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PUBLIC SERVICE LECTURE HELD AT EKITI STATE | |
| A quarterly Public Service Lecture was held on Thursday 9th, 2005 at the State Cultural Centre, Ado-Ekiti. The lecture was delivered by Chief Salah Andrew Idakwo. Below is the full lecture: THE IMPERATIVES FOR THE REFORM OF THE PENSION SYSTEMS IN NIGERIA: THE SIGNIFICANCE OF THE NEW PENSION ACT, 2004 BY CHIEF SALEH ANDREW IDAKWO IntroductionThe Pensions Schemes which hitherto operated in the country were based on non-contributory defined benefits (db) sustained under the pay-as-you-go (payg) system which made them unfounded schemes. These schemes were the Civil Service Scheme, the Police Service Scheme, the Military Service Scheme, Customs, Immigrations, and Parastatals Service Schemes. The scheme applied to the States and Local government in the country but did not affect the private sector. These schemes faced a number of problems, the major ones being: Ø increasing difficulty of the government to fund the schemes which were non-contributory; Ø frequent retrenchment of officers without first considering the pension implications; Ø arbitrary increases in pension rates without corresponding increases in funding; Ø very poor record management (storage, retrieval, and use); Ø lack of input from beneficiaries. These problems resulted in huge pension liabilities, which invariably the government cannot settle. It has been estimated that over N2000 billion is required just to settle 2002 pension liabilities estimates alone. This figure did not include those who might have retired between 2002 and 2005 and certainly would not include those to be retired in the current exercise under consideration at the federal level. With the increasing competition forever dwindling government funds by other sectors of the economy like education, health, and infrastructural development, etc. It is doubtful if this amount can be fully provided by government without these other sectors suffering. It is apartment from the above therefore that if the current hardship of pensioners is to be abated, and adequate provisions made for future retirees, a new pension policy has to evolve. The Need for a New Pension PolicyA new pension policy is needed to address the problems enumerated above. This policy will recognize the important role played by the stakeholders, particularly the employees, not only in participating in the management of the scheme for their future benefits but also in contributing to the funding. This provides the only guarantee that funds will be available to meet their retirement needs as and when due. Taking the above factors into consideration, it is apparent that a Defined Contributory scheme will best suit Nigerian circumstances. A defined contributory scheme is a scheme where both the employer and the employee agree to contribute an approved percentage of the employee’s monthly emoluments towards funding retirement benefits. The New Pension Reform Act 2004: The new pension law was enacted with the following objectives in view:- Ø to ensure that every person who works in either the public or private sector receives his/her retirement benefit as and when due Ø Assist improvement individuals to save in order to cater for their livelihood during old age. Ø Establish a uniform set of rules, regulations and standards for the administration of pension in the country. Ø Set up the National Pension Commission to regulate, supervise and administer the scheme. Ø Stem the growth of outstanding pension liabilities. Nature of the Scheme: The scheme would be contributory, fully funded and based on individual accounts that are privately managed by Pension Fund administrators (PF), while the pension asset will be held by Pension Assets Custodians (PAC). There would be strict regulation of the scheme by the National Pension Commission (NPC). Ø Eligibility. All workers in the public service of the federation and all workers in the private sector where the total number of personnel is five (5) or more will participate in the scheme. Ø Exempted workers. All existing pensioners and workers with less than three (3) years from 1st July 2004 and the category of officers covered by section 291 of the 1999 constitution are exempted from the scheme. The Level of ContributionThe scheme provides that both the employer and the employee will contribute a minimum of 7.5% of the employee’s basis salary including housing and transport allowances. The military personnel will however contribute 2.5% while the Government contributes 12.5% to raise the level to 15%. An employer may elect to contribute for both the employee and his contribution provided such contribution is not less than 15% of the workers basic salary as stated above. Contribution should be remitted within seven (7) days of salary payment to the Assets Custodian who must notify the PFA to credit the retirement savings account of the employee, signifying that the scheme is fully funded and that the fund available can be invested to yield returns to the employee. Individual Accounts The employee will open an account to be known as the retirement Savings Account (RSA) in his name with a Pension Fund Administrator of his choice. The account belongs to the employee and remains with him for life. He may change employment or transfer his