That pension reforms will not derail

In 2004, Nigeria embarked on one of the most successful reforms in its history with the enactment of the Pension Reform Act (PRA 2004).

Before then, employers used to have riotous schemes that did not inspire confidence in the employees.

In the private sector, there were schemes that were less than beneficial and were often implemented in ways that gave too much room for discretion and short-changed would-be beneficiaries.

The public service operated the Defined Benefit Scheme (BDS) under which retirees were entitled to a life pension based on years of service and hierarchy. However, economic challenges and fiscal crises caused arrears of pension payments to government retirees to pile up. Pensions were budgeted for annually but we’re only paid if there was funding and this was usually the least on the priority list. Pensioners were dying in penury and frustration while waiting for their entitlements. This was the situation when President Olusegun Obasanjo’s administration introduced the pension reform in 2004.

With the reform came the Contributory Pension Scheme (CPS), which has been regarded by most Nigerians as an outstanding success story in Nigeria.

Under CPS, it is mandatory for employers in the public service and private sector with a certain number of employees to make a minimum contribution towards the retirement benefits of these employees. There is also the contribution by the employees themselves, which is akin to compulsory savings towards retirement. The funds are invested by the Pension Fund Administrators (PFAs) and kept in custody by Pension Fund Custodians (PFCs).

As a result, value is added to the savings over the years through returns on investment. These fundamental changes have created a new economy.

From a negative position of huge unfunded pension liability, pension assets in Nigeria had grown to N13.88 trillion as of the end of March 2022. The total number of pension contributors is close to 10 million and still growing.

Unfortunately, it is not everybody is excited by the success story if we have to judge by developments in recent years. For instance, the Nigeria Police Force (NPF) has been making efforts to exit CPS.

At first, the NPF compared itself to the military which was granted an exemption by law. Although this comparison is unnecessary since the armed forces are generally treated as separate from civil forces, the legal aspect is that excising the police is against the Pension Reform Act (as amended).

The police are part and parcel of the CPS as provided for by the law. When police agitation reached its height under former President Goodluck Jonathan in 2013, the police were allowed to set up their own PFA as a compromise, supposedly to take care of their peculiarities.

Still, the police are not content. They want to exit the scheme completely and run a totally different pension scheme for whatever reason, without an amendment to the law or presidential approval.

According to unrefuted reports, the determination of the police to exit has gone to the illegal extent that the Deputy Inspectors General of Police (DIGs) and Assistant Inspectors General of Police (AIG) have been enrolled on the Integrated Payroll and Personnel Information System (IPPIS) to collect full salaries for life under a defined scheme that was not intended for them. This they did without any permission of anyone, not the president, not the regulatory authority and certainly not in conformity with the Pensions Reform Act.

To make matters worse, some are still collecting pensions from the police PFA. That is a classic case of double payment. They are enjoying pension both from the contributory scheme and the defined benefit, which is unlawful and unconstitutional.

Some of the statistics should be of concern to us. Of the N577 billion budgeted for pensions in 2022 by the Federal Government of Nigeria (FGN), military pensions and gratuities account for N237 billion. That is close to half of the entire pension budget.

Police pensions and gratuities for certain exempted groups amount to N8 billion of the FGN budget for pensions for the year under discussion. However, if the police authorities succeed in pulling the NPF out of the contributory pension scheme altogether, that alone would have consumed the entire FGN budget for pensions in 2022.

The military is just about 25 per cent of the size of the police, so FGN is going to be saddled with a pensions and gratuities budget that will pass N1 trillion.

With its current fiscal challenges, the FGN will have no other option than to owe pensions. Meanwhile, the contribution of police funds to the pensions sector will shrink and this will no doubt affect the growth and prospects of the pension industry in particular and the Nigerian economy in general.

To be continued tomorrow
Abayomi, an economist, wrote from Akure, Ondo State.