PENSIONS REFORM IN NIGERIA: A COMPARISON BETWEEN THE OLD AND NEW SCHEME

PENSIONS REFORM ACT IN NIGERIA: A COMPARISON BETWEEN THE OLD AND NEW SCHEME

DURU . UGO

Lecturer, Department of Accounting, University of Benin, Nigeria

OKOYE, A. E.

Professor, Department of Accounting, University of Benin, Nigeria

Abstract

The history of the Nigerian Pensions administration dates back to the 1950s.The Pension Reforms Act of 2004 brought into limelight the new pension scheme in Nigeria which is a defined contributory scheme unlike the old scheme which was largely defined benefits. Although the new scheme is being adjudged to be better than the old scheme in that it is expected to help remedy the deficiencies and inadequacies prevalent in the old scheme, it is advocated that only proper coordination, supervision and regulation of the pension industry in Nigeria will make to happen.

Key words: Pension, pension scheme, retirement benefits, pension fund administrators

Introduction

The issue of pension has received much attention in many countries over the past decades. In fact, in recent times, pension has increasingly attracted the attention of policy makers in many countries as a means of facilitating privately funded retirement income savings by an ageing workforce (World Bank, 1994).Many countries have opted for various forms of contributory pension scheme where employers and their employees are supposed to pay a certain percentage of the employee’s monthly earnings to a retirement savings accounts from which they would be drawing their pension benefits after retirement. Besides pension funds are now among the most important institutional

investment in the world capital markets (Klumpes and Mason, 2000). Nigeria adopted for the contributory pension scheme following her pensions reform in 2004.

Pension is the amount paid by government or company to an employee after working for some specific period of time, considered too old or ill to work or have reached the statutory age of retirement. It is monthly sum paid to a retired officer until death because the officer has worked with the organization paying the sum (Adam, 2005:468). Pension is also the method whereby a person pays into pension scheme a proportion of his earnings during his working life. The contributions provide an income (or pension) on retirement that is treated as earned income .This is taxed at the investors’ marginal rate of income tax. On the other hand, gratuity is a lump sum of money payable to a retiring officer who has served for a minimum period of term year (now five years with effect from 1/6/92). A greater importance has been given to pension and gratuity by employers because of the belief that if employees’ future needs are guaranteed, their fears ameliorated and properly taken care of, they will be more motivated to contribute positively to organization’s output. Similarly various governments’ organizations as well as labour union have emphasized the need for sound, good and workable pension scheme (Adebayo, 2006, Rabelo, 2002).

The objective of this paper is to consider the pension scheme in Nigeria by comparing the old scheme with the new pension scheme which came into existence through the Pension Reforms Act of 2004.The first part of the paper considers a brief history of the pension system in Nigeria. Thereafter, the problems and characteristic features associated with the old pension scheme is examined. In the next section, the Pension Reform Act of 2004 is explored in great detail by looking at some of the provisions. The last section compares the old and the new pension scheme.

History of the Nigerian Pension Industry

One of the oldest documents to discuss social support was the Code of Hammurability by King Hammurabus of Babylon in the 18^th century (Momoh and Idomeh ,2008). For instance, the code defined the rights of evildoers and orphans to the estates of their

relations. According to Bloom (2005), one of the first publicly financed social security systems was developed in the late 16^th century in England from a series of legislature Acts known as “poor laws”. Under these laws, local governments built large alms-house facilities that housed the people too old or unfit for work. Poor laws also established work houses and facilitated public housing for the employed. Moreover, these laws gave rise to the social insurance in Europe and social security in the United States (Momoh and Idomeh , 2008)

The pension system was introduced into Nigeria by the Colonial Administration. The first legislative document on pension in Nigeria was the 1951 Pension Ordinance which has retroactive effect from January 1, 1946. The Ordinance provided public servants with both pension and gratuity (Ahmed, 2006). The National Provident Fund (NPF) scheme established in 1961 was the first legislation to address pension matters of private organizations in Nigeria. This was the first social protection scheme for the non-pensionable private sector employees in Nigeria. It was mainly a saving scheme where both employee and employer contributed the sum of N4 each on monthly basis. The scheme provided for only one-off lump sum benefit (Ahmad, 2006).

The NPF was followed by Armed Forces Pension Acts No 103 also of 1972 and by the Pension Acts No. 102 of 1979, 18 years later .The Pension Acts N 102 of 1976 which commenced on 1^st April, 1974 encompassed the recommendation of Udoji Commission which included all consolidated enactments and circulars on pension as well as repealing existing 113 pension laws hitherto in force. Other Pension Acts included: Pension Rights of Judges Act No 5 of 1985, the Police and other Government Agencies Pension Scheme enacted under Pension Acts No.75 of 1987 and the Local Government Pension edict which culminated in the setting of the Local Government Staff Pension Board of 1987.

In 1993, the National Social Insurance Trust Fund (NSITF) scheme was set up by Decree No. 73 of 1993 to replace the defunct NPF scheme with effect from 1^st July 1994 to cater for employees in private sector of the economy against laws of employment men in old age, invalidity or death (Balogun, 2006). In 1997, parastatals were allowed to have individual pension arrangements for their staff and appoint Boards of Trustees (BOT) to administer their pension plans as specified in the Standard Trust Deed and Rules prepared

by the Office of Head of Service of the Federation. Each BOT was free to decide on whether to mention an insured scheme or self-administered arrangement. It must be recall that the first private sector pension scheme in Nigeria set up for the employees of the Nigerian Breweries was in 1954.The United African Company (UAC) scheme followed in 1957.

The Chilean Model – the wrong Imitation by Nigeria

Dostal and Cassey (2007) argued that the Nigerian Authority saw the Chilean reforms (Chilean model) to be emulated and copied. But she failed to learn the lessons of Chile. In fact, at the time Nigeria was coping, Chile was preparing for an alternative social pension scheme. Again while the Nigerian government was beginning to give serious attention to pension reform (using the Chilean model) in early 2005 the Chilean model was being criticized by supporters of the scheme and the World Bank had come to conclude that the Chilean reform model has not delivered the benefits that it was set out for from the beginning because of the too many assumptions made. Therefore, it was advocated that to realize the claims, other reforms were also required to complement or precede pension reforms (Gill, Packard and Yermo, 2005, Holz and Hinz, 2005, World Bank 2005).

Similarly, the Chilean government announced wide-ranging changes to the pension provision since 2006, placing greater emphasis on solidarity and tax financing and higher controls on the operations of the individual accounts to which employees are subscribed (Gobierno de Chile, 2000). Again the World Bank has claimed that it advised against the establishment of a “multi-pillar system” in Nigeria on the grounds that the financial sector was insufficiently developed (World Bank, 2005). Notwithstanding the reforms undertaken in Nigeria was radical, involving the setting of a new basis for determining pensions and the establishment of new delivery structures.

Evolution of the Pension System in Nigeria

To determine the direction of changes in pension reform, it is apposite to trace the development of pension system in Nigeria, particularly from the 1970s. In the Public Sector, including civil and public services, statutory bodies and government owned companies, pensions were governed by the Pensions Act of 1979, later the Pensions Act 1990 as amended by the Pensions Regulations of 1991. The Act provided for benefits in terms of gratuity and pension payments.  Gratuity is a single, lump sum payment while pension is a periodic payment, normally on monthly basis for life. The Scheme was a compulsory and non-contributory one, which created a right to monetary collection by public servants and an obligation on the part of government to make payment.

It should however be noted that before April 1974, gratuity and pension for public servants were not treated as rights but as privileges. The applicable law provided that ‘no officer shall have an absolute right to …pension or gratuity’ [Section 6(1)]. As from 1974, they became rights to which a public servant who qualified for them was entitled against the government. The pension scheme for civil servants was financed, from government general revenue as may be appropriated in annual budgets, on a pay-as-you-go basis. It was neither from payroll tax deductions from employee salaries nor from any Fund specially set up for the purpose. In that context, pension benefits were regarded as deferred element of employment compensation package. Government parastatals however tended to operate separate funded schemes which required setting aside on an annual basis, a percentage of the total basic salaries of their staff in a special Fund under the management of a Board of Trustees.

Under the Pensions Act of 1979, both gratuity and pension for the public sector worker were salary rate-related and were financed wholly by the government without contribution by the workers. 

The National Provident Fund Act initially provided for private sector pension schemes. It was however essentially a savings scheme. Originally, the National Provident Fund (NPF), a contributory scheme, which was established in 1961, also covered public servants. It was wound up for public servants after it had lost N17bn in corruption (Fashina, 2003). The weaknesses in the National Provident Fund (NPF) led to the establishment of the Nigerian Social Insurance Trust Fund (NSITF) through Decree No 73 of 1993. The NSITF, a contributory scheme involving contributions by both the employees and employers, aims at creating limited social security, covering aspects such as pension, invalidity, death, accident and disability benefits. In addition to the NSITF, there are also several in-house arrangements in the private sector (Ozo-Eson, 2004: 85-86). Unlike the public sector, most in-house pension schemes in the Nigerian private sector had always been based on contributory system by which both the employers and employees funded the schemes. The employees contributed a percentage of their monthly salaries, subject to a maximum while the employers equally contributed a percentage of employees’ salary to the scheme. Under the NSITF before the Pension Reform Act 2004 became enforceable, this was 3.5% and 6% contributions by the employee and employer, respectively. Considering the paltry benefit resulting from the statutory scheme, individual companies tended to operate company administered contributory gratuity schemes to supplement the statutory retirement gratuity scheme. The previous pension scheme in the private sector also provided for a lump-sum cash payment upon retirement, among other benefits.