service, even from the public to the [private sector without changing the account. Withdrawal from the Account He can however withdraw from the account only at the age of fifty (50) years or upon retirement. The withdrawal may take any of the following forms:- · Programmed monthly or quarterly withdrawal (to be arranged with the PFA). · Purchase of annuity for life through a licensed life insurance company · A lump sum from the account provided that what is left is sufficient to pay 50% of his monthly remunerations as at the draw of retirement. Live Insurance Policy. Every employer will maintain a life insurance policy in respect of every employee for a minimum of three times the annual total emolument of the employee in case of death in service. An officer who retires normally will not benefit from this policy. Privatization of the Pension Business By the new scheme, the pension business has being fully privatized, as the scheme requires the pension funds to be privately managed by the PFA and PAC. The NRC is a regulatory body. Pension Fund Administrators. Pension fund administration are to be fully licensed and will open retirement pension fund administrators are to be fully licensed and will open retirement saving account for employees, invest and manage the funds in fixed income securities listed in the Stock Exchange and other instrument as would be directed by the NRC. The PFA is required to maintain books of account on all transactions relation to the pension funds managed by it, provide regular information on investigation strategy to the beneficiaries and pay retirement benefit to the retire employees in accordance with the provision of the Act. The PFA will at no time handle pension assets. The PFA must be a limited liability company whose sole object is the management of pension funds. It must have a paid up capita of one-hundred and fifty million Naira (N150m), and have the professional capacity to manage pension funds and pay retirement benefits (incase of programmed withdrawal). Pension Assets Custodian The PAC has responsibility for warehousing the pension fund assets. Contributions go directly to the custodian who immediately notifies the PAC. The PAC must be a limited liability company, a licensed financial institution which holds the pension assets in trust for the clients. He must have a minimum net worth of at least five billion naira (5bn) and a total balance sheet of one hundred and twenty-five billion naira (N125bn), and guaranteed by its shareholders. The National Pension Commission A national pension commission has being established for the scheme. The commission will regulate, supervise and ensure the effective administration on the scheme. Besides ensuring prompt payment of benefits, the commission will ensure safety of the pension funds by issuing guidelines for licensing approving, regulating and monitoring the activities of the PFA and PAC. The commission shall receive and investigate any complaints of impropriety against any OFA, custodian or employer or any of their staff in order to ensure that the funds are exposed to minimum risk and fraud. It will employ the use of approved risk rating agencies to determine the viability of an investment instrument. The structure, the powers and functions of the commission are clearly defined in the Act. Transitional Arrangements Existing pensioners will continue to be paid by the existing boards or offices be renamed departments until the last pensioner under the pay-as-you-go scheme dies. Five of these departments are listed in the Act viz Federal Civil Service Pensions, the Military, the Police, the CIPPO, Security Agencies and the MFCT Pension Board, when the states comes on board it is expected that the State Pension Board and the Local Government Pension Board will perform similar functions and roles. Pension Earned Under the PAYG System The pension earned under the PAYG system is portable with the new CPS. However at the federal level, the PAYG terminated on 30th June 2004 for those joining the scheme. Retirement Benefit Bonds A bond will be issued to those workers in the public service not exempted from the scheme for the services rendered and the pension earned under the pay-as-you-go before the commencement of the CPS. The bond is in recognition of government indebtedness to them and would be redeemed at the time of their retirement and paid to their RSA. Retirement Benefit Bond Redemption Fund A fund will be set up known as the Redemption Fund in order to redeem the bonds to be issued for the pension already earned. The fund will be maintained by the Central Bank of Nigeria. In the case of the Federal Civil Service, the Government will pay 50% of the total monthly wage bill of the federal service to the account. The total amount in this account will be used to redeemed the bond. When the last pensioner’s bond is redeemed, then the fund account will be closed. Private Sector Pension Scheme Viable pension s in the private sector will continue to exist provided they are fully funded at all times. Any shortfall in funding should be made up within ninety (90) days, and that the pension funds are set apart from the company assets. The fund will be held by an asset custodian unless the company has the capacity to manage the pension fund asset. It may retain all its existing investments subject