA would imply disinvesting and unwinding investments in long-term bonds, corporate debt, and illiquid real-estate investments before maturity. Because the financial ecosystem is interconnected, this will place a strain on the financial system.
4. 75% lump sum payment to pensioners on retirement will make them worse off
With regards to the proposed amendment to enable retirees withdraw 75% lumpsum payment. The proposal may seem noble, especially given that from a retiree’s viewpoint, persistent angst of sub-inflation returns, and sub-optimal customer service experiences are noteworthy.
However, from a macro-economic perspective, the opportunity costs can be immense and enabling a 75% lump sum withdrawal may not be a proportionate response to the challenges faced.
Specifically, decimating the Nigerian savings industry by encouraging large scale fund withdrawals will deprive the economy of the benefits of domestic investment mobilization.
Most economists agree that the degree of savings in any country is a key driver of growth of in that economy. There is even a formula:
- National savings rate = (Income – Consumption) / Income. But that is beyond the scope of this topic
However, the core point is that a country’s domestic savings is used to drive investments which stimulate economic growth and then future consumption.
Conversely, if a country does NOT encourage savings (i.e. if a country has a high marginal propensity to consume), the result is that the country will eventually need borrowings to sustain itself.
If this issue sounds familiar (i.e. high propensity to consume which decimates savings culture and ultimately results in higher borrowing for critical projects) then you are probably thinking about the recent Federal Government experience of decimating its Excess Crude Oil Savings account. From a high of $17billion to just under $35million as at January 2022.
- An investment analyst, Ayo Bamidele, stated that 25% of the pension fund is NOT sufficient to sustain pensioners in the long term. Specifically, he said “if we are advocating for a larger lump sum payment of at least 75% as proposed under this bill, then we need to ask if the 25% remaining is enough to sustain you periodically for the rest of your time on earth. The answer is a resounding NO.”
In conclusion
Both amendments may appear noble, however, from a macro-economic perspective, the proposals have huge potential to decimate Nigeria’s fragile retirement savings industry and creating financial risks to the economy due to lower domestic savings.
The idea of regulatory reform should always be to make things better for all stakeholders and the Nigerian economy at large. Therefore, rather than looking to decimate Nigeria’s savings culture by increasing the number of exempt groups such as the Police, as well as, expanding eligible withdrawals, the focus should be directed to how to grow returns and benefits available to retirees.
This can be accomplished by enabling the Pension’s industry to seek more opportunities to participate in real sector development and growth. Alternatively, the retirement account holders can be given the flexibility within the existing Pensions structure to utilize their existing account balances for certified low-to-medium risk investment opportunities
- Examples of what the accounts can be used for is unlimited such as Mortgages, Real Estate investments, or individuals be allowed to buy USD assets which get custodied by domestic custodians or even using the fund balance as a source of loan or collateral for a loan.
- The basic premise is that individuals can access their accounts for certified investments but keep within the AUM balances rather than full scale withdrawals.
Interestingly, in advanced economies, retirement accounts form the basis of wealth creation and individuals are encouraged to tap into these balances for further investment opportunities such as buying a house or buying a small business (i.e., folks can use their retirement balances rather than taking out personal or business loans at high-interest rates).
Source: nairametrics