However, unlike the trend in the private sector, employees in the public sector enjoyed a more guaranteed security of tenure, with guaranteed entitlement to pension and gratuity – the major advantage of the public sector over the private sector. Once confirmed after the probationary period, the employee’s job was secured until retirement age unless employment was determined by either party by following the established due procedure. This is derived from the doctrine of ‘employment with statutory flavour’. Contrary to the practice in the public sector, the tendency in the private sector is that the employer has the right to hire and fire at will, with or without any reasons.

The maximum monthly pension entitlement after retirement under the NSITF was 65% of past salary level while for Federal Government employees, it was 80% of last salary earned (Casey and Dostal, 2008).

Olayiwola (ND: Internet source) has summarized and categorized the types of pension systems in Nigeria, prior to the Pension Reform Act 2004 into four, namely:

• The fully Unfunded Defined Benefit (DB) Scheme, in the civil service
• The Defined Contributory (DC), scheme for employees in the organized private sector, administered by the NSITF
• The Self-Administered Scheme in government parastatals and the private sector, and
• The Insured Scheme by individuals administered by pension Fund management or Insurance companies

The nature of the pension reform, pursuant to the Pension Reform Act 2004 and why the Academic Staff Union of Universities (ASUU) perceives it as a retrogressive piece of legislation from employees’ point of view may also be comprehended by the nature of the concerns of the government expressed in an undated document called ‘Blue Print on the Contributory Scheme’. The document is a summary of proceedings at the National Workshop on Pension Reforms, which held on 11 – 13 September 2001. From the Federal Government point of view, the previous pension system had to be reviewed because ‘increasingly, the number of officers on pension payroll may in the next few years outnumber those in active service. At the moment, the Federal and State Governments are bearing the cost of pension hundred per cent under the ‘Pay-As-You-Go’ system’. (FGN, 2001). For a regime whose economic policies tend to be more job-taking than job-creating, it is understandable if measures are taken to reduce the pension-induced financial ‘burden’. The former President of the Federal Republic of Nigeria, Olusegun Obasanjo, made this point in his address to the said National Workshop on Pension Reforms, which held  on 11 – 13 September 2001 – that ‘there should be a new pension scheme that can endure economic depression’. The then President also expressed concern for a situation in which ‘in some of our sectors, the pension bills are as high as the bills for wages and salaries. This is neither feasible nor sustainable … The pension bill has continued to grow phenomenally  (and) given the growing demand from other economic sectors, the government will need to share the burden’(FGN, 2001).

From the foregoing, the findings of Chlon-Dominczak and Mora (2003) with regard to neoliberalism as a factor triggering pension reform is applicable to explaining the Nigerian pension reform process, which has brought with it the following – abolition of gratuity, abolition of the PAYG system, abolition of payment of pension for life and introduction of contributory system, privatization of pension management, etc - measures which are critically analyzed later on in this paper in the course of dissecting the Pension Reform Act 2004.

Adesina (2007: Personal Communications) also shares the concern that the reform of social policies in Africa should be seen as a neoliberal agenda, which goal is to roll back the state. To this extent, the reforms, which include pension reform, should not just be seen as ‘World Bank’.  For Jimi Adesina, ‘It is more analytically and politically more worthwhile seeing this as part of a wider class project within which to understand the ascendance of market-transactional logic among the local petty-bourgeois and bourgeois class elements; hence the internal/endogenous economic and political forces that are driving the neoliberal project’. Adesina’s conclusion is irresistible when the findings of Akintola-Bello (2004) are borne in mind with respect to the uses to which governments, in varying degrees, had deployed accumulated pension funds in the 1960s, ‘70s and early ‘80s.

Akintola-Bello (2004:54-56) shows elaborately how in the past, in almost all countries, pension reserves had been used to achieve social, economic and development objectives. These could be in the form of policy directives for pension reserves to be given as special loans to government as in Korea; a percentage of pension funds being invested in areas with a social dimension as in Mauritius; all monies being compulsorily invested in non-marketable government bonds as in the United States; the bulk of pension funds to be invested in government bonds or government-guaranteed debt while a small portion is to be invested in the private corporate bonds as in India; and investment of pension funds to develop the productive base and projects that have developmental dimensions as in Jordan. Investing in projects that have ‘developmental dimensions’ had permitted the use  of pension reserves to fund personal loans for housing that met the needs of low and medium income groups, education, health, subsidies to mortgage markets and investment in social and infrastructures as in Turkey, Jordan, Venezuela, Tunisia, Malaysia, Japan, Korea, Sweden, Algeria, Iran and morocco. Similarly, a recent study of Anglophone African countries (ISSA, 1997, cited in Akintola-Bello) shows the same trend of how pension funds were used to finance housing development in Gambia, Ghana, Kenya, Mauritania, Swaziland, Tanzania, Uganda, Zambia and Nigeria. However, the age of the neoliberal policy of privatization dictates that there must be a fundamental reform of pension policy such that the predictable and cheap source of credit, which pension funds represent, can benefit capital market development as investible funds rather than being available to meet social, economic and development needs of the public.

The works by Boeri (2003: 157 – 170) and Orenstein (2003: 171 – 194) examine the relationship between international demonstration effects and domestic policy choices.  The insights they provide help in an understanding of the impacts of global politics on reforms in developing countries, not only on pension reforms but also on the broader social policy models in transition and/or developing societies.

Boeri (2003) argues that the choice of social policy models in transition countries is influenced by geographical proximity to the EU countries. His work shows that countries with a greater chance of EU accession adopted social policy models that were more in tune with those of EU member states.  Orenstein (2003) also analyses the global spread of paradigmatic pension reform. Drawing on the literature concerning diffusion of innovation, he posits that pension reform should not be seen simply as a result of domestic political processes but also as a product of global patterns of ideational innovation and diffusion. Countries tend to follow the model of innovative leaders in their regions. Hence, the larger, richer and more industrial counties tend to innovate first and smaller and poorer countries tend to lag behind.

Orenstein (2003) also shows that international organizations have played a major role, particularly in cross regional diffusion of ideas and models. Orenstein (2003) explains for example that the International Labour Organization (I.L.O) gave a major boost to pension system creation in the years after the Second World War while the World Bank has played a leading role in diffusing paradigmatic reform at the present time. Orenstein (2003) points out certain notable differences in the processes of creation of pension and the diffusion of its reform. While Germany was the leader in the first phase of pension creation, the leader in the spread of paradigmatic reform was Chile, a middle income country with semiperipheral status in the world economy. In the current phase, thanks to the influence of globalization, pension system reform is diffusing more quickly at approximately two times the rate of its establishment.

The insights offered in the works of Boeri (2003: 157 – 170) and Orenstein (2003: 171 – 194) are confirmed in the Nigerian experience. The trade unions have had to constantly rely on the provisions of Conventions and Recommendations adopted by the International Labour Organization (ILO) in their strivings to maintain the universal minimum standards in working and living conditions that have been set by the I.L.O. and the tendency by the Nigerian judiciary is to hold that where there is variation between international law and domestic law, the international law or treaty prevails.

From the foregoing, it is clear that though there are certain differences in the contents and speed of reform, there are also indisputable similarities in the reform processes in Europe and the developing countries, particularly in respect of the rationale for reform, the typology of reform changes and the political economy of pension reform. In particular, the literature review has shown that pension reform is a globalized idea, which is influenced by neo-liberal ideology.

The relevance and potency of the conclusions drawn from the literature review are further reflected in the analysis of certain key sections of the Act undertaken below.

A CRITICAL ANALYSIS OF THE PENSION REFORM ACT 2004

As stated earlier, paradigmatic pattern of reform predominantly characterizes Nigeria’s pension reform, even though the changes reflect an amalgam of elements of both parametric and paradigmatic changes. The fundamental changes brought about by the Pension Reform of 2004 include introduction of a unified economy-wide pension scheme to replace the dual pension schemes previously existing for the public and private sectors; replacement of the pay-as-you-go/defined benefit (PAYG-DB) system previously operating in the public sector by a mandatory Fully-Funded-Defined Contribution (FF-DC) for both the public and private sectors; privatization of the pension system through decentralized institutionalization of managing individual retirement accounts by privately owned Pension Fund Administrators (PFAs); individual contributing-employees bearing the risks of managing retirement accounts to the extent of having the right to choose and place accounts with preferred PFAs; abolition of payment of gratuity and guaranteed pension for life, delay in accessing contributions, an opportunity for early retirement and significant down-sizing of the PAYG system by limiting those entitled to it to judicial officers and those who have three or less number of years to retire, as from the coming into force of the Pension Reform Act.

Though this paper is essentially Nigeria-specific, there is a sense in which the fundamentals are applicable to the processes of pension reform internationally. The theoretical underpinning for this contention is rooted in Thandika Mkandawire’s (2007:7) monocropping and monotasking, which characterize the World Bank/IMF policy framework recommended for African states. Monocropping has to do with the perception that there is only one optimum toward which all countries must move and only one policy is good enough to attain that end. In this regard, the idea of privatizing pension schemes as a policy is central to much of the pension reforms internationally. Monotasking is concerned with assignment of only one task to institutions. In this aspect, virtually everything has to be harnessed to the task of safeguarding and promoting private property. Even the judiciary is assigned the task of protecting private property. According to a World Bank lawyer, judicial reform is part of a larger effort to make the legal systems in developing countries and transition economies more market friendly. (Messick, 1999:118, cited in Mkandawire, 2007:9). The pension reform Act 2004 should be located within this declared goal.

A detailed analysis of the Pension Reform Act 2004 is presented below.

The Contributory Nature of the Pension Scheme

Section 1 subsection (1) of the Act provides for ‘a Contributory pension Scheme’ for payment of retirement benefits of employees to whom the Scheme applies.

The Scheme is ‘contributory’ because Section 9 sub section (1) provides that employers and employees in both the public service and private sector (in enterprises employing 5 or more employees) shall contribute ‘a minimum of seven and half per cent’ of the employee’s salary to the scheme. This means that the public sector worker, who was not required to make any contribution before the Act, has to start contributing 7.5% while the contribution of the private sector employee rises from 3.5% to 7.5% and the private sector employer contribution rises from 6% (before the Act) to 7.5%, at the commencement of the Act. In the case of the Military, the government shall contribute ‘a minimum of twelve and a half per cent…’ while the employee shall contribute ‘a minimum of two and half per cent’. However, the stipulated rates could be revised upwards upon agreement between the employer and the employee. [S. 9(6)]. Similarly, an employer may ‘elect to bear the full burden of the Scheme’, meaning accepting to pay 15% of the employee’s salary to the Scheme. Also, an employee covered by the Act may make voluntary contribution to his/her ‘retirement savings account’ in addition to the statutory rates or rates fixed out of agreement, as the case may be. [S.9(5)].

The Pension Reform Act 2004 however provides for taxation of additional contribution (called ‘voluntary contribution’ in the Act) to pension funds, which is in excess of the statutory rates of contribution. Section 10 of the Act provides that the statutory rates of contributions ‘shall form part of tax deductible expenses in the computation of tax payable by an employer or employee under the relevant income tax law [S. 10]. However, any ‘voluntary contribution’ made under subsection (5) of Section 9 of the Act shall be subject to tax at the point of withdrawal where the withdrawal is made before the end of 5 years from the date the voluntary contributions was made [S. 7(2)]. The taxation of ‘voluntary contribution’ constitute additional tax burden, which is unjustifiable.

The crucial point being stressed under this sub section of the paper is that in conditions where the current salary rates at both the Federal Level (N7,500.00 minimum basic wage) and State level (N5,500 minimum basic wage) are considered inadequate, establishing a ‘contributory’ pension scheme represents an indirect cut and punitive taxation on the income of the worker. For workers whose poverty wages may cut short their life span, they do not stand a chance of benefiting from their savings. Where there are no guarantees of subsidized basic social services such as education and health, an average worker finds it absolutely difficult to make voluntary savings. The ‘contributory’ pension scheme is therefore nothing but imposed or forced taxation, which does not enjoy the consent of the worker. For ‘contributory’ pension scheme to make sense, government and the private sector employers should be made to pay enhanced living wages and salaries, which will make it convenient for the workers to pay their share of the contributions to the Scheme. For example, the NLC, TUC and CFTU (2004) cited the practice in Chile, where at the inception of a similar scheme, the workers’ salaries were increased by the same degree as their rate of contribution.

An international comparison may also serve some useful purpose here. The public/state pension rates paid by the government in Britain are 84.25 pounds a week (i.e. 4,381 pounds a year) for a single and 134.75 a week (i.e. 7,007 a year) for retired couples, which Socialist Worker (16 December 2006: 13) considered grossly inadequate. It should be noted that every worker (either in the public or private sector) is entitled to state pension in the UK. As against 7.5 % of an employee’s salary expected to be paid by the employer in Nigeria, British employers are typically required to pay 12.8% of employees earnings, meaning between 97 pounds a week or 5,044 pounds a year, and 645 pounds a week or 33,540 pounds a year. This translates to 9.6% of their labour costs compared to an average of 15.2 percent for OECD countries and an average of 17.8% across the EU. In fact, in many EU countries, the proportions are higher – France 29.7%; Italy (24.9%); Belgium 23.3%; and Austria 22.6%. (Andy Wynne, 2007:1). Similarly, in 2000, Pension Bills as proportions of GDP in selected countries were as follows: Britain 4.5%; Germany 11.5%; Italy 12.6%; Spain 9.8% (Organization of Economic Co-operation and Development (OECD) cited in Socialist Worker, 19 February 2005).

Abolition of Rights to Gratuity and Pension for Life

A study of the Pension Reform Act, 2004 reveals that the right to gratuity has been abolished, indirectly. Though, there is no direct provision to this effect. But this is the implied or presumed conclusion that could be drawn from the provision of Section 8 of the Act.

Gratuity is a single, lump sum payment. Pension is a periodic payment, normally on monthly basis for life, until the changes made in the Pension Reform Act, 2004.

Under the Pension Reform Act 2004, the only groups of workers who have unequivocal entitlement to gratuity are the groups exempted from the Act. [S. 8(3)]. The said workers are ‘any employee who at the commencement of this Act is entitled to retirement benefits under any pension scheme existing before the commencement of this Act but has 3 or less years to retire shall be exempted from the Scheme’ [S. 8(1)] and ‘the categories of person mentioned in Section 291 of the Constitution of the Federal Republic of Nigeria 1999’ [S. 8(2)]. The categories of workers exempted by Section 291 of the Constitution of the Federal Republic of Nigeria 1999 are judicial officers, as defined by Section 292 of the Constitution.

A judicial officer at the levels of the Supreme Court or Court of Appeal may retire voluntarily at the age of 65 and compulsorily at the age of seventy. [S. 291(1)]. A judicial officer at any other level may voluntarily retire at the age of sixty years but compulsorily at the age of sixty-five [S. 291(2)].

Section 291(3) of the 1999 Constitution provides that any of the listed judicial officers

shall ‘be entitled to pension for life at a rate equivalent to his last annual salary and all his allowances in addition to any other retirement benefits to which he may be entitled’, provided he has been in that position ‘for a period not less than fifteen years’. [S. 291(3)(a). Those who have held their position in the same categories for less than 15 years shall be entitled to the same rate of pension stated above but ‘pro rata the number of years he served as a judicial officer in relation to the period of 15 years’.

Now back to the issue of gratuity. Section 8(3) of the Pension Reform Act provides that ‘any person who falls within the provisions of subsections (1) and (2) of this section (i.e. those who have 3 or less number of years to retire and judicial officers, emphasis mine) shall continue to derive retirement benefits under such existing pension scheme as provided for in the First Schedule to this Act’. [S. 8(3)].

The First Schedule to the Pension Reform Act 2004 contains the formula for calculating pension and gratuity in respect of retirement.

The application of Section 8(3) of the Act has put a category of the Academic Staff Union of Universities (ASUU) in a precarious position. The Act not only nullifies the Collective Agreement between ASUU and the Federal Government signed in 1992, it has also repealed a more favourable legislation – the Universities (Miscellaneous Provisions) Decree No 11 of 1993.

In the Collective Agreement, it was agreed that ‘the compulsory retirement age for academic staff shall be 65 years. Contract appointment may be given to a retired academic staff’. On voluntary retirement, it was agreed that ‘academic staff could retire voluntarily after ten (10) years’ service while on pension and gratuity, it was agreed that ‘each academic staff shall be entitled to gratuity after five (5) years of continuous service’

The Universities (Miscellaneous Provisions) Decree No 11 of 1993 had also incorporated aspects of the above mentioned Agreement and in fact strengthened it. It provided for instance that ‘a person who retires as a professor having served a minimum period of 15 years’ in that position until retirement age, ‘shall be entitled to pension at a rate equivalent to the last annual salary and such allowances, as the Council may, from time to time, determine as qualifying for pension and gratuity, in addition to any other retirement benefits to which he may be entitled’ [Section 9(a)(b)]. The Decree (now Act), went further to provide that ‘notwithstanding anything to the contrary in the Pensions Act, the compulsory retiring age of an academic staff of a University shall be sixty-five years. [S. 8(1)], and ‘A law or rule requiring a person to retire from the public service after serving for thirty-five years shall not apply to an academic staff of a University’ [S. 8(2)].

Though Section 99(1) of the Pension Reform Act does not specifically mention the above legislation that has given legal backing to the ASUU-FGN Agreement as one of the legislations repealed, it falls under ‘other laws’ repealed or amended by Section 101. The said section 101 of the Pension Reform Act provides that ‘If any other enactment or law relating to pensions is inconsistent with this Act, this Act shall prevail’.

Implication of Exempting Certain Categories of Employees and public officers from the Scheme Created by the Pension Reform Act 2004

As we have analyzed above, Section 8(1) of the Act exempts two main categories of employees from the scheme, viz:

(i)                 employees who have 3 or less number of years to retire and who at the commencement of the new Act are entitled to existing scheme and

(ii)               judicial officers, particularly the chief Justice of the Supreme Court and all Justices of the Supreme Court and the Court of Appeal as provided under S. 291 of the Federal Republic of Nigeria, 1999.

The question then is: if indeed the new Pension Scheme is more favorable to the employees than the previous Act, why exclude certain categories of public sector workers?  The exemption clause just shows that the new Pension Act offers less favorable benefits, if any, to employees.

Though there is no express provision excluding employees at state and local government levels, the employees at those levels are impliedly excluded from the scheme by virtue of S.1(2) of the Act which states that the Act covers all employees in the public service of the Federation, Federal Capital Territory and the private sector/establishment  where there are 5 or more employees.

Considering that labour, pensions and gratuities are on the exclusive legislative list, precisely items 34 and 44, conflict of laws situation is likely to develop in this respect.

Inadequacy of the Level of Contribution

Although the Public Service pension scheme under the Pensions Act No 102 of 1979 and that of 1990 was non-contributory, it had a defined benefit scale - the quantum of retirement benefits receivable by a retiree could be determined based on total number of years computed on the officer’s total annual emolument.

For the purpose of the Pension Reform, the Federal Government commissioned studies to determine the level of contribution that could meet anticipated gratuity and pension benefits. The actuarial reports indicated that for adequate funding of the public service scheme, 25% of gross emolument of all Government employees needed to be set aside annually to meet existing and maturing gratuity and pension liabilities (Summary of Proceedings of the National Workshop on Pension Reform, 2001). However, the Pension Reform Act stipulated a minimum of 15% of total emolument shared on the basis of a maximum of 7.5% by the employee and a minimum of 7.5% by the employer. This points to the fact that the level of contribution is inadequate, ab initio.

Ambiguity about Minimum Retirement Age

In the public sector, the statutory retirement age is either 60years or 35 years of service, whichever comes first. In the private sector, the effective key criterion varies between 55 and 60 years. The factor of 35 years of service does not apply strictly to the private sector. After retirement, professionals with special skills may be employed on contract basis.  

Section 4(1) of the Pensions Act (CAP 436 laws of the Federation of Nigeria) 1990 had clear provisions on the minimum retirement age. But the Pension Reform Act 2004 contains no specific provision on same. It however stipulates that no person shall be entitled to make any withdrawal from his retirement savings account before attaining the age of 50 years [Section 3(1)]

The pertinent question therefore is: has the new Pension Act reduced the minimum retirement age from 60 to 50?  There is a need for clarity on the minimum and compulsory retirement ages.

Shorter or Longer Working Age Before Retirement

In industrially developed countries, there is a tendency for trade unions to argue for shorter or reduced retirement age so that retirees can spend a longer part of their lives to enjoy their retirement period. On the contrary, in Nigeria, trade unions tend to argue for longer retirement age. Thus, ASUU for example agitates that retirement age should be raised from 65 to 70. In other words, there is a concern that people should be allowed to work until they are older. What explains this difference in attitude is the attainable quality of life in retirement, which is determined by the value of pensions paid. In a situation in which life expectancy in Nigeria is estimated to be only 45 for female and only 44 for male (World Bank’s WDR, 2006: 293), working longer before retirement means many may live a lifetime, working, without an opportunity to retire and rest before they die. In other cases, the pressure of having to work longer may contribute to early deaths. There is a need for labour to take a holistic view of the whole issue about pensions and make the correct demands, such as enhanced salaries and pensions indexed to inflation, and entitlement for gratuity and pension for life.

Confusion about Retirement Age that Qualifies a Retiree to Withdraw from Retirement Savings Account

While Section 3(1) provides that no person shall be entitled to make any withdrawals from his retirement savings account before attaining the age of 50 years, Section 3(2)(c) states a contradictory provision permitting withdrawal from the retirement savings account by an employee who retires before the age of 50 years.  Section 3(2) (C) provides as follows:

3(2) (C) … Any employee who retires before the age of 50 years in accordance with the terms and conditions of his employment shall be entitled to make withdrawals in accordance with Section 4 of this Act.

What appears to justify withdrawal from the retirement savings account by a retiree who has not attained the age of 50 (under Section 3(2) (C) is retirement ‘in accordance with the terms and conditions of his employment’. But that differentiating clause between Section 3(1) and Section 3(2)(c) has merely compounded the confusion about the minimum retirement age.  If the Act concedes, as it appears, that employees could retire before attaining the age of 50, in accordance with the terms and conditions of employment, it means the Act appears to accept that there is no uniform national law on the minimum retirement age (even in the public sector) and that the issue has been ‘deregulated’ such that employers and employees could determine the minimum retirement age through negotiations and agreements.

What is clear from the quoted provisions above is that there is no clear provision on the minimum and compulsory retirement ages in the Act which replaces one that had unequivocal provisions on the matter.

Legalized Delay in Payment of Retirement Benefits

Whereas one of the problems, anomalies and hardships which the Pension Reform Act 2004 declares it seeks to remove is non-payment of retirement benefit as and when due [S.2(a)], the Act goes ahead in Section 4(2) to legalize delay in the payment of retirement benefits.

Section 4(2) provides that when an employee retires before the age of 50 years in accordance with the terms and conditions of his employment [S.3(2)(C)],

the employee may, on request, withdraw a lump sum of money not more than 25 percent of the amount standing to the credit of the retirement savings account provided that such withdrawal shall only be made after six months of such retirement and the retired employee does not secure another employment (S.4(2).

It does not seem to matter to the lawmakers if the retired employee and members of his/her family die before the expiration of six months when he/she will become entitled to make collections from personal savings. How does that person sustain self within the six months period?

Funds in Retirement Savings Account: To Care for Contributors at Old Age or to Pool Funds for the Interest of Investors?

Section 2(b) of the Pension Reform Act 2004 states that one of the objectives of the Pension Scheme being established under the Act is to assist individuals by ensuring that ‘they save in order to cater for their livelihood during old age’.  However, the provisions of S.4 of the same Act suggest that the real goal of the Pension Scheme under the Act is to ensure a pool of funds for investors, rather than the concern for livelihood and survival of employees at old age.

For example, S.4(1) (a) provides that:

4(1) A holder of a retirement savings account upon retirement or attaining the age of 50 years, whichever is later, shall utilize the balance standing to the credit of his retirement savings account for the following benefits:

(a)               programmed monthly or quarterly withdrawals calculated on the basis of an expected life span.

Certain questions arise from the provision of S.4 (1) (a) above. How is the so-called ‘expected lifespan’ of the individual to be determined? Do employees at top management level and lower management level who belong to different income brackets tend to have the same average life-span? What will be the criteria for calculating the ‘expected life-span’ of individuals at lower and top levels of management? What happens when the actual life-span is shorter than the calculated ‘expect life-span’ – who enjoys the surplus balance? What happens if the actual lifespan of the retiree is longer than the estimated ‘expected life-span’ - who supplies the shortfall to maintain the retiree for the rest of his/her life? These are critical issues not addressed by the Act.

Section 4(1) (b) also contains another ‘benefit’ (read purpose) to which the holder of a retirement savings account ‘shall utilize the balance standing to the credit’ of the account – ‘Annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments’.

While individuals should be free to buy any form or type of insurance policy at any time in his/her lifetime, it is curious why the Act should obligate a retired person to compulsorily acquire a particular insurance policy by employing the word ‘shall’ rather than “may” as in the text above.

The third ‘benefit’ (again read ‘purpose’) for which a retired person ‘shall utilize the balance standing to the credit’ of the retirement savings account is provided in Section 4(1) (C). – collection of ‘a lump sum from the balance standing to the credit of his retirement savings account provided that the amount left after that lump sum withdrawal shall be sufficient to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50 percent of his annual remuneration as at the date of his retirement’.

In the situation of lack of government welfare programme to provide social services for vulnerable groups, e.g. children and the aged, in the absence of any form of social security as of a right, the tendency of retired persons in Nigeria is to use the lump-sum benefit received as gratuity to invest in some form of business activity which could yield them income to supplement their pensions to maintain themselves and their families.  We have shown earlier that the Pension Reform Act has effectively eliminated the right to gratuity.  Section 4(1) (C) of the Act is now reiterating that a retired person can only collect a lump sum from the retirement savings account only if the sum left after the lump sum will be sufficient to buy an insurance policy – an annuity – or fund periodic pension payment which will not be less than half the remuneration the person was receiving when in employment.

When the combined effects of the provisions of S. 4(1) (a), (b) and (c) are considered, it would not be difficult to come to the conclusion that the Pension Reform Act 2004 does not seem to be concerned with the care of retired persons at old age; rather, the concern seems to be to create a pool of cheap funds for investors. The Pension Reform Act 2004 seems set to stimulate savings for the development of the domestic capital market in line with the concern of the economic blueprint of the Federal Government, the National Economic Empowerment and Development Strategy (NEEDS). The NEEDS document states that a minimum investment rate of about 30 per cent of GDP is required to unleash a poverty-reducing growth rate of at least 7-8 percent per annum, yet, the savings-investment equilibrium had stagnated at about 20 per cent. In order to mobilize investible resources from the capital market development, the NEEDS document identifies a policy thrust to be pursued – ‘encourage the deepening of the capital market by encouraging investment in insurance…’ (Cited in Ozo-Eson, 2004: 86).

It is within this context that S. 73(1) and S.74 can be properly understood.  The two sections make provisions for investment of pension funds within and without the country.

S.73(1) itemizes how the pension funds and assets ‘shall’ be invested.  It provides:

73(1) Subject to guidelines issued by the Commission from time to time, pension funds and assets shall be invested in any of the following:

(a)               bonds, bills and other security issued or guaranteed by the Federal Government and the Central Bank of Nigeria.

(b)               Bonds, debentures, redeemable preference shares and other debit instruments issued by corporate entities and listed on a Stock Exchange registered under Investment and Security Act 1999.

(c)                Ordinary shares of public limited companies listed on a Stock Exchange registered under the Investments and Security Act of 1999 with good track records having declared and paid dividends in the preceding five years., and so on.

To show the bias for creating a pool of investible funds rather than caring for employees at old age, Section 9(3) of the Pension Reform Act also strengthens the bias for the insurance sector of the economy.  It provides that:

‘employers shall maintain life insurance policy in favour of the employees for a minimum of three times the annual total emolument of the employee’

Without doubt, the insurance industry hardly enjoys the confidence of ordinary Nigerians.  The question can therefore be reiterated: Is the pension scheme, as presently conceived, to take care of employees at old age or to make available a pool of cheap investible funds?

Encouragement of Non-Remittance of Deducted Contributions

The Pension Reform Act encourages corruption in terms of weak penalty for failure on the part of the employer to remit contributions (by employees and employers) to the Pension Fund Custodian within seven (7) working days from the day the employee is paid his salary. (S. 11(5)(b).

The employer is empowered to deduct at source, the monthly contribution of the employee in his employment [S.11(1) 5(a)].  The penalty for non-remittance within seven days as stated above is payment of not less than 2 percent of the total contributions that remains un-paid in addition to making the remittance already due [S.11(7)]. 

With the weak penalty for non-remittance, the tendency will likely be a harvest of predominant non-remittance by employers of labour, including government.  Given the high cost of funds in the banks, employers are likely to prefer not to remit pension contributions and pay the cost of non-remittance, if at all they would be penalized.

Minimum Pension Guarantee

Section 71(1) of the Pension Reform Act provides that ‘All retirement savings account holders who have contributed for a number of years to a licensed Pension Fund Administrator shall be entitled to a guaranteed minimum pension as may be specified from time to time by the Commission’.

The following observations about S.71(1) above are pertinent. First, how the ‘guaranteed minimum pension’ will be determined is not explained.  Pensioners are likely to be at the mercy, whims and caprices of the Commission that may arbitrarily fix rates that may have no bearing with the salary structure, including the national minimum wage obtaining in the country.

Second, in view of the provision of S.4(1) (a) which states that the monthly or quarterly withdrawals by a contributor will be calculated on the basis of an expected life span,  how would a ‘minimum pension guarantee’  be met?  If the rate of withdrawals based on an expected life span is below the ‘minimum pension guarantee’ how would the difference be made up?

Third, one of the qualifying criteria for being entitled to a ‘minimum pension guarantee’ is having contributed for a number of years to a licensed Pension Fund Administrator (S.71(1).  Surprisingly, the number of years is not specified.  The only conclusion that could be drawn is that pension administration will be left to the arbitrary regulations of the National Pension Commission.

Lack of Categorical Provision on Disbursement of Returns on Investment of Pension Funds and Assets

Although Sections 73 and 74 of the Pension Reform Act stipulate how Pension Funds are to be invested, there does not seem to be any categorical provision on how employee contributors to the scheme are to benefit from accruals of the returns on investment of pension funds and assets.  There is hardly any specific provision on the percentage of the returns that should be paid into the employee’s retirement savings account.  How and why should a set of people be compelled to make contributions which will be invested and without any consideration for a share of the returns on investment?

Section 47(f) provides that the pension funds custodian shall:

undertake statistical analysis on the investments and returns on investments with respect to pension funds in its custody and provide data and information to the pension fund administrator and  the Commission

Surprisingly, the Act does not make any provisions with regard to the responsibility of the Pension Fund Custodians to render account on investments to the employee-contributors to the Fund.

Management Structure of the Pension Fund

To manage the Pension Scheme, the Pension Reform Act 2004 has created a complex management structure. At the apex is the National Pension Commission (NPC) which is to regulate, supervise, issue licenses and ensure the ‘effective administration’ of pension matters in Nigeria.  Section 4 of the Act establishes the NPC which is dominated by nominees of government, government officials and selected (not elected) representatives of the Nigeria Labour Congress and the Nigeria Union of Pensioners. Other Unions in the various industries and other central labour organizations are left out.

Section 44 of the Act establishes the Pension Fund Administrators (PFAs) which are empowered to manage pension funds by opening retirement savings account for all employees with a Personal Identity Number (PIN) and investing and managing pension funds and assets, among other responsibilities. to employees, among other functions.

Next to the PFAs, are the Pension Funds Custodians (PFCs) established by Section 46 of the Act. Only a licensed financial institution could be registered as a Pension Fund Custodian. The functions of the PFCs include receiving contributions remitted by the employer under Section 11 of the Act on behalf of the Pension Fund Administrators

However, Section 11(4) provides that:

the employee shall not have access to his retirement savings nor have any dealing with the Custodian with respect to the retirement savings account except through the pension fund administrator.

From the above provisions, it could be observed that the PFC is nothing but an unnecessary duplication of the roles of the PFA. How could the PFA manage funds being kept by another body? Why should the employee not have access to a body (PFC) that is said to be holding fund in trust for him/her? The provision that says the employee cannot have any access to the PFC means that the PFC does nothing but insulate the PFA against the pressure of the employees.

By virtue of Section 11(3), the employee selects a PFA and notifies his employer.  To be registered, the PFA is expected to have among other things, a minimum paid up share capital of N150m (N150,000,000.00).  But the PFC is expected to be a financial institution, which in the case of banks, were recently required to have a minimum recapitalization base of N25bn.  Why the duplication of roles and bodies?  Why the waste of funds and returns on investments realized from the pension funds? Considering the recent reports of corruption and failure of one of the recapitalized banks, the Spring Bank, due to high level corruption in the Central Bank of Nigeria (CBN), what is the guarantee for security of contributors’ funds held by the PFAs/PFCs? For example, in a newspaper advertisement, the Chairman of Spring Bank PLC, Segun Agbetuyi (2007) accused Governor of the CBN of collusion in the corruption perpetrated by some Directors of Spring Bank and posed a pertinent question: ‘How many more of the Spring Bank odyssey do we currently have in the belly of the Consolidation programme’ in the Nigerian banking system? (See The Punch, Wednesday, June 13, 2007: 44 – 45).

Transitional Bureaucratic Structures

The Act makes provisions for transitional bureaucratic structures to co-exist with and be supervised by the NPC.

For the public sector, Section 30 of the Act establishes a Pension Department made up of the existing pension boards or offices in the Public Service of the Federation and the Federal Capital Territory. In the case of the Public Service of the Federation, it comprises the Civil Service Pension Department, the Military Pension Department, the Police Pension Department, the Customs, Immigration and Prisons Pension Department and the Securities Pension Department.

Sections 32 and 33 of the Act spell out the functions of the Department, which include receiving budgetary allocations from Government and paying pension and gratuity of existing pensioners and the exempted category of employees under the previous pay-as-you-go pension scheme. Section 38 of the Act provides that ‘the Department shall cease to exist after the death of the last pensioner or category of employee entitled to retire with pension before the commencement of this Act’.

The establishment of the Department is another duplication of the activities of the NPC and it amounts to a waste of resources, particularly bearing in mind that the Department shall only be dissolved ‘after the death of the last pensioner or category of employee entitled to retire with pension before the commencement of this Act’. If the last pensioner remains alive for the next century, would public resources continue to be wasted on retaining the Department for the purpose of paying the pension of that single person?

Sections 39 to 41 of the Act make provisions for transitional arrangement for the private sector. Section 39 provides that ‘any pension scheme in the private sector existing before the commencement of this Act may continue to exist’. However, among other things, the pension funds and assets are to be fully segregated from the funds and assets of the company and held by a Custodian. Every employee is given the option of continuing under the previous scheme or joining the Scheme established by the new Pension Act. Any employer who opts to manage its pension fund shall apply to be registered as a ‘Closed Pension Fund administrator.’ And be subject to the supervision of the NPC.

As in the case of the NPC, PFAs and PFCs, there is no consideration for accommodation of the democratic voice of the trade unions representing the employees in the transitional structures.

Section 42 (1), (2) and (3) of the Act also provides that the NSITF shall establish a company to undertake the business of a Pension Fund Administrator. The funds that had been contributed by any person before the coming into force of the Pension Reform Act 2004 together with any attributable income are to be credited into the retirement savings account to be opened by the NSITF for individual contributors. However, contributors under the NSITF Act cannot access their account until five years after the commencement of the Pension Reform Act when the individual contributor shall be free to select the Pension Fund Administrator of his choice for the management of the funds standing to his credit. Section 42 is essentially a provision in the interest of investors, not contributors. The Section merely seeks to create an accumulation of investible funds.

As far as the management and transitional management structures are concerned, there tends to be an implicit assumption in the Pension Act that the implementing
transitional institutions such as the National Pension Commission, Pension Fund Custodian and Pension Fund Administrators, among others will play by the rules. Nothing can be further from the truth. Evidences abound that in Nigeria, corruption appears to be the norm, rather than the exception. This has the tendency of jeopardizing privately managed pension funds. The collapse of the Finance Houses of the 1990s in Nigeria sent many retirees and potential retirees who lost their life savings in the process to early graves.  Besides, by its nature, the market system experiences endemic and cyclical crisis. The PFCs/PFAs are nothing more
than economic institutions expected to invest the accumulated pension funds through different forms of portfolio management. The crucial question remains: what happens to the funds of the pensioners in situations where any of these privately owned institutions collapses, either through administrative or systemic failure?

Denial of Access to Court

The Act also denies access to court contrary to the provisions of Section 6 subsection (6) of the 1999 Constitution, which guarantees access to court ‘in all matters between persons, or between government or authority and to any person in Nigeria, and to all actions and proceedings relating thereto, for the determination of any question as to the civil rights and obligations of that person’.

Section 92(1) of the Act provides that any employee or beneficiary of a retirement savings account who is dissatisfied with the decision of a PFA or PFC may apply to the NPC to review the matter. Section 92(2) guarantees speedy resolution of matters by the NPC. Hence, NPC shall dispose of any matter within three months from the date the matter was referred to it! Where any party is dissatisfied with the decision of the Commission, the party may refer the matter to arbitration or the Investments and Securities Tribunal established under the Arbitration and Conciliation Act and the Investment and Securities Act 1999, respectively. [S. 93(1) and (2)]. The awards got under S. 93(1) and (2) ‘shall be binding on the parties and shall be enforceable in the Federal High Court. (S.94).

However, it is not an individual party that can approach the Federal High Court! ‘An offence under the Act shall be instituted before the Court in the name of the Federal Republic of Nigeria by the Attorney General (AG) of the Federation or such officer, State Attorney General or his agent or any other legal practitioner in Nigeria that the AG may authorize. (S. 91). So, if the Attorney General of the Federation or the Attorney General of the State is not positively disposed to initiating the necessary legal processes or too preoccupied with other state matters, the aggrieved contributor suffers.

It is not only in respect of denial of access to court that the Pension Reform Act violates the Constitution. The idea of imposing a uniform regulation on both the private and public sectors offends the provision of Section 173 of the Constitution, which limits the legislative capacity of the National Assembly to pensions in the Public Service. But the private sector employers might not have been able to effect fundamental changes such as abrogating gratuity right without State support. Hence, the need for government’s arbitrary, unconstitutional and undemocratic action of disregarding collective agreements covering such issues in both the public and private sectors.

CONCLUSION

This paper assesses pension reform processes in Nigeria and particularly the Pension Reform Act 2004.  A critical issue raised by the review is the question of the role of the state in issues of citizens’ welfare. The review has shown that the philosophical foundation upon which the Nigerian pension reform is hoisted is neo-liberalism, which has the goal of rolling back the state and in the process halting the trend of the state using public resources to provide for the welfare of the citizenry. The Pension Act is perceived as a clever attempt to make government abdicate its social responsibility, particularly to the vulnerable classes - the ageing, retirees, unemployed, children, students, poor farmers, and traders, and so on. With enduring institutions, commitment to transparency and democratic norms, the public sector should be sanitized and the state made to assume its rightful place as the institution that protects, defends, and provides welfare services for the weak segments in the society.

The extent of poverty in Africa, including Nigeria, would suggest that the level of living standards should dictate limits to the dimensions and depth of deregulation and flexibility in the labour market, which the Pension reform Act aims to attain. Much of the political insecurity in Nigeria and Africa could be associated with socio-economic insecurity – poverty, absolute want, destitution, hunger, homelessness, disease and unemployment induced idleness - of the vast majority of the citizens in individual countries. A pension reform, which implies low pensions and denial of guaranteed pension for life, among others, would further deepen the existing levels of pensioner poverty and misery, which would have implications for degrees of corruption, commitment to work, productivity and overall wealth creation.

As Amartya Sen (2004) puts it, public reasoning should be foundational to public policy. Public policy in turn means the deliberate collective public efforts which affect and protect the social well-being of the people within a given territory (Adesina, 2007).  Indeed, as Roy (2004) points out, in India, the word ‘public’ is now a Hindi word, meaning ‘people’. It is posited that the idea of a tolerable minimum level of livelihood should define the limits beyond which no system of governance should fall. To maintain a minimum level of social well being in the context of the Nigerian situation in which an estimated 70 per cent of the population live in extreme poverty (living on income less than US$1/day) demands formulation and implementation of a comprehensive social insurance, which includes unemployment insurance, publicly or state guaranteed old-age pension for life, and so on. The forgoing underlines the need for the review of Nigeria’s Pension Reform Act, particularly Section 8 (3) which preserves gratuity and pension for life for selected categories of workers and to that extent, impliedly abolishing gratuity and pension for life for all categories of workers.

Divisions of the Pension Scheme

Pension scheme is broadly divided into the defined contribution plan and the defined benefits plan. In defined contribution plan, a contribution rate is fixed. For instance, in Nigeria an employee contributes 7.5% of his monthly emolument while the employer

also contributes same amount or more depending on the category of employee. The retirement benefit is variable depending on the performance of the investment selected. In defined benefit plan, the retirement benefits is stipulated usually as a percentage of average salary, but the contribution will vary according to the percentage of the average compensation a participant receives during his or her three earning years under the plan (Owojori, 2008).

Basically, the two pension plans create very different investment problems for the plan sponsors. While the defined benefit plan creates a liability pattern that must be anticipated and funded, the defined contribution plan creates a liability only as long as there is investment at any point in time. Investment is often left to the people who benefits from the decision or suffers from the consequences (Anthony and Bubble, 1997:575).

Problems with the Old Pension Scheme

A major problem of the pension fund administration in Nigeria was the non-payment or delay in the payment of pension and gratuity by the Federal and State governments. For instance, the pension backlog was put at about N2.56 trillion as at December, 2005. In fact, pension fund administration became a thorny issue with millions of retired Nigerian workers living in abject poverty and they were often neglected and not properly cater for after retirement (Orifowomo, 2006). Sadly, retirees went through tough times and rigorous processes before they were eventually paid their pensions, gratuity and other retirement benefits. At one time the money to pay their benefits is not available; and at another time, the Pension Fund Administrators were not there to meet the retirees’ needs. Basically, the old scheme has been beset with a lot of challenges and problems. Besides the aforementioned; other problems were: demographic challenges and funding of outstanding pensions and gratuities, merging of service for the purpose of computing retirement benefits. These problems coupled with the administrative bottlenecks, bureaucracies, corrupt tendencies and inefficiencies of the civil service, and the economic downturn have resulted in erratic and the non-payment of terminal benefits as at when due (Orifowomo, 2006; Ezeala, 2007, Abade, 2004). Other problems were: gross abuse of pensioners and pension fund benefits which were politically motivated in some cases,

extended family and other traditional ways already broken down due to urbanization and increased labour and human mobility. Moreover, considering Statement of Accounting Standard (SAS) No. 8 “on accounting for employees’ retirement benefits” the problems of the old pension scheme which led to the pensions reforms of 2004 include: wrong investment decision, wrong assessment of pension liabilities, arbitrary increases in pension without corresponding funding arrangements, non-preservation of benefits, some were mere saving schemes and not pension schemes, and serious structural problems of non- payment and non-coverage. There was no adequate safeguard of the funds to guarantee prompt pension and other benefits payments to retirees.

The old scheme was characteristically defined benefits, unfunded mostly pay as you go, discriminatory and not portable. The employee was not entitled to pension benefits if he is dismissed from service. Also there was no adequate provision to secure the pension fund. Following the unsatisfying nature of the old scheme, the unpleasant experiences face by retirees and pensioners and the huge pension liabilities, it became apparent the need for reform and change. Therefore, the need for the Federal Government to guarantee workers’ contributions and accruing interest in the event of failure of the PFA was advocated. Besides, it was estimated that over N600 billion ($4.5 billion) investible assets could be amassed annually through the pension scheme in Nigeria. Hence, the government could not only pay the retirement benefits as they become due but also utilize the saved pension fund for long-term development purposes.

The New Pensions Reform Act of 2004

The Pensions Reform Act (PRA) of 2004 is the most recent legislation of the Federal Government of Nigeria which is aimed at reforming the pensions system in the country. It encompasses employees in both the public and private sectors. The PRA of 2004 came into being with a view to reducing the difficulties encountered by retirees in Nigeria under the old pension scheme. It is believed that the new scheme will: guarantee the prompt payment of pensions to retirees, eliminate queues of aged pensioners standing hours and days in the sun to collect their pensions and also increase their standard of living. But the fear is whether the programme will actualize the set objectives by the

“power and people that be” when we call to remembrance the abysmal failure of the National Housing Fund which was set up by Decree No3 of 1993. Nevertheless, before the enactment of the PRA of 2004, the three regulations in Nigerian pension industry were: Securities and Exchange Commission (SEC), National Insurance Commission (NAICOM) and the Joint Tax Broad (JTB).The new scheme is regulated and supervised by the National Pension Commission. The Commission has the power to formulate, direct and oversee the overall policy on pension matters in Nigeria. It also establishes standards, rules and regulations for the management of the pension funds .It approves, licenses , sanctions and promotes capacity building and institutional strengthening of the PFA and PFCS

Objectives of the New Pension Scheme

The objectives of the Scheme according to Section 2, Part 1 of the PRA of 2004 include to:

-              Ensure that every person who worked in either the public service of the federation, federal capital territory or private sector receives his retirement benefits as and where due.

-              Assist improvident individuals by ensuring that they save in order to cater for their livelihood during the old age.

-              Establish a uniform set of rules, regulations and standards for the administration and payment of retirement benefits for the public service of the federation, federal capital territory or private sector.

-              Stem the growth of outstanding pension liabilities.

-              Secure compliance and promote wider coverage.

It is envisaged that the various reforms measures put in place, which also clearly spelt out in the objectives of the new PRA of 2004 , would be able to remedy the situation by adequately tackling the difficulties in the old scheme by being adequate, affordable, sustainable and robust (Balogun,2006). It must also prevent old-age poverty and able to smoothen life-time consumption for the vast majority of the population. It must be able to withstand major shocks including economic, demographic and political volatility. Ahmad (2008) remarked that as part of the implementation efforts increased registration of

contributions in public and private sector, membership of Contributory Pension Fund Administrators (CPFAs) and Custodians (CPFCs), growth in total Pension Fund assets to about $6.08billion in December, 2007.

Types of Pension Reform Options

There are two broad types: parametric and the systematic pension reforms. Parametric reforms involves adjustments to the parameters of the pension system such as retirement age, contribution rate etc. These adjustments which may be ad hoc or discretionary tend to create uncertainty and problem in the system (Rabolin, 2005). On the other hand, systematic reform involves a complete shift in the pension systems by a country for example from say, defined benefit system to the defined contributory system or social pension or voluntary pension scheme. Systematic reform could be single-pillar or multi-pillars depending on the contribution of the various systems, e.g Nigeria (2004), Chile (1980), Argentina (1994) but it reversed later in 2007.

Basically, Nigeria embarked on a multi-pillars, systematic pension reform changing completely from the defined benefit to the defined contributory scheme. It has an individual’s Retirement Savings Accounts (RSA), valued arrangement taking various forms (individuals, employer sponsored, defined benefit and defined contributory ) which are flexible and discretionary in nature and informed intra-family or inter-generational sources of both financial and non-financial support to the elderly, including adequate health care (Holzmnann and Hinz, 2005).

Other key options in the new pension scheme

1.            Nature of the scheme: The new pension scheme is a contributory pension scheme (Section 1 Part of PRA 2004). For the payment of retirement benefits of employees who are eligible under the scheme.

2.            Rate of contribution: Section 9 (1) specifies the contribution by the individual and the employer as follows:

(a)  In the case of public service of the Federation and the Federal Capital Territory a minimum of 7.5% by the employer and a minimum of 7.5% by the employee.

(b)  In the case of the military, a minimum of 12.5% by the employer and a minimum of 2.5% by the employee.

(c)  In other cases, a minimum of 7.5% by the employer and a minimum of

7.5% by the employee.

However an employer could bear full burden of the scheme provided. Section 11(5) empowers the employer to deduct at source the monthly contribution of the employee in his employment and remit the said amount not later than 7 working days from the day the employee’s salary is paid to the custodian specified by the Pension Fund Administrator (PFA). The PFC is to notify the PFA to credit the employee’s revenue savings account. There is 2% of total contribution fine on any employer who defaults for each month. The government contribution to the pension of public service employees of the Federation and FCT shall be a charge of the Consolidated Revenue Fund (CRF) of the Federation (Section 11(8)). The revision of the rate of contribution shall be agreement between the employer and the employee.

3.            To encourage the employee, the contribution to the new scheme is to be part of tax deductable expense in the computation of the tax payable by the employee.

4.            Retirement Bond Redemption Fund (RBRF) : Section 29 (1) of the Acts empowers the CBN to establish, invest and manage the RBRF for the Federal public service and the FCT. The Federal Government was to pay into the fund an equal amount of 5% of the total monthly wage bill payable to employee and the public service of the federation and the FCT. The Redemption fund account was to be used by the CBN to redeem any bond issue in respect of accrued retirement benefit (Section 29 (3) ).

5.            Management and Custodian of Pension Assets: Unlike the old scheme, the Act specifies an institutional framework for the proper management and custodian the pension assets –mainly based on the key principle of “ring fencing” to ensure effectiveness and effect in the administration by all those concerned. First, the Pension Fund Administrators (PFA) opens and administers the RSA

for the employee in liaison with PENCOM and appoint the pension fund custodian (PFC). They manage the pension fund assets and administer

6. Retirement benefits. On the other hand, the PFCs receive the total contributions and hold pension fund assets in safe custody on trust for the employees and beneficiates of the retirement benefits. They also execute transactions and undertake other related activates on behalf of PFA (Section 44-47, 59) .Both of them were to keep proper books of accounts and submit audited financial accounts not later then four months (120 days) from the end of the financial year (Sections 56 &57) to PENCOM.

Allowance was also given for closed pension fund administration whereby organizations manage existing scheme for employees in their outfits. There were heavy sanctions for default (Section 64) by them. Only the Pension Commission was to regulate, and suspense the scheme; direct overall pension policy matters, approve, license and supervise the PFA, PFC and other institutions relate to pension for maximum compliance. It has been argued that a two-tier system of the PFA and PFC was adopted to safeguard the fund, and their function interlock to act as a grid against financial impropriety. Nevertheless since both parties assume joint trust positions, an incidence of financial impudence is reduced but cannot be totally rule out.

Others checks include (1) PFC guarantee (2) strict intense supervision (3) Rigorous licensing procedures (4) Auditor report to PENCOM.

Investment of Pension Fund

The main concern of the new pension scheme is safety of the fund and the maintenance of fair returns on the amount invested (Section 72). The need for safety is emphasized in determining the quality of the instrument to invest in and a PFA is expected to adopt a risk management profile in making investment decisions with due regard to the credit rating of companies registered under the investment and Securities Acts of 1999. PFA was expected to appoint risk management and investment strategy committees. The risk management committee determines the risk profile of investment portfolio and ensures

adequate internal control measures and procedures. The investment strategy committee determines the portfolio mix consistent with the risk profile, evaluate and review the performance of investment on periodic basis.

Against the guaranteed structure, the PFA is to invest in the any of the following as specified by Section 73(1):

(a)  Bonds, bills and the securities issued by Federal Government or the Central Bank of Nigeria

(b)  Bonds, debenture, redeemable preference shares and other debt instruments issued by listed corporate entities in Nigeria.

(c)  Ordinary shares of public limited companies listed on the Nigerian Stock Exchange.

( d ) Bank deposits and securities

( e ) Investment certificates of closed-end investment fund or hybrid investment fund

( f ) Quoted unitized investment ( i) Bond and other debt securities issued by listed companies ( ii) Real estate investment ( iii) Other investments prescribed by the pension commission

However, the PFA shall not:

( a) sell pension fund asset to: ( i) itself (ii) any shareholders director or affiliates of the PFA (iii) any employee of the PFA (iv) Either of 1-3 or those related to them (v) affiliates of any shareholders of the PFA (vi) the PFC.

(b)  Purchase any pension fund assets and

(c)   Apply pension fund assets under its management by ways of loans or credits as collaterals for any loan taken by any PFA.

However, due to the impact of the global financial crisis on the Nigerian capital market in 2008 , there were fears on how to invest over N700 billion pension funds on equity shares in the Nigerian Capital market because of the effects of institutional shareholdings and the global meltdown eroding such investments overnight (Daleng,2006, Ahmad, 2008).

Transitional Challenges in the New Pension Scheme

According to Admad (2008a), the transitional challenges in the new pension scheme

include:

1.  Knowledge gap and general misconceptions

2.    Widening the coverage in the informed and private sector, many of the SMEs, private, small business are not yet to buy the idea

3.    Securing system wide buy- in and initial reluctance from employees for register with PFAs.

4. Capacity building in the new pension industry.

5. Quantifying and transferring legacy funds and asset managed by employees, insurance companies and pension managers.

Balogun (2006) pointed to other areas which require further strengthening in order to

make the new pension scheme effective and efficient to include:

1.  Durability pension for employees who sustain minor or permanent injury/disability in the course of their duties.

2.  In respect of section 71 (1) of the PRA, relevant guideline stipulated in the number of years an RSA holder is expected to contribute to be qualified for the Minimum Guarantee Pension (MGP).

3.  The full involvement of state and local government in the new contribution pension scheme to include the large number of public sector employees currently not within PRA of 2004.

4. Enrichment and adequate funding of the data base by PENCOM.

Prospects of the Defined Contribution Scheme

Admad (2008a) rekindles some of the prospects of the defined contributory scheme to

include:

1. Intensified Public Education & Enlightenment

2. Strong Support from and collaboration with stakeholders especially social.

3. Consistent support and strong political will from the executive and legislative arms of government.

4. Federal Government of Nigeria had consistently and religiously met her obligation to the pensions fund contribution.

5. Gradual adoption of the new scheme by other tier of government especially state government

6. Major corporations and institutions have bought idea of the new scheme

7. Consistent macroeconomic stability to downtrend in inflation

8. Relatively strong enforcement power of PENCOM.

9. PENCOM’s effort to build capacity in the areas of risk management, supervision, corporate governance and information technology. However, Ahmad (2008b) argues that corporate governance in the pension industry in Nigeria is still being faced with a lot of challenges notwithstanding the efforts of the Commission. These challenges include: history of bad corporate governance by people in many organizations, inappropriate and adequate sanction for breaches, the “tyranny and immunity “of management, re-defining the roles of the external auditor and self regulatory organizations (SROs) under the PRA of 2004 to make them culpable on concealing breaches, possible conflicts of interest arising from PFA participation in companies’ boards following fears that they might become major investors and be elected to boards and disclosure of confidential information. However, necessary economic, political and institutional framework must be put in place to support and enforce good corporate governance.

10.   Development of a comprehensive accounting standards for retirement benefits

CONCLUSION

This paper assesses pension reform processes in Nigeria and particularly the Pension Reform Act 2004.  A critical issue raised by the review is the question of the role of the state in issues of citizens’ welfare. The review has shown that the philosophical foundation upon which the Nigerian pension reform is hoisted is neo-liberalism, which has the goal of rolling back the state and in the process halting the trend of the state using public resources to provide for the welfare of the citizenry. The Pension Act is perceived as a clever attempt to make government abdicate its social responsibility, particularly to the vulnerable classes - the ageing, retirees, unemployed, children, students, poor farmers, and traders, and so on. With enduring institutions, commitment to transparency and democratic norms, the public sector should be sanitized and the state made to assume its rightful place as the institution that protects, defends, and provides welfare services for the weak segments in the society.

The extent of poverty in Africa, including Nigeria, would suggest that the level of living standards should dictate limits to the dimensions and depth of deregulation and flexibility in the labour market, which the Pension reform Act aims to attain. Much of the political insecurity in Nigeria and Africa could be associated with socio-economic insecurity – poverty, absolute want, destitution, hunger, homelessness, disease and unemployment induced idleness - of the vast majority of the citizens in individual countries. A pension reform, which implies low pensions and denial of guaranteed pension for life, among others, would further deepen the existing levels of pensioner poverty and misery, which would have implications for degrees of corruption, commitment to work, productivity and overall wealth creation.

As Amartya Sen (2004) puts it, public reasoning should be foundational to public policy. Public policy in turn means the deliberate collective public efforts which affect and protect the social well-being of the people within a given territory (Adesina, 2007).  Indeed, as Roy (2004) points out, in India, the word ‘public’ is now a Hindi word, meaning ‘people’. It is posited that the idea of a tolerable minimum level of livelihood should define the limits beyond which no system of governance should fall. To maintain a minimum level of social well being in the context of the Nigerian situation in which an estimated 70 per cent of the population live in extreme poverty (living on income less than US$1/day) demands formulation and implementation of a comprehensive social insurance, which includes unemployment insurance, publicly or state guaranteed old-age pension for life, and so on. The forgoing underlines the need for the review of Nigeria’s Pension Reform Act, particularly Section 8 (3) which preserves gratuity and pension for life for selected categories of workers and to that extent, impliedly abolishing gratuity and pension for life for all categories of workers.

Table 1

Comparison between the Old and New pension scheme

Characteristics			Old Scheme			New Scheme
1.	Type		Largely defined benefit			Defined contribution
2.	Funding		Mostly unfunded and pay as you			Contributory and fully funded
			go (PAYG)
3.	Membership		Voluntary in private sector			Mandatory for all employees in public and
						private sector except pensioners and those
						with 3 years to retire
4.	Pension portability		Not portable			Personalized and very profitable
5.	Management		Largely State	and	management	Private sector and individual choice
			union
6.	Retirement benefit		Discriminatory			Uniform application
7.	Supervision		Fragmented	and	unregulated	Strictly regulated by PENCOM.
			(SEC, NAICOM and JTB)
8.	Pension liability		Implicit and not transparent			Explicit  through  retirement  bond  and
						capped
9.	Tax exemption		Limited			Contribution and retirement benefits
10.		Insurance policy	Voluntary and mostly in private			i)	Mandatory for all employers
			sectors			ii)	Three times the employees
							emolument
11.		Dismissal from service	No pension benefits			Full pension rights
12.		Collateral for loans	Benefits  could  be  used  as			Benefits cannot be used as collaterals
			collaterals
13.		Deductions from benefits	Benefits  can  be  subjected  to			Contents of RSA can be used for payment
			deductions especially employers			of retirement benefits only.
			in any financial obligations in the
			employee.
14.		Claiming retirement benefits	Cumbersome			Straight forward
15.		Minimum service years	Generally 5 years for gratuity &			Month	of employment for all benefits
			10 years for pensions			subjects to minimum age
16.		Gratuity	Provided to those qualified			Provision for lump sum withdrawal
17.		Risk Management	No provision			Adequate provision
Source: Admad, M.K. (2008a)

14

Comparing Between the Old and New Pension Scheme

A comparison of the old and new pension shows some remarkable difference between them as shown in table 1. For instance, starting from the type of scheme, funding, membership to risk management of the pension fund, the new scheme seems to be broader, inclusive and more adequately provided for. While the old pension scheme was largely defined benefits and unfunded, the new scheme is defined contribution and fully funded. The new scheme is very portable and enjoys uniform application unlike the old which was not. In fact, employees who leave one employment for another or even dismiss from service have no fear of losing entirely their pensions or other retirement benefits under the new pension scheme. The regulation and supervision of the new scheme is by PENCOM whereas the SEC, NAICOM and JTB were jointly responsible for the old scheme.

Akeni (2009) made a comparison of nine items in the old and new scheme by conducting a survey of the pension fund administrators, pension fund custodians and the beneficiaries in the public and private sector. He found that the new scheme was better that the old in terms of : accountability, accessibility, ease of payment of pension and gratuity, funding, management of pension fund, transparency, stakeholders’ confidence in the scheme, auditor’s control and corporate governance . Although there was agreement that the new scheme was applauded as far better than the old , he discovered that the new scheme may not address the difficulties currently encountered in the pension industry in Nigeria nor impact positive or the standard of living of retirees and pensioners unless there were proper coordination and supervision by the Nigerian Pension Commission of the pension fund administrators and custodians.

Therefore PENCOM must undertake periodic review of the investment guidelines of pension fund and create conductive environment for smooth operations by the pension fund administrators and custodians. It must ensure that the administrators and custodians abide by the rules of the pension game in order to ensure their efficient and effective performance. The public must be regularly enlightened and adequately keep abreast of development in the pension industry by the Commission and the administrators. The government must also continuously monitor the operations of PENCOM and conduct external checks to get rid of excesses.