to the regulations, rules and standards prescribed by the commission. Any employer managing a pension fund asset of five hundred million naira (N150m) or more may be licensed as a closed Pension Fund Administrator in order to manage such funds directly or through a wholly owned subsidiary dedicated exclusively to the management of such funds. The NSITF shall continue to function but will establish a company to undertake the business of a PFA. The NSITF will however transfer all pension funds and assets it holds to a custodian. Safeguards for the Scheme The safety and the success of the pension reform depend on the availability of funds to contributors on retirement. Since this fund is required to be available at the end of a productive live, it is very necessary that adequate measures be taken to protect it. Accordingly, stringent provisions have been made for its protection. These include:- Ø Separation of PFA and PAC Ø Pension Asset Custodian guarantee Ø Government pension contribution to be a first charge on the Consolidated Revenue of the Federation Ø Establishment of Risk Rating Institutions Ø Compliance officers – to be appointed by the PFA to ensure that the provision of the act as well as the internal rules and regulation of the PFA is complied with Ø Regular reporting by the PFA to the NPC Ø Statutory Reserve Fund – Each PFA is required to reserve 12.5% of the net profit annually for payment of claims Ø Sanctions – Clear administrative sanctions have been provided for non-compliance Ø Public Disclosure of Information – PFA and PAC shall be required to disclose their rates on return and publish their audited accounts annually. Minimum Pension Guarantee All RSA holders who have contributed for a number of years to a PFA shall entitled to a guaranteed minimum pension as may be specified by the commission. Benefits of the SchemeThe country will benefit from the scheme as it frees the government of the straggle hold by pension liabilities, thereby making funds available for other social activities. It will solve the problem of under funding of pension and give assurance to the pensioners. The workers will take active part in the management of his retirement benefits and will have up-to-date information of his pensions funds. The contributor has the freedom to choose his PFA and change him at will, but once every year. The scheme imposes fiscal discipline on the nation and the employer, and is a firm foundation for economic development as it creates a huge pool of long term funds for investment and encourages accountability introduces clear legal and administrative sanctions in the case of mismanagement and fraud. It provides for a separation of investment, administration and custody of assets. It encouraged transparency and accountability by the requirements to publish the rate of returns regular statements of contributions and earnings thus annual audited accounts. It ensures a pre-funding of retirement benefits thus removing the uncertainty associated with the pay-as-you-go system. Advantages for Joining the Scheme by the State. Ø The Pension reform Act, 2004, is already in place and has effectively repealed all other pension legislations in the country. The continued retention of the Defined benefit (PAYG) system will, by and large, be illegal. Ø By reforming the State pension scheme, the state will be conforming with the Federal law, failing which it will be impossible to transfer the State civil/public servants to the Federal Service. This is because the conditions of service with regards to pension will not be the same for the two Services. One is already operating the contributory pension scheme while the other is not. Any staff transferred at all will lose pension earned between 1st July, 2004 when the Federal Government started the new scheme. Ø The new Pension Law does not recognize the States share of pensions. It has no provision for gratuities and does not incorporate all the pensionable allowances as in the old system. The State will suffer a great disadvantage if it does not reform early. A reform which seeks to ensure the prefunding of the pension regime is the most probable way to eliminate the huge liability and deficits that is associated with the present arrangement. ConclusionThis is a revolutionary innovation no employer of labour can afford not to adopt. It is a new scheme in the public service of Nigeria. Like all innovations, people are bound to express reservations. Nevertheless, like a cancerous tumor which must be surgically removed if the patient is to survive, the pension system needs to be comprehensively reformed if the pensioner must survive. Any delay will lead to the total collapse of the existing system due mainly to inadequate funds to sustain the system. The crisis that will follow such a collapse can only be imagined. References Ø Federal Establishment Circulars 1974 – 2003 Ø Report of the Proceeding of the National Workshop in Pensions Reforms in Nigeria, 2001 Ø Pensions Act No. 102 of 1979 (Cap 346 of The Law of the Federation of Nigeria, 1990) Ø Pension Reform Act, 2004 Ø Workers Today, Pensioners Tomorrow by Prince S.A. Kujore: Omega Production October, 2002. Ø Public Service Rules and Financial Regulations – federal Government of Nigeria 2000 edition. | |
